Despite all the talk of “Ethereum killers” in the 2021 bull run: aside from Bitcoin, founder Vitalik Buterin’s blockchain is still the measure of all things. Especially during this ruthless bear market, it leaves Solana, Avalanche, Terra, Fantom and Co. far behind in the rearview mirror. This is also illustrated by looking at the total locked value. 60% of all crypto capital is currently tied to Ethereum as part of smart contract blockchains.
At the start of the year, it was clear that Ethereum still had a lot of work to do before the second-largest blockchain by market capitalization could be considered mass adoption. The results were expected to follow last year’s promises this year.
And then there was that, too, not just with the long-awaited merger. Although the price took a different direction in 2022, the cryptocurrency ends the year better than its price suggests.
The price drops, the network expands (T1)
The price of ETH started in 2022 at around $3,800. And there is also the absolute record of this year. Because it was followed by the first annual price drop. Almost an omen in hindsight: Barring a brief rebound in April, the price of cryptocurrency has trended lower for most of 2022.
There was growth elsewhere. In the first quarter of 2022, Ethereum saw massive gains in network revenue (value of all network fees) compared to the same quarter last year, as well as new records for staking and daily active addresses. Stablecoin activity has also increased rapidly. When it comes to pure network growth, the signs were actually even better than the bullish prior year.
The focus of Ethereum and the wider crypto community shifted towards the end of the quarter on the most important event of the year: the change in the consensus mechanism aka “The Merge”. Ethereum 2.0 has become the “consensus layer”. The big step towards scaling and mass adoption of Ethereum has been changed accordingly under the hood. Now the process would be much more fragmented than initially thought.
When to merge? (Q2)
But first, the project’s developers put the brakes on their supporters in April: the move from proof-of-work to proof-of-stake was postponed. The company was too big and too important, so apparently nothing was left to chance. The “difficulty bomb”, which was supposed to be a time constraint for miners to change, was also postponed and fueled fears that ETH 2.0 may not work this year either…
The mood of investors, who would be shaken by the turbulence of the part of the year anyway, was all the more gloomy. As is well known, the Terra ecosystem imploded only shortly after the postponement of the merger and caused a huge loss of confidence in the crypto scene, which unfortunately also left its mark on Ethereum. As the quarter progressed, the price of ETH fell in double digits.
Suddenly, Ethereum staking has also returned to the limelight. So, some investors started wondering if their staked ETH would even be unlocked. After the “depeg” of the UST stablecoin, the Lido liquid ETH staking token “stETH” also lost its peg at the original price. In part, the ETH equivalent likely caused the Celsius crypto lending service to crash.
Just a month after Terra collapsed, the crypto market was once again on the verge of a crash. And for Ethereum, to reach the (provisional) annual low for 2022. At around 880 US dollars, the price marked the “lowlight” of the year. A quarter to forget.
Ethereum too centralized? (Q3)
After the shock of the collapse of Terra and the bankruptcy of Celsius and crypto hedge fund Three Arrows Capital, Ethereum, along with the rest of the crypto market, was able to catch its breath in late July. The announcement of a fixed date for the Ethereum merger contributed, among other things, to the price recovery. The developers have set September 19 as a conservative target for the merging of the beacon and main chains.
But the next storm was already looming on the horizon. Or should we say “tornado”? In early August, the Department of the US Department of Justice OFAC decided to sanction the Ethereum-based crypto mixer “Tornado-Cash”. And as a result, sparked what is probably the hottest privacy debate of the year in the crypto industry. The charge was money laundering, with OFAC declaring any interaction with the platform’s smart contract illegal.
More and more protocols are therefore cutting their connection to Tornado Cash. Eventually, even Ethereum miners started boycotting transactions based on the protocol. It was considered the first case of censorship on a blockchain and immediately led to the following debate: possible centralization after the Ethereum merger.
It turned out that most of the ETH stake was in the hands of a few providers, including major exchanges Coinbase, Binance, and Kraken. Were they able to decide on the legitimacy of all transactions on Ethereum? The question remains open to this day. Tornado Cash transactions are still being validated, which also calls into question the effectiveness of OFAC’s sanctions. Providers such as Rocket-Pool or Ankr also seem to further decentralize staking.
At least one thing was clear: the merger was coming. And on September 15, a few days earlier than expected, at 08:44 in the morning, the developers successfully ushered in the era of Ethereum 2.0. A technical masterpiece that crossed the stage perfectly.
As a result, ETH payout dropped, reducing the price of network backup and increasing selling pressure. More importantly, changing the consensus mechanism meant a 99% reduction in power consumption. As a result, the “Ultra Sound Money” blockchain not only became interesting for ESG-conscious investors, but even made “energy-wasting” Bitcoin difficult to explain.
Facing the future (Q4)
The merger had proven itself: Ethereum is still to be expected. No sooner had the cape been reached than the calls for the next one were heard. Because the staked ETH was still blocked and therefore users insisted on early activation. Therefore, the following phases “the Surge, Scourge, Verge, Purge and Splurge” were on the agenda.
Developers’ focus was initially reserved for blockchain scaling. The fourth quarter moved into the phase of layer 2 blockchains, Arbitrum and Optimism in terms of activity, which could be another driver of mass adoption in the coming year. The ultimate goal is to use these and other changes to reach 100,000 transactions per second on Ethereum. A task that is now an integral part of the Ethereum roadmap. Vitalik Buterin himself presented them on November 5 with new changes.
Meanwhile, starting in early November, one event has become the dominant topic in the entire crypto space: the FTX affair. In the wake of the fiasco, regulators are more focused on the blockchain industry than ever. And with Ethereum, the question always seems to be whether ETH is a commodity (like Bitcoin) or a security.
Ethereum is on a consolidation path so far this quarter. But the position is firm and we are looking to the future. At the end of the year, founder Vitalik Buterin gave an overview of his visions for the future. DeFi, DAO, stablecoins and digital identities were found here. If you look around the industry, you can quickly see that these and many other innovations are currently built primarily on Ethereum.
Ethereum Perspectives: Flippening or Floppening?
The focus should then shift to the upcoming Shanghai update. With it, staking payments begin. The first implementations of sharding should follow.
The idea of a “Flippening” came up. Not only does the relative price strength of Ethereum versus Bitcoin amid the bear market prove how realistic this scenario is becoming more realistic with each passing month. Technical innovations, “ultra-sound tokenomics” and the DeFi sector as a driving force should ensure that Ethereum remains closer than ever on the heels of the crypto king Bitcoin next year.
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