Ethereum’s Role in the Crypto Recovery
Caution: This article is intended to inform you of technical developments in the market, and should not be read as a guarantee of future price movements.
Ethereum has been a major driver of the recent crypto recovery, outpacing Bitcoin by a wide margin.
TL;DR Quick Facts:
- ETH ☝️ 61% month over month.
- BTC ☝14% month over month. Why the difference?
- ETH price has been depressed by fears.
- Those fears are dissipating as solutions to problems are found.
- Layer 2 scaling is live.
- Usability and onboarding issues are being solved.
- DeFi has crossed the $1 billion locked milestone.
- Million+ user dapps have arrived.
- $Trillion+ market opportunities can soon be unlocked on Ethereum.
As I write this, Bitcoin is up 14% month over month after peaking around $1,400 last week. There is clearly excitement related to the halving and safe-haven narratives fueling the $10k BTC tug-o-war between bulls and bears.
Pretty impressive, but Etheruem is currently up 61% month over month. You can see the difference by looking at the ETH price relative to BTC for the last 30 days. If they were rising at the same rate, this line would be flat:
Let’s take a closer look at why Ethereum might be leading the crypto recovery.
In December 2017, people were bullish about the possibilities of building Blockchain applications, and the first Blockchain game to garner mainstream media hype was Cryptokitties.
Unfortunately, what made it newsworthy was not that it was so popular, but that it was too popular for the Ethereum network to handle. This led to a rush of alternative blockchains and speculation that one of them would have a better fundamental layer one¹ design to handle mainstream application scale.
For the past two and a half years, Ethereum’s price has been depressed by speculation that something else could dethrone it. ETH’s price crashed hard around July of 2018, shortly after EOS launched its mainnet. When the price of BTC crashed due to FUD from a BTC fork hash war in November 2018, ETH fell even more than BTC, which really depressed the ETH price relative to network value fundamentals such as daily active users.
In the meantime, the whole time, Ethereum has been gaining even more momentum with developers and solving its scaling and usability problems. In fact, Ethereum is the only smart contract platform with significant usage. You can see this reflected in transaction volumes, which are still primarily driven by speculation on all other smart contract platforms:
EOS isn’t excluded from the above chart intentionally. This data is not available for EOS on Coinmetrics. The EOS network has been suffering from availability issues due to operation spam attacks, which have created denial of service (DoS) conditions on the network. It’s possible spam transactions are actually being used by holders of EOS and other easily gamed networks to boost rankings on metrics charts in order to artificially drive up the token value.
Metrics like “operations” on a blockchain are easily gamed and can’t be compared apples-to-apples across blockchains.
For example, I just dug around for Telos apps (highly ranked by number of operations) and couldn’t find a single app with any traction to speak of. I also interact a lot with companies building on blockchains, and I have not heard any dapp buzz about the platform. The total 24 hour transaction volume including speculative trades is only $133,038 USD, implying near-zero usage. Compare to ETH’s $26,555,777,245 (source: Coinmarketcap). Buyer, beware.
Tip: Never rely on a single metric. Always find corroboration for activity statistics, preferably corroborating another dimension of activity.
Last fall, EOS proved that it shared many of the scaling problems that plagued Ethereum. The network stopped working and continued governance woes interfered with its technical capabilities. EOS was Ethereum’s top competitor, and it was suddenly dead in the water.
At the same time that competing platforms struggled to attract and retain users, Ethereum broke through two major obstacles:
Layer two² scaling solutions launched live mainnets, allowing new dapps like Audius to scale to tens of thousands of active users (prior to this, all Ethereum apps combined only managed about 10k daily active users).
Audius brought with it mainstream musicians and fans willing to follow them anywhere. It’s just getting started, but it could one day rival Spotify as a more fair, more accountable alternative for streaming payments, and as a way that fans can earn money by curating and sharing playlists.
Etherum’s usability got a major shot in the arm from Fortmatic, which smooths over major hurdles including authentication, fiat to crypto onboarding, and key management. To use Fortmatic safely, users don’t even need to know that they’re using blockchains or private keys. They can pay for purchases using credit cards and sign in with usernames, passwords, email, phone numbers and 2FA (2 Factor Authentication).
Fortmatic is now integrated with most of the popular apps in the ecosystem, and it can even enhance the usability and security of traditional apps, whether or not those apps make any other use of Ethereum.
Million+ User Dapps Have Already Arrived
The first million+ user dapps are already live (two of them on Theta network, not Ethereum, but Ethereum is the defacto dapp platform):
- DLive (on Theta) has 5 million+ users.
- Theta.tv (on Theta) has 5 million+ users.
- Brave browser’s earning/tipping features are powered by Ethereum. 10 million+ users.
The improved UX breakthroughs I mentioned above were just recently released, and app developers have not had a lot of time to finish integrating them. As the year progresses, we may see a few more million+ user dapps appear.
DeFi
While all this was happening, DeFi continued to explode, recently crossing the $1 billion locked milestone (money locked in collateral or related smart contracts empowering decentralized finance applications).
After rebounding so much, how much more price growth could Ethereum possibly sustain?
Let’s look at the network value fundamentals. First, daily active users, using Bitcoin’s relative network value as a comparable, Ethereum’s current active address count predicts a ~$76 billion market cap. It’s currently ~$23 billion.
So, if we assume that the Bitcoin halving is priced in and the value ratios should be about the same: by active users, Ethereum could climb 260% from where it is now, after already climbing 60% in the last 30 days.
By transaction volume, both Bitcoin and Ethereum look overpriced based on their historical data.
This metric makes it appear that investor speculation may be driving some of the current value of both networks, but if we’re framing this into comparable value relative to Bitcoin, that predicts about a ~$46 billion cap for Ethereum — 156% increase over present value.
If we’re playing it safe, I think Ethereum could grow another 50% — 100% over the next few weeks or months. I also think few people will make these connections, and that we’ll see some up and down movement as traders call the top prematurely and try to bank profits on the way up.
But this much I’m fairly certain of: Ethereum has built a very strong competitive moat in the dapp ecosystem. To attract developers, competitive networks will need to offer something 10 times better, and I don’t simply mean ten times faster L1 scaling. I mean better compositional primitive smart contracts on mainnet.
This article is not predicting that Ethereum will one day beat Bitcoin (though that could happen). Even if Ethereum beats Bitcoin as payment and transaction network, the Bitcoin network may continue to provide an essential and valuable service as a proof of work security and settlement layer for the entire internet of value: One that Ethereum dapps will likely continue to take advantage of.
I am not confident that Ethereum 2.0 is technically capable of replacing Bitcoin as a security and settlement layer, and Ethereum dapps may need to rely on Bitcoin’s additional security as we scale up representation of large debt pools, real-estate, and synthetics with trillions of dollars in value at stake.
Imagine both Bitcoin and Ethereum operating as complementary protocols underlying a multi-trillion dollar internet of value.
- Layer one (L1): The capabilities built into the blockchain’s on-chain capabilities.
- Layer two (L2): Off-chain solutions which integrate with L1 protocols. e.g., side-chains, direct p2p protocols.
Eric Elliott is the author of the books, “Composing Software” and “Programming JavaScript Applications”. As co-founder of EricElliottJS.com and DevAnywhere.io, he teaches developers essential software development skills. He builds and advises development teams for crypto projects, and has contributed to software experiences for Adobe Systems, Zumba Fitness, The Wall Street Journal, ESPN, BBC, and top recording artists including Usher, Frank Ocean, Metallica, and many more.
He enjoys a remote lifestyle with the most beautiful woman in the world.
