State of Ethereum, Vol. 1
Outlook for the network in the face of multiple headwinds.
Over the next three weeks, FirstWatch will publish research into the state of the ethereum network, web3, and the overall smart contract ecosystem.
John went to EthDenver in mid-February. Over 12,000 people attended ETH Denver while the ETH price hovered at $3,000. That is double the number of attendees at the 2020 conference when the ETH price was at $300. He met the founder of a billion-dollar crypto fund, met many people who owned million-dollar Ape pictures, and saw Vitalik Buterin, founder of ethereum.
In anticipation of major developments on the ethereum network, FirstWatch will publish our thoughts on the state of the ethereum network, the ethereum merge, and a multi-chain future.
Ethereum is still dominant.
“...the most powerful Legos the world has ever seen.” — Alexis Ohanian, co-founder of Reddit, on ethereum
Alexis Ohanian is referring to the web being rebuilt on the blockchain. Ethereum provides key building blocks to achieve that vision. It’s a behemoth blockchain. You can think of it as a giant highway that decentralized applications use to communicate with each other and their users. These apps communicate through “smart contracts”, which are conditional statements that can route crypto-assets from one wallet to another without the need for a middleman. Think of this like an IF...THEN statement on excel, but one that consistently transfers billions of dollars worth of digital assets every day.
The Leading “Layer 1”
Ethereum is a Layer 1 smart contract platform.
Other smart-contract platforms vying to steal some of ethereum’s market share are Solana, Avalanche, and Binance; Ethereum, though, is leading all competitor L1’s by a wide margin in relevant metrics such as transactions, developer activity, and total value locked.
Total Value Locked
As of 2021, ethereum had about 4,000 active devs. The next closest chain was Polkadot at 1,500.
Ethereum Transactions Per Day
Ethereum has a huge network effect both in capital committed, and developers actively building. While its status in the market is clear, the network has developed some pretty significant drawbacks compared to the competition.
Ethereum’s transactions and usage, mainly due to NFT trading and Defi, have caused the platform to have extremely high demand. So much so, that demand has outpaced capacity on the network. That translates to extremely high and unpredictable fees, referred to as gas fees. In August of 2021, in a proposal called EIP-1559, the ethereum network attempted to address these gas fees through proposals that added some new highway lanes to increase transaction capacity and standardized the fee structure.
This proposal introduced a burn mechanism. Now, for every transaction that gets approved, some ethereum gets burned, causing the coin to swing from being inflationary to deflationary, where coins are consistently destroyed, reducing supply. Investors have pointed to this as a differentiating feature from other blockchains.
Ethereum can be slower and more expensive than Solana, Binance Chain, Avalanche, and most newer layer 1 chains out there. This is due to longer block times on ethereum, which means transactions take longer to confirm.
It may be facing a classic innovator’s dilemma, where new competitors can create products that address ethereum’s gaps before it has time to adapt. However, ethereum is doing all it can to evolve.
The ethereum merge, to be discussed in the coming weeks, is scheduled to happen this summer. This should significantly improve network capacity, and drive carbon emissions down 99+%. Additionally, many chains are building on top of ethereum to capitalize on its network effect. These chains, called layer 2 chains, create innovative ways to compute smart contracts in more efficient ways, all the while benefitting from settling the transaction on the ethereum mainnet.
The entire smart contract landscape is poised to grow exponentially over the coming years, infiltrating everything from real estate to accounting to data usage. According to Lightspeed Ventures, companies have two years to figure out their blockchain strategy. With that expectation, many new users will turn to ethereum as the most trusted blockchain or to competitor protocols that are emerging with new technology to execute their blockchain strategy. Ethereum will rely on mass network effects and pending updates to remain the largest player in the game or risk losing market share to competitors because of scaling problems.
2022 will be full of headlines about ethereum’s anticipated merge and layer 2’s. In our next post, we will go into more detail about the upcoming ethereum merge and layer 2 landscape.
Some key stats:
Ethereum has about 1.2M transactions per day.
The average ethereum block time is 12-14 seconds.
Currently, the average gas fee for a swap in defi is ~$23.
Ethereum gas fees explanation.
Coinbase Ventures summary of EthDenver.
➡️ About FirstWatch Crypto ⬅️
FirstWatch Crypto was started by Dan McGlinn (@DigitalDanMcG) and John "Blaize" Hrabrick (@blaizebitcoin) who have been investing in the space for a combined 8 years. FirstWatch Crypto is on a mission to simplify the crypto investment landscape.