Ethereum is the world’s largest programmable blockchain. It is the foundation for the future of the internet (Web3), and the future of finance (DeFi). Currently, more than half of the entire DeFi ecosystem exists on Ethereum. And despite market volatility and macroeconomic uncertainties, user engagement with Ethereum remains strong.
In this three-part series, we look at how the Ethereum ecosystem is building for the long term, and is poised for growth. This series is adapted from the recently released ‘Impact of the Merge on Institutions’ report written by MetaMask Institutional and the ConsenSys Cryptoeconomic Research team. You can find the full report here.
As with any efficient technology, the Ethereum roadmap is full of upgrades to its infrastructure that make it future-proof. The first such upgrade, called the Merge, will occur in mid-September 2022. It will be a historic moment for the nascent crypto industry and will set up Ethereum for increased security, sustainability, and scalability.
Currently, the Ethereum network has two blockchain layers running in parallel – the layer running Proof of Work (PoW), called the execution layer (the historic state of Ethereum and block production), and the layer running Proof of Stake (PoS), called the consensus layer. The Merge will see these two layers join, effectively ending PoW and transitioning the Ethereum mainnet fully to PoS.
Why Ethereum dominates DeFi
The DeFi ecosystem today is worth $62.6B, and Ethereum accounts for a majority of the overall DeFi ecosystem, with $36.7B total value locked (TVL). Part of the reason for Ethereum’s dominance in DeFi is that most of the popular DeFi applications such as MakerDAO, Aave, Uniswap, and Curve were built natively on Ethereum.
Ethereum also benefits from a strong community of developers and users, especially the Ethereum CoreDevs, who are committed to improving the network by creating documentation and regularly rolling out network updates. These resources help maintain a robust and decentralized network, and drive further adoption.
The network has seen skyrocketing figures for adoption and utilization, which are strong signals for network maturity. To understand how user adoption has increased for Ethereum, let’s take a look at some statistics.
Since January 2020, the total number of unique addresses on the Ethereum network has more than doubled to over 200M (Figure 1). This shows the popularity of the Ethereum network among Web3 users.
The number of active Ethereum addresses has also trended upwards since January 2020, and is currently above 504K, despite the recent market downturn (Figure 2). User participation in the network despite market volatility points to the fact that there are use cases of Ethereum that transcend price activity. In comparison, growth on Fantom is down 70% since the market crash in May.
In a sign of the maturity of the Ethereum network, gas fees have fallen steadily since January this year (Figure 3). They have also become more predictable even as network activity has increased. Lower gas fee makes Ethereum transactions cost efficient, and agnostic of network activity. As a result, users do not need to worry about paying $100 to complete a transaction during times of congestion.
Since January 2020, daily transactions on Ethereum have trended upwards and have stabilized (Figure 4). On average, over 1M transactions per day have been completed on Ethereum over the last 12 months. So users continue to leverage the network, despite Web3 and global macro market volatility. This is also a signal that meaningful applications with real world use cases are being built on Ethereum.
To understand the magnitude of the number of transactions happening on Ethereum, sample this: In 2021, Ethereum processed more transaction volume than Visa, the world’s largest payments processor. Ethereum processed transactions worth $11.6 trillion, while Visa processed $10.4 trillion (Figure 5).
A powerful metric to determine network demand for a blockchain is protocol revenue, which is the amount of money users are willing to pay to transact on a blockchain. A blockchain earns revenue by selling block space, which a miner (or validator on the consensus layer) purchases to complete transactions.
On the other hand, a blockchain’s primary expenditures are around the resources it spends on shoring up network integrity and maintaining security. These expenses are generally attributable to issuance. Currently, nearly every blockchain spends more money on securing their network than they receive from selling blocks. Therefore, revenue provides a better sense of network demand than simply relying on the total number of transactions. While using Tron or Solana might be cheaper than Ethereum, users may be willing to pay a premium to use Ethereum due to factors such as better security and reliability of the network.
Since mid-March this year, ETH generated $1.8B in protocol revenue, the highest among 20 top blockchains including Avalanche, Solana, Polkadot and Polygon (Figure 6). For a comparison, take Avalanche: It recorded the second-highest protocol revenue in the same time period, generating only $72.6M.
Over the same time period, Ethereum commanded over 90% of the total protocol revenue compared with other Layer 1 (L1) networks (Figure 7).
Since December 2020, staking on Ethereum has gained enormous traction. Over 13.3M ETH had been staked as of August 19, 2022, accounting for nearly 11% of all ETH supply (Figure 8).
As we have seen above, the number of users and liquidity coming to Ethereum is incomparable to other L1 networks. As a result of this high liquidity and large user base, Ethereum becomes attractive to developers who are choosing between different blockchains on which to build. This popularity contributes to building a moat of liquidity for Ethereum. Most decentralized applications (dapps) with the highest TVL and usage across Web3 are built natively on Ethereum. As a result, there is a tremendous amount of value circulating within the network and institutional players can benefit from tapping into this value.
In the next part of this series, we will explore how the Merge will make the Ethereum network more secure.
This series is adapted from our exclusive report, “The Impact of the Merge on Institutions”, in which we discuss how changes to the Ethereum network as a result of the Merge will translate into opportunities for institutional investors.
You can download the full report here.
On September 12th, the key contributors to the report will talk about it on our “Breaking Down the Merge for Institutions” webinar. You can register for it here.