Original source: Ebunker Chinese

The Ethereum merger is one of the most important upgrades in Ethereum's history, which enhances ETH's deflationary properties while significantly reducing the network's carbon footprint. Although ETH's price has been range-bound for more than a year, the fundamentals of the Ethereum network have changed a lot. The merged ETH issuance has dropped by more than 80%, the staking participation rate has increased by 87%, and about 1 million ETH has been permanently destroyed from the supply.

ETH supply has dropped by 296k since the merger

On September 15, 2022, Ethereum successfully completed the merger, transforming the network from PoW to PoS consensus mechanism, which completely changed the token economics of ETH. The daily issuance of ETH has dropped from 13,500 to about 2,300 at present, a decrease of more than 80%. Coupled with the introduction of the Ethereum burning mechanism, as long as the basic transaction fee is higher than the new circulation rewarded to the stakers, Ethereum will show a deflationary state.

Currently, the ETH supply is nearly 300,000 less than when it was merged. Assuming that it is still in the PoW mechanism, the ETH supply will increase by 3.8 million, equivalent to approximately US$6.27 billion.

Challenges of Liquidity Staking

Although ETH's deflationary properties have increased, new challenges to the decentralization of the Ethereum network have also begun to emerge. Ethereum's merger has contributed to the prosperity of liquid staking tokens (LST) in 2023. These assets representing staked ETH certificates can be easily traded on trading platforms or used in various DeFi applications.

In April this year, Ethereum activated the staking withdrawal function after completing the Shanghai upgrade, thereby reducing the price difference between ETH and staked ETH, further strengthening the adoption of LST. Currently, the various liquidity staking protocols have a total of about 10.8 million ETH staked, accounting for 42.5% of the total ETH staked.

According to Dune Analytics data, the number of ETH staked in Lido, the largest liquidity staking protocol, has increased from 4.6 million at the beginning of the year to 8.6 million. CBeth (ETH staked on Coinbase) has also reached 1.17 million since its launch in September last year, and Reth staked on Rocket Pool has also reached 450,000.

Since Lido’s ETH staked accounts for nearly one-third of the total ETH staked, some industry insiders believe that Lido’s market share is too high, which is not conducive to the decentralization and decentralization of Ethereum.

Allen, founder of Ebunker, a well-known Ethereum non-custodial staking service provider, said that the Lido community is also aware of this, so Lido is currently actively considering decentralization at the geographical level, decentralization at the client level, and decentralization of node supplier jurisdictions. As one of Lido's node suppliers, Ebunker is also promoting a variety of clients to avoid too much ETH being concentrated on very commonly used clients such as Geth, so that Ethereum remains neutral and robust.

In May, Ethereum co-founder Vitalik Buterin advocated that staking service providers that control more than 15% of ETH staked should proactively raise user fees to slow their adoption until their advantage decreases.

NFT interest declines, ETH market sentiment is low

According to a set of data released by Messari on September 15, Ethereum NFT transaction volume has dropped significantly, indicating a clear decline in user engagement and trading activity. Ethereum PFP (i.e. "avatar") NFTs have achieved great market success, but are now facing massive price drops. Many of these NFT collectibles have seen floor prices drop by at least 30%, leaving collectors and investors worried that their value will continue to decline.

According to the total fee trend chart of Ethereum payments released by GlassNode on September 19, the data has continued to decline recently and has hit a low point in nearly 8 months. Of course, this downturn is not limited to the NFT market. The price of ETH has also fallen in the past month, and its price has also affected the overall sentiment of Ethereum and its NFT market.

According to GlassNode, the number of addresses holding more than 1,000 ETH fell to 6,082, a five-year low. Of course, this may have something to do with the rise of staking, after all, whales also like to earn the 4% APR provided by the ETH network.

In addition, the number of addresses holding at least 0.1 ETH has also decreased slightly, which may be related to the launch of cheaper Ethereum L2 networks (such as the recently very popular Base L2).

L2 adoption continues to rise

Since mid-September, the number of ETH held on Ethereum L2 has been climbing and currently remains above 2 million, close to 2% of the total supply.

The number of ETH held on each mainstream L2 is shown in the figure above: Arbitrum holds a total of about 1.3 million ETH, worth about $2 billion; Optimism holds a total of 320,000 ETH; ZKSYNC based on ZK holds a total of 186,000 ETH. All three L2s have accelerated user adoption because of airdrop rewards or airdrop expectations. In contrast, Coinbase's Base is a blockchain based on OP. Although the official has clearly stated that there will be no airdrop rewards, according to L2 data, Base holds about 143,000 ETH, which is a brilliant performance.

It is worth noting that the above L2s all have significant Dapp ecosystems, some of which are only launched on specific L2s. These Dapps sometimes automatically airdrop tokens. Therefore, Base’s adoption by users may also be due to the expectation that Dapps on Base may have airdrop rewards.

However, fundamentally, it is the market demand for expansion that is the main factor driving L2 adoption. Since Ethereum can only process about 15 transactions per second, it sometimes pushes gas fees to a level that ordinary users consider expensive. However, numerous L2s have effectively reduced this data, and the average gas fee on the L2 chain has dropped to $0.7.

In addition to the above mainstream L2, the development of the following L2 is also worth paying attention to:

1) Starknet is a ZK-based L2 with a total of 60,000 ETH on it. The project has not yet been fully launched.

2) Consensys’ Linea has not been able to attract more adoption for the time being, with data hovering around 24,000 ETH.

3) Mantle, released by BitDAO, is supported by crypto futures exchange Bybit, which holds 23,000 ETH.

Polygon ZK, which has not yet been fully launched, holds approximately 10,000 ETH. Its three ZK L2s have different structural settings while maintaining a focused development posture.

Currently, the Ethereum ecosystem is waiting for the release of Scroll L2, after which the L2 field may start moving towards the growth and adoption phase. On the other hand, new players are also joining the L2 segment. For example, Aztec has been developing for many years with the aim of launching a privacy-focused L2.

L2 will become a catalyst for the prosperity of the Ethereum ecosystem

Overall, the L2 ecosystem will continue to attract a large amount of ETH, which may promote a new wave of adoption and revitalize the DeFi ecosystem.

L2 and L2 SDK can allow any project to launch its own second-layer software package, especially after the trading platform supports direct deposits to L2, the gas fee will become lower and lower.

For example, Coinbase has already done this on the Base chain. Kraken also supports direct deposits for the Polygon sidechain. As L2s move beyond the initial launch phase, larger L2s are likely to attract direct deposits from major crypto exchanges. In addition, cross-chain bridge projects also allow assets to be transferred from major L2s to other L2s at low fees. Once a user uses one of the L2s, they are participating in the Ethereum ecosystem.

Although the performance of L2 has not been tested by a large number of users in the bull market cycle, its future performance remains unknown. However, after more than a decade of efforts in the crypto industry, the concept of how public blockchains can be expanded to a global network has taken shape.

If L2 can successfully expand the capacity of Ethereum, the crypto world will witness a public chain system that is completely different from previous market cycles - Ethereum will become the basic chain, and numerous L2s will greatly accelerate the adoption rate of this basic chain.

Ultimately, the ETH+L2 architecture will become a truly global distributed infrastructure with the formation of "many stars supporting the moon".