Ethereum is ready to move “from adolescence” into the stage of maturity thanks to the upcoming technical update in March and the expected approval of exchange-traded funds based on the second cryptocurrency, this is the opinion of analysts at the cryptocurrency investment fund Astol Advanced Limited (Hong Kong). They believe that the upcoming technical update of the Ethereum blockchain, the deflationary model of issuing the second cryptocurrency, the generated income of $2 billion over the past year, as well as the expected decision of the US Securities and Exchange Commission (SEC) on ETH-based exchange-traded funds (ETFs) in May 2024 may act as growth drivers for Ethereum.
At the beginning of March 2024, the Ethereum blockchain will undergo a large-scale update from the technical side, which received the working name Dencun and serial number EIP-4844. The update will introduce several important technical changes to improve the efficiency of the Ethereum blockchain and introduce a new type of transaction that will make second-layer networks (L2 networks) built on top of the main Ethereum blockchain faster and cheaper. EIP-4844, also known as protosharding, is designed to reduce costs by compressing data into binary large objects (blob-carrying transactions, BLOBs). Transactions containing a BLOB only include a hash reference to the object data, which is stored off-chain, resulting in lower processing and storage costs. Ethereum’s performance is currently limited by low transaction speeds, throughput, and high costs for users. The average transaction fee of $2.3 as of February 22 is significantly more expensive than competitors. This threatens that end users will switch to other blockchains. It is not entirely clear how much Dencun will reduce transaction fees for end users of second-tier networks. Some experts estimate its reduction by 10-20 times compared to the current average price of $0.23. Grayscale estimates that in 2024, average fees for major second-tier networks range from $0.15 to $0.60.
What will the update change? Analysts call the full implementation of this update a prerequisite for Ethereum to become “the most secure blockchain for decentralized applications (DApps).” The rise in popularity of layer-2 blockchains will also likely increase competition between them as they struggle to attract users to their platforms. Analysts point out that the achieved benefits of network effects and liquidity are particularly favorable for Ethereum to attract new financial applications and developers. Thus, the Ethereum blockchain is ahead of competitors in the number of active developers, attracting 306 specialists weekly. The number of DApps deployed on the Ethereum network, according to a Grayscale report, has reached 4.4 thousand. That is, Ethereum is more than five times larger than its closest competitor – the Tron blockchain – in terms of ecosystem liquidity – the volume of locked funds (total value locked, TVL), amounting to $56 billion at the time of publication.
At the same time, the report notes that layer-2 networks built on top of the Ethereum blockchain have attracted liquidity that rivals some of its biggest competitors. As of February 27, 2024, the TVL of the Arbitrum layer 2 network alone is $3.1 billion, which is higher than most layer 1 blockchains, including Solana, Avalanche or Polygon. An additional benefit from the growth of layer-2 networks for Ethereum has been attracting new users to its own ecosystem. According to Grayscale, the number of Ethereum mainnet users remained virtually unchanged in 2023, while second-layer networks such as zkSync, Arbitrum, Optimism and BASE saw constant growth. In parallel with the second cryptocurrency, the capitalization of a whole list of projects and altcoins related to second-level solutions for the Ethereum blockchain is growing. According to the analytical service L2Beat, the value of blocked assets in applications and protocols of second-layer networks exceeds $29 billion.
According to Grayscale analysts, the Ethereum blockchain will continue to strengthen its position in 2024, becoming the most secure platform for smart contracts. The total amount of ETH staked increased by 83%, reaching a new record of $82 billion. This growth is largely driven by the demand for passive income through ETH staking and the increase in the number of services offering staking derivatives. Grayscale believed that so-called restaging platforms like EigenLayer, which managed to raise $7.6 billion in ETH by February 20, 2024, could play an important role in strengthening Ethereum’s leadership.
Restaking services allow you to reuse ETH coins blocked by network validators to confirm transactions, not only in Ethereum, but also simultaneously in other services. This opens up the opportunity for cryptocurrency owners to receive additional income from their coins.
Analysts consider the possible approval of the Ethereum-ETF to be another growth driver for Ethereum. Following the debut of a group of Bitcoin spot ETFs in the US, several asset managers, including BlackRock, Fidelity and Ark Invest, have filed applications with the US Securities and Exchange Commission (SEC) to create Ethereum spot ETFs. According to S&P Global and ETF market analysts at Bloomberg, the regulator may approve such funds as early as May of this year. Analysts at brokerage Bernstein predict that the likelihood of such an ETF being approved by regulators before May is approximately 50%. They predict the likelihood of final approval within the next 12 months. Bloomberg ETF market analyst James Seyffart clarified that the fund approval process will not require the same time commitment as it did for Bitcoin, and can be quickly deployed on an existing foundation. According to Standard Chartered Bank, the price of ETH could rise to $4 thousand on expectations of the approval of spot exchange-traded funds (ETFs) on Ethereum in the United States, similar to what it was for Bitcoin.
Meanwhile, the cryptocurrency market is heating up, with stablecoin market capitalization and trading volume hitting new highs in February. Stablecoin market capitalization rose 1.95% to $138 billion in February, recording its fifth straight monthly increase since September 2023. Growth has been observed for the fifth month in a row since the end of the third quarter of 2023, with a high influx of cryptocurrencies into the market. This influx has pushed stablecoins to their highest point since early 2023. At the same time, stablecoin trading volume increased in the first two months of 2024. Trading volume reached 1.04 trillion in January, the highest volume on centralized exchanges (CEX) since December 2021.
One could also hint at higher stakes this month as a result of a $440 billion increase in trading volume as of February 16th. While stablecoin performance and activity have increased, their overall market dominance has fallen from 8.15% to 7.09% this month. The decline in dominance in February marks the sixth consecutive month of decline in overall market strength relative to other cryptocurrencies. This followed massive inflows into other cryptocurrencies, pushing their market capitalization to $1.97 trillion as institutional inflows entered the market. Tether (USDT) maintains its leadership in the stablecoin market, with its market cap reaching $97.3 billion, up 1.23% over the past 30 days. This growth ensures that USDT dominates at 70.6%, followed by USDC and DAI.
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