Ethereum’s Next Catalyst
The implications of Ethereum’s upcoming upgrade
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This week, we dive into the most relevant catalyst to keep in mind for crypto investors for the rest of 2023. We discuss the current market environment, an overview of this upgrade and the implications it could have for crypto in the short- to medium-term.
Network Fees — Sum of total fees spent to use a particular blockchain. This tracks the willingness to spend and demand to use Bitcoin or Ether.
- Bitcoin and Ethereum fees declined by 32% and 24%, respectively, as speculative activity cools down
Exchanges Netflows — The net amount of inflows minus outflows of a specific crypto-asset going in/out of centralized exchanges
- Bitcoin recorded negligible outflows during this week, while half a billion worth of Ether left centralized exchanges
Ethereum’s Next Catalyst
Crypto markets have been relatively quiet since the meme token speculation from early May appears to be behind us. Fees, active addresses and transactions have declined for both Bitcoin and Ether in the past few weeks, while price action has been almost non-existent.
Record Low Volatility — Ethereum’s 30-day volatility set a new all-time low this week
- With ETH’s price hovering around $1,800, it’s annualized volatility based on the last 30 days would imply price fluctuations of just 23%
- For reference, the Nasdaq’s 30-day volatility has averaged a level of 20% throughout 2023, per ITB capital markets data
- Despite Ether’s lack of price action, it has outperformed the vast majority of large cap crypto-assets, including Bitcoin, over the last 30 days
What’s Next for Crypto? As the recent volatility slump continues, investors are looking ahead to what could be the next drivers for crypto
- From the macro side, over the next 1–2 weeks we should get closure on whether a deal on the debt ceiling is reached or not, which could lead to some volatility depending on the final outcome
- Within the crypto space, arguably the most important upcoming catalyst is the implementation of Ethereum’s EIP-4844
EIP-4844, also known as “proto-danksharding” is a major improvement for Ethereum scalability and it’s scheduled to be implemented in late Q3-early Q4 of 2023 as part of the Dencun upgrade. Through EIP-4844, the cost of using Ethereum layer-2s is projected to decrease by at least 10x (with some reports saying potentially as much as 100x).
Spurring L2 Adoption — Proto-danksharding is expected to attract more users into using Ethereum directly through roll-ups
- The reduction in costs for roll-ups comes as a result of the introduction of “data blobs”
- Data blobs temporarily store data on L2 transactions until they are validated by the L1, substituting the current “CALLDATA” mechanism where data is stored in mainnet forever
- Since 90%+ of the cost of L2 transactions is L1 data storage, the implementation of data blobs in EIP-4844 is forecasted to reduce L2 fees by at least 10x
- While this is a deeply technical deployment, the end result for users will be as simple as having to pay a tenth of the cost for L2 transactions, making these more accessible to a broader audience
Growing Economic Activity — Transactions on L2s and Ethereum as a whole are likely to expand following the implementation of proto-danksharding
- Optimistic roll-ups alone already account for as many transactions as Ethereum mainnet
- Following proto-danksharding transactions between ZK-rollups and optimistic ones are expected to grow an order of magnitude larger
- While lower fees on L2s may lead to less ETH being burnt short-term, the expansion of the total economic activity being settled on Ethereum is likely to lead to greater value accrual over the medium-term
Ethereum’s proto-danksharding is expected to bring renewed interest into the currently quiet market. With the specific date of implementation still being uncertain, it is likely that markets start shifting their focus on the upgrade as more details become official. Ultimately, this upgrade is expected to get crypto one step closer to mainstream adoption, and as such it is certainly worth keeping on your radar.
