5 key reasons to be bullish on Ethereum in 2023
By Tom Rodgers, Head of Research, ETC Group
Read the full January 2023 Digital Asset and Metaverse Review
Featuring Macro Signals, Regulatory Signals, On-Chain Signals, Digital Asset Equities and Into The Metaverse
1. Ethereum fees are up 53% in January, so fundamentals support price rally
Ethereum fees (revenue) are a useful gauge for both the short-term and long-term demand for Ethereum blockspace. As demand for blockspace increases, so do Ethereum fees. Over a longer timeframe, increasing network fees indicate a growing and more highly utilised network, creating an associated upturn in demand for ETH to access Ethereum blockspace.
Demand for blockspace naturally leads to greater fees being paid for inclusion in those blocks. While demand has not returned to the heights of the 2021 bull run, it has nevertheless started to pick back up again and has been increasing in general since July 2022.
Ethereum fees moved 26.89% higher across January 2023 compared to the previous month. The total fees collected by the Ethereum network for apps using its blockspace in December was $74.5m, compared to $115.3m in January 2023.
More fees paid over a given period adds more support and security to the network and means that ETH asset price appreciation does not outstrip underlying revenue growth.
This fundamental strength could bolster Ethereum to outperform Bitcoin as investors look beyond the hype — and a potentially faltering rally — to see which chains are producing notable utility and value.
2. ETH turns deflationary again
The state of Ethereum more than four months since the Merge is setting the stage for a potentially huge bull run in the second-largest cryptoasset.
We said in previous research that ETH would pick up more Store of Value credentials from its deflationary turn, as DeFi volume and NFT markets pick back up and demand for blockspace returns to the smart contract blockchain. That has proved to be precisely the case.
As of 31 January Ethereum’s inflation rate was minus 0.003%, with 4,614 ETH being removed from the ~120 million circulating supply over the course of the previous 24 hours.
After August 2021’s London hard fork, in an upgrade widely known as EIP-1559, part of Ethereum’s transaction fee required to process operations on the blockchain (such as NFT sales, DeFi trades or for moving ETH between wallets) is now deleted from circulation permanently.
Bitcoin, by direct contrast, is disinflationary, rather than deflationary, meaning that its inflation rate is falling over time but is still positive. Until the (fourth?) Bitcoin halving scheduled sometime in August 2024, Bitcoin’s currency inflation rate will be 1.78%, falling to 1.1% after the halving.
3. Shanghai fork poses more positive ETH catalysts
One other key positive catalyst for ETH holders is the Shanghai hard fork, which is scheduled for March 2023. This is the most significant technical development since The Merge in September 2022, and will enable users to withdraw Ethereum deposits and rewards that have been accrued since staking went live on the Beacon Chain in December 2020.
On 24 January Ethereum developers announced the successful deployment of a shadow fork as a precursor to Shanghai.
Shadow forks are created to test readiness, test design flaws, and circumvent any issues that could crop up when such a backwards-incompatible network upgrade goes live. In a nutshell, a copy of the blockchain is created to serve as a technological sandbox for developers to stress-test features.
Currently, the Ethereum network has $26 billion worth of ETH staked on the network that users will be able to access progressively.
This, we must recall, was one of, if not the largest and most complex changes to any cryptocurrency network in history.
The Merge, on 15 September 2022, was the result of seven years of work, changing the network’s consensus mechanism from the energy-intensive Proof of Work mining structure favoured by Bitcoin.
This massive upgrade reduced the electricity consumption and carbon footprint of Ethereum overnight by 99.988% and 99.992% respectively.
According to the Crypto Carbon Ratings Institute, Ethereum’s electricity consumption immediately dropped from 22,900,320 MWh/year to 2,600 MWh/year, while its CO2-equivalent emissions fell from 11,016,000 tons to 869.78 tons.
4. Ethereum Nightfall opens door to vast new markets: enterprise Web3 with privacy
On 18 January 2023 EY released Nightfall D3, an upgrade to the public domain source code for scaling Ethereum for enterprise applications using Polygon. Crucially, Nightfall is a privacy system that allows businesses to shield the content of transactions while still using the public Ethereum blockchain.
The upgrade includes two major changes. First, the code can now be deployed on a fully decentralised basis to prevent control by any one organisation or group. Second, to prevent anonymous usage (while still maintaining an open and permissionless model) users who wish to deposit or withdraw funds are required to have an enterprise-class X.509 identification certificate. X.509 is a global standard public-private key pair that allows registered users to digitally sign documents, messages and transactions.
EY made its first move to start scaling Ethereum in 2019 by releasing the first version of Nightfall. Polygon’s co-founder responsible for the project, Antoni Martin, said: “The move to update Nightfall in the public domain is a major milestone in scaling the Ethereum ecosystem and will open up new use cases for enterprises in Web3.”
5. NFTs reach ~$1bn in sales in January, up 34%
One of the best ways to track speculative interest in crypto markets is to look at its frothier elements, NFTs and DeFi.
NFT sales across the major blockchains advanced to almost $1bn in January 2023, an average 33.83% rise across the top 12 chains. Ethereum again led the way.
It’s worth noting that not every blockchain is designed to be a Layer 1 chain for transactions in Web3. On the Tik Tok-adopted ImmutableX, for example, users can only do three basic things: buy NFTs, sell NFTs and hold NFTs. Compare this to Ethereum, which can compute any type of arbitrary code and hold the state data of all the smart contracts being used on its platform at any time.
NFTs on Ethereum registered $758m in sales in the 30 days to 31 January 2023, with Solana taking second place with $151m.
ETC Group first predicted in Q3 2021 that Ethereum-based NFTs would be the ‘trojan horse’ to take crypto to its first billion users, and we are now more confident than ever that this will be the case.
Users, transactions and holders of non-fungible tokens are continuing to rise. As IntotheBlock’s Lucas Outmoura noted in mid-January, the number of daily NFT sales recently neared its all time high of 140,000 transfers. Trading volume is starting to recover and across January 2023 rebounded to a six-month high.
Household names such as Nike have already profited heavily from introducing users to Web3 and NFTs: in August 2022 the sports apparel giant reported $185m in sales from NFTs, making it the highest earning NFT brand in the world at the time.
We would expect this trend to continue, as NFT markets are still immature and penetration remains in a fairly nascent state.
