This week in crypto. The state of Ethereum, NFT projects getting into fungible tokens and more...
The state of Ethereum
Ethereum proved that a blockchain can be great not only for creating an independent money, but for a multitude of purposes.
Its creator Vitalik Buterin was the first to theorize and then – realize the idea of complex blockchain-based smart contracts, opening the door to countless possibilities to decentralize so many aspects of our lives.
This week Vitalik made the cover of TIME magazine, showing how increasingly popular crypto is becoming. He also gave a long interview, sharing details about Ethereum beginnings and his vision of its future. Ethereum is an evolving project, both technically and socially; it’s about time we check on its state.
The tech
From its conception in 2014, Ethereum was meant to change, passing the stages outlined by Vitalik Buterin: Frontier, Homestead, Metropolis, and the final one – Serenity. These stages reflect the journey from the PoW consensus and limited transaction throughput to a PoS-based blockchain with high scalability and much lower transaction fees.
Ethereum is now in the middle of the Serenity stage:
The first step – the rollout of the Beacon Chain with PoS consensus – was accomplished in December 2020, and it now exists as a parallel chain to the Ethereum Mainnet. The users have staked over 10M ETH on its deposit contract since the rollout – a necessary condition to be able to compete for producing new blocks once Ethereum changes consensus.
The second step towards Serenity will be the Merge of the Mainnet (also called execution layer) and the Beacon Chain (also called consensus layer). It will effectively switch Ethereum to the PoS consensus and free it from the controversy surrounding the PoW, while increasing the throughput and decreasing the fees.
The third step would be sharding – extending Ethereum to 64 blockchains, which would increase the capacity of the network and improve transaction speed considerably.
This week Ethereum completed an important procedure: the Merge was successfully implemented on the Kiln testnet.
Successor to the previous merge testnet, Kiln is expected to be the last merge testnet created before existing public testnets (Goerli, Ropsten, etc.) are upgraded. After that, the Mainnet itself could be upgraded, and the success of Kiln’s merge could indicate that it could indeed happen in 2022, as announced by the Ethereum Foundation.
The usage
Ethereum is a universal tool that anyone can use: that’s the beauty of the blockchain that by design cannot discriminate. For the moment its most popular use cases are the DeFi, or decentralized finance, and NFTs.
That seems to sadden Vitalik Buterin, who is preoccupied that too many people are guided by their greed instead of creating long-term solutions to the world problems. He mentioned in his TIME interview that he was dreaming about Ethereum becoming a launchpad for all sorts of sociopolitical experimentation: fairer voting systems, urban planning, universal basic income, public-works projects… In Vitalik’s eyes Ethereum could become a counterweight to the authoritarian governments or centralized Silicon Valley companies.
This vision is still minoritarian among the companies building on Ethereum, which has pushed Vitalik to speak up more often. Of course, he cannot have any direct influence neither on the protocol, nor on what’s being built on it, but he is still an important figure in the blockchain world, and an acknowledged visionary. Speaking up on putin’s invasion of Ukraine, he said : “One silver lining of the situation in the last three weeks is that it has reminded a lot of people in the crypto space that ultimately the goal of crypto is not to play games with million-dollar pictures of monkeys, it’s to do things that accomplish meaningful effects in the real world.”
Vitalik’s vision of the NFTs goes further than the current use cases: “NFTs can represent much more of who you are and not just what you can afford”. He has called for the creation of a new type of NFT, based not on monetary value but on participation and identity. For example, the allocation of votes in an organization might be determined by the commitment an individual has shown to the group, as opposed to the number of tokens they own.
Speaking about million-dollar pictures of monkeys, the NFTs of today are a very important part of Ethereum transaction load. So important, actually, that since the decline in the hype around them Ethereum has seen its fees steadily declining: an average fee is now around $10, down from $62 in November. The decline reflects lower ETH prices of course, but also lower gas fees, signalling a lower demand.
There can be another explanation for it too: the rise of Ethereum competitors, which are eating away at its “market share”.
The competitors
Ethereum hasn’t yet completed the Serenity stage, and it has a limited throughput, controversial PoW consensus and high fees. Different competing blockchains have emerged trying to fill this or that gap, with most eminent being Solana, Terra and BSC (Binance Smart Chain).
Solana is playing strong on NFTs, while Terra is steadily gaining ground as a high place for DeFi: DefiLlama analytics website shows that 55% of the Total Value Locked in DeFi is on Ethereum (down from approximately 83% one year ago), while Terra is responsible for over 11% (up from almost 0% a year ago). BSC is leveraging the enormous ecosystem around the Binance exchange.
Bitcoin could also be considered a future competitor, as several layer-2 solutions are being actively developed in order to allow it run complex smart contracts.
We are still early though, and it’s important to see beyond the figures.
Some of the Ethereum competitors are pumped so heavily by the VCs that developers engage in building on them just in order to make a quick buck. Others have chosen to sacrifice decentralization or security to achieve higher scalability. The consequences of both can be seen in only in a long-term (unless a major security breach knocks a blockchain off before).
Ethereum stays a decentralized blockchain with a democratic governance and thousands of developers working on it. The Merge will be a significant step to improve its scalability issues and lower its fees, which consequently could attract more social usage DApps that Vitalik is so hopeful for. It’s crucial though that for the sake of decentralization the decision-taking process remains democratic and does not dwindle into plutocracy – the problem so many PoS blockchains have.
NFTs and Metaverse
The initial hype around the NFTs may be calming down, as people become more cautious of scams and more demanding towards the new projects. This does not mean that the space itself has lost its creativity though.
The new thing in collectible NFTs now are fungible tokens, and the famous Bored Ape Yacht Club community issuing them may well start a larger trend. This week the newly formed ApeCoinDAO issued 1Bn APE coins, acting as a DAO governance token, but which can also be used as a payment token in BAYC ecosystem, give access to exclusive services or be used as an incentive for third-party developers willing to contribute.
Since the token release two days ago its price went from $7 to $17, correcting to $10 since. For the moment it is mostly speculation, although some projects have already started attributing APE tokens a utility, like Animoca Brands’ Benji Bananas game, which now accepts the token as an in-game currency. Read more on ApeCoin here.
Strictly speaking, ApeCoin is not the first fungible token used in the NFT space. Projects like NounsDAO have already issued theirs, others are planning to. However, tokens launched by the project of the quality and the scale of BAYC, backed by many prominent Web3 players, is going to be exceptionally interesting to watch.
Markets
Bitcoin
Bitcoin has cleared the $41k level, gaining almost 10% this week along with the stock markets that try to recover from the recent slide.
As noted by the Glassnode, HODLing remains the preferred strategy of Bitcoin investors, with the proportion of young coins now at all-time-low of 24.5%. It means that more bitcoins have been sitting idly on their addresses than those that have exchanged hands in the past 6 months. Such market behaviour has been historically associated with late stage bear markets.
Ethereum
Ethereum price action was a bit more vivid than Bitcoin’s this week, with ETH gaining 15% and reaching $2’880.
The successful completing of the Merge on another testnet must have surely contributed to an increase in public confidence in the protocol and its future.
Also, the final Merge will sign even further decrease of ETH supply, as more nodes will stake their coins. This would add to the deflationary pressure initiated by the EIP-1559 update, and make ethers even scarcer - which would logically pull the prices up.
Quote of the week
“I do think we need an alternative to the dollar as we’ve seen in the last week or two and that you know, there will be several survivors and I’m invested to a small extent in Bitcoin.”
Bill Gross, a 77-yeard old co-founder of PIMCO investment firm (>$2.2Tr AUM) and a long-term Bitcoin critic