As of July 4, 2023, ETH has accumulated a 63% increase this year, and BTC has accumulated a 87.1% increase. After switching to the PoS mechanism, Ethereum's performance is slightly weaker than BTC, which is different from many people's expectations at the beginning of the year. Why is this? After the US SEC strictly regulated the crypto market, the market is undergoing some very subtle changes. PoS tokens seem to be facing a crisis. What impact will this have on Ethereum? As the leader of blockchain 2.0, what "dangers" and "opportunities" does Ethereum face after the Shanghai upgrade? How will Ethereum's future market develop?
Did Ethereum encounter selling pressure after the Shanghai upgrade?
After the Shanghai upgrade of Ethereum, ETH withdrawals were opened. Did this create selling pressure on Ethereum? According to Oklink data: As of June 29, the ETH pledge rate is currently 21.15%. From the trend point of view, the overall pledge rate of Ethereum has shown an upward trend after the Shanghai upgrade. This means that after Ethereum withdrawals were opened, the newly added ETH pledge amount exceeded the withdrawal amount, which not only did not create selling pressure on Ethereum, but further reduced the circulation rate of ETH, which will be beneficial to Ethereum in the long run.
In addition, after the implementation of EIP-1599, according to Oklink data, as of July 4, 2023, the cumulative destruction of Ethereum reached 3,429,221.74, which will further push Ethereum towards deflation. It is worth noting that the destruction mechanism of Ethereum may seem to have a relatively limited impact on the market during the bear market, but in the bull market or when the ecosystem sees a new boom (similar to "DeFi Summer"), the price performance of Ethereum is expected to become particularly strong, and the cumulative destruction effect of Ethereum will be further highlighted.
The US SEC's regulatory attitude has changed dramatically. Will the switch to the PoS mechanism of ETH be affected?
The recent crypto market is still mainly affected by the supervision of the US SEC. Although the SEC did not sue Ethereum this time, has the SEC really given up its regulatory power over Ethereum?
After Ethereum switched from the PoW mechanism to the PoS mechanism, the regulatory attitude of the US SEC has taken a significant turn. On June 14, 2018, Hinman, the former director of the Corporate Finance Division of the US Securities and Exchange Commission (SEC), said in a speech: "Apart from the fundraising that accompanied the birth of Ethereum, based on my understanding of the current status of Ethereum, the Ethereum network and its decentralized structure, the current offer and sale of Ethereum does not constitute securities trading." He also believes that the native assets of the Ethereum network do not need to be regulated as securities. In response to Hinman's speech, Laura Jarsulic, a lawyer in the SEC's Office of General Counsel, said in an email on June 12: "I am reserved about the direct inclusion of statements about Ether in the speech... because it will make it difficult for the agency to take a different stance on ETH in the future." Both Redfearn and the Office of General Counsel believe that Hinman skipped the threshold question of whether the SEC has jurisdiction, and warned Hinman that by creating this "other" category and focusing on information asymmetry, it will expose regulatory loopholes that the SEC may not have the power to make up for.
If the SEC's attitude was relatively vague before, the SEC's attitude this year has been very clear. According to Bitpush, in February 2023, SEC Chairman Gary Gensler made it clear in an interview with New York Magazine that "everything except Bitcoin is a security." Although the SEC did not sue ETH as a security this time, it is not impossible in the future. At present, the main reasons why the SEC has not taken action may be the following: First, the SEC has not reached a consensus with the CFTC. The CFTC actually believes that ETH is a commodity, and the dispute over regulatory power has not yet been determined; secondly, it is relatively difficult for the SEC to sue Ethereum. In addition to factors such as Ethereum's wide audience, suing Ethereum will almost trigger criticism from the entire crypto world. At present, the SEC is expected to have no time to respond, and it may first solve the cases of Binance and Coinbase; in addition, if the SEC takes action against Ethereum, it may even cause the main innovation force in the crypto industry to move eastward. At present, cities such as Hong Kong and Singapore are actively taking on businesses such as crypto exchanges.
Overall, Ethereum's short-term regulatory crisis is relatively limited, but it is not absent in the long run. Judging from the recent performance of the crypto market, PoS tokens are generally affected by the SEC, and many mainstream crypto assets have plummeted, which means that SEC supervision has, to a certain extent, hit investors' confidence in crypto asset holders in the Ethereum ecosystem. In contrast, PoW tokens are once again popular in the market. After all, the probability of them being considered securities is much lower, especially a group of PoW tokens that are closely related to Bitcoin. Previously, according to Bitpush, EDX Markets, supported by Citadel and Fidelity, has officially announced the launch of its digital asset market, which will provide trading services for four cryptocurrencies including BTC, ETH, LTC and BCH. Smart money in the market seems to have smelled the opportunity for speculation. The discussion rate of BCH on social media has reached a three-year high, and its trading volume has reached a new high this year. In addition, a number of old POW public chain tokens such as BCH fork project eCash (formerly known as BCHA), Bitcoin SV (BSV, Litecoin (LTC), DASH and Ethereum Classic (ETC) also rose relatively high. In the overall market environment of stock game, market speculative funds seem to have a trend of shifting from PoS assets to PoW assets.
Opportunities come after dangers. Dencun upgrade will promote the explosion of Ethereum ecosystem
In the short term, although the US SEC regulation will have some adverse effects on the crypto ecosystem, if we look back at the history of the crypto industry, we will understand that it will only make the industry stronger. Historically, Bitcoin has been labeled a "scam" by regulators in various countries and has been "killed" hundreds of times, but now Bitcoin has not only been integrated into the traditional financial industry, but has also become the legal currency of many countries; Ethereum is still very young, and it is currently most likely just repeating the path that Bitcoin has taken. In the future, regulation may only be a temporary obstacle to Ethereum's powerful technological innovation.
Let's turn our attention back to Ethereum itself. The next important technical upgrade of the Ethereum network, the Dencun upgrade, is likely to push Ethereum towards the next huge boom. The Ethereum Dencun upgrade mainly includes five EIPs (Ethereum Improvement Proposals), which aim to increase data storage capacity and reduce fees. The core improvement is EIP-4844. The largest unit cost of Layer 2 transactions is "Call Data", which currently accounts for more than 80% of L2 transaction fees. EIP-4844 will effectively solve this problem. In the first half of the year, Layer2 leaders Arbitrum One and Optimism have achieved great success and formed a great competition for Layer1. In the future, with the launch of tokens such as zkSync and StarkNet, the Ethereum Dencun upgrade will be completed, and the shares of other Layer1 public chains will most likely be further divided.
In addition, the Layer2 ecosystem is building a super chain ecosystem, the purpose of which is to unify the Layer2 network to build a Rollup chain factory, which will break the island effect of Layer2. Subsequently, concepts such as Layer3 have also begun to be proposed. The huge building based on the "foundation" of Ethereum seems to be breaking through layers of obstacles and rising from the ground, leading the Web3 world to embrace Web2. On February 23, 2023, Coinbase announced the launch of the test network of Ethereum Layer 2 network Base based on OP Stack; on June 19, BNB Chain announced the launch of the opBNB test network, which is an Ethereum virtual machine (EVM) compatible L2 scalability solution based on Optimism OP Stack. The participation of these two crypto giants in the construction of Layer2 super chains has made everything start to not just stay on the concept.
Technological innovation means that huge application innovation may be born. Cheaper and more efficient transactions will directly promote the development of DeFi, NFT and Metaverse. At the same time, it will also help promote cooperation and innovation among different industries, including supply chain, Internet of Things, energy and other fields. Once the ecological application explodes, under the joint action of Ethereum's pledge mechanism and destruction mechanism, ETH will most likely begin to truly "lead the way".
Why has ETH performed worse than BTC this year?
According to Bitpush, as of July 4, 2023, ETH has accumulated a 63% increase this year, and BTC has accumulated a 87.1% increase. Although we are still optimistic about Ethereum's future performance, we have to say that ETH's performance in the first half of the year is still much weaker than Bitcoin, which is not what many people expected at the beginning of the year. What is the reason behind this?
This article believes that the main reason behind this is that in the first half of the year, a series of innovative applications appeared in the Bitcoin ecosystem, while the Ethereum ecosystem was actually lackluster in comparison. At the beginning of this year, two innovative applications appeared in the Bitcoin ecosystem, becoming the core force driving the rise of Bitcoin. A Bitcoin NFT protocol called Ordinals promoted the popularity of Bitcoin's native NFT in a very short period of time; as a result, it attracted a group of Ethereum NFT protocols to migrate to the Bitcoin network. Yuga Labs, the strongest IP creator in the NFT field, also launched the NFT series TwelveFold on the Bitcoin blockchain based on the Ordinal protocol.
Another is the Nostr protocol. On February 1, 2023, Twitter founder Jack Dorsey announced the launch of the Nostr-based application Damus, where users can post content, send private messages, and make lightning network payments. As of February 5, 2023, the number of public keys has reached more than 500,000; in addition, Nostr's ecosystem also includes the communication tool Anigma, the text sharing tool Sendtr, the online chess game Jeste, and so on.
Then on March 8, 2023, crypto community user @domodat borrowed from Ethereum’s ERC-20 token standard and created a standard for testing homogeneous tokens on Bitcoin with the help of the inscription function. Although it currently only has three functions: deployment, minting, and transfer, it has made Meme tokens popular and even caused congestion in the Bitcoin network. Since then, protocols such as BRC-21 have also been proposed one after another. In addition, with the support of Bitcoin’s Layer2 ecological construction, applications such as DeFi have also begun to appear in large numbers in the Bitcoin ecosystem.
Looking at the Ethereum network, although the Shanghai upgrade is very important, its core is just to allow ETH to be withdrawn relatively freely. Although it has brought popularity to the staking track, it is not actually a core technological breakthrough. The congestion problem that restricts the development of Ethereum has not been solved in essence. It is difficult to transform technology into productivity, thereby promoting breakthroughs and explosions in ecological applications, and it is difficult to increase the intrinsic value of Ethereum, which will be reflected in the price, which will be inferior to BTC's performance.
As we said above, the Dencun upgrade is essentially an important upgrade that transforms technology into productivity. From the timetable, Ethereum core developers expect the Dencun upgrade to be launched at the end of 2023, and next year Bitcoin will usher in halving in April and May, and market sentiment will gradually warm up; coupled with the Federal Reserve's policy may shift next year, etc., Ethereum is likely to strengthen some time before the Dencun upgrade at the end of the year, and usher in a good round of market conditions stimulated by the outbreak of the Layer2 track.