Weekly Onchain Insights: Ethereum On-Chain Activity Heats Up Ahead of Major Upgrade
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Hey onchainers,
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Crypto markets have been consolidating, registering low volatility in June and July so far. While price action remains unremarkable and newcomers fade, crypto continues to progress.
Notably, Ethereum is moving ahead with the much-anticipated London hard fork. The upgrade appears to be ready to launch on August 4th, although the date will be made official in the core developer meeting today at 2PM (UTC). As this hard fork approaches, on-chain data is showing signs of strength for Ethereum.
Diving into 1559
The London hard fork includes the implementation of five Ethereum Improvement Proposals (EIPs), EIP-1559 being the most prominent of these. The awaited EIP is set to restructure fees on Ethereum by introducing a base fee. In contrast to existing transaction fees, the base fee is burnt, meaning that the ETH paid for it is effectively removed from circulation. Q2 has historically been a strong quarter for Bitcoin, recording positive returns in 6 out of 8 quarters and never falling below 6%. As can be seen in the graph below, in Q2 of 2019 and 2020, Bitcoin recorded impressive returns of 177.42% and 41.8% respectively.
Like existing fees, the base fee also adjusts dynamically based on demand. With EIP-1559 the base fee adapts along with the block size, targeting a specific level of gas usage close to the gas limit.
When gas usage is below the target, base fee decreases to encourage demand; when gas usage is above the target, the base fee (and the amount of ETH being burnt) increases. This aims to make gas fees more predictable, while also having Ethereum holders benefit from spikes in fees.
Ethereum fees have been notoriously high in the first half of 2021, eclipsing fees seen during the 2017 bubble.
Like existing fees, the base fee also adjusts dynamically based on demand. With EIP-1559 the base fee adapts along with the block size, targeting a specific level of gas usage close to the gas limit.
When gas usage is below the target, base fee decreases to encourage demand; when gas usage is above the target, the base fee (and the amount of ETH being burnt) increases. This aims to make gas fees more predictable, while also having Ethereum holders benefit from spikes in fees.
Ethereum fees have been notoriously high in the first half of 2021, eclipsing fees seen during the 2017 bubble.
Sudden spikes in fees — like the one seen in May 2021 amidst the dog token mania — should become less frequent following the implementation of EIP-1559. Additionally, since the burning of the base fee effectively reduces Ether’s supply, ETH has the potential to become deflationary if the amount being burnt surpasses proof of stake issuance.
This, in particular, is what has many Ether holders awaiting the implementation of the London hard fork. This anticipation is apparent in on-chain activity, which is displaying strong signs of conviction.
On-chain signs of conviction
Following a drop of over 50% in price, Ethereum long-term holders remain unfazed. The number of hodlers — addresses that have been holding for over one year — continues to grow in spite of the volatility.
Approaching 36 million addresses, the number of ETH hodlers has managed to grow consistently regardless of price action. This shows high conviction from long-term players, not panicking in volatile times and likely increasing in anticipation of the upcoming protocol upgrades.
Similarly, on-chain flows suggest bullish activity picking up, particularly relating to funds flowing out of centralized exchanges. Exchange flows have become an important tool to gauge investor positioning for a particular crypto-asset. This is the case as inflows into exchanges tend to increase prior to or during price crashes, a signal that holders may be depositing with the intention to sell.
Conversely, outflows from centralized exchanges suggest buying activity. This is the case as holders wish to have their crypto-assets stored safely in a hard wallet or into a decentralized application where they can earn a yield on top of their assets.
Netflows are the difference between inflows minus outflows. Therefore, negative netflows point to a high amount of outflows relative to inflows. In Ethereum’s case, netflows just hit a new record low.
A net amount of $1.3 billion worth of ETH left centralized exchanges on July 2nd. This drop can be interpreted as bullish, suggesting that holders are leaving exchanges for more secure or yield-generating locations.
Potential next steps for ETH’s price
While this pattern implies positive expectations for Ethereum, ETH’s price has some roadblocks ahead before it is able to climb higher. Using the In/Out of the Money Around Price, clusters pointing whether addresses are profiting (in the money) or losing (out of the money) signal price levels where activity is concentrated.
In Ether’s case, we observe that 770,000 addresses had previously bought 9.57 million ETH at a price of approximately $2,200. With Ether just dropping below this level at the time of writing, $2,200 is expected to be a range with strong resistance since buying activity had previously been concentrated here and short-term traders may look to close positions at this level. If Ether closes above $2,200, a move higher towards $2,400 (the next large cluster) is likely.
On the other hand, support is expected just above $2,000. At this range 675,000 addresses previously acquired 1.12 million ETH. Holders at this level may look to buy again given the strong amount of activity at this level. Were Ether to drop below $2,000, a move towards $1,800 is to be expected.
Overall, short-term the direction for Ether’s price remains uncertain. At the same time, though, progress and conviction in Ethereum continues to grow as demonstrated by on-chain activity in anticipation of the London hard fork.
