The State of Ethereum

NOV 02, 2021 • 3 Min Read

Jeremy Ong + 2 others

Disclosure: Delphi Ventures and members of our team have invested in ETH. We have also done consulting work for Aave in the past. These statements are intended to disclose any conflict of interest and should not be misconstrued as a recommendation to purchase any token. This content is for informational purposes only and you should not make decisions based solely on it. This is not investment advice.

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ETH’s Structural Megatrend

  • Since August 2020, ETH % supply on exchanges has been trending down from ~27% to ~12% as of today. On the other hand, the % supply of ETH deposited in smart contracts has been making new highs during the same time period, climbing from ~10% in June 2020 to ~21% today.
  • We are witnessing a structural shift in which more digital assets are shifting from centralized custodians & service providers to decentralized counterparts. The biggest tailwind that’s driving this phenomenon is hot money searching for higher yields on Ethereum. Many DeFi users also bridge ETH onto other chains for the same reason. As DeFi and multichain activity continues to take off, we expect this trend to continue.
Gas Price Ticks Up, ETH Burning Follows

  • Ethereum’s median gas price has climbed beyond levels we saw a few months ago during the August-September NFT frenzy as on-chain activity picks up.
  • While NFT-related activities have taken a breather (more on this in tomorrow’s daily), the increased volatility in the market means that arbitrage opportunities appear more often across various liquidity pockets on a plethora of DEX’s.

  • Since the implementation of EIP-1559, OpenSea leads the way as the #1 contributor to ETH burning. Unsurprisingly, the NFT mania that happened during August and September proved to be unsustainable as OpenSea’s burn contribution plateaued.
  • Despite NFT activity cooling down, Uniswap v2, USDT and ETH transfers stepped up to fill the void left behind by OpenSea. This is in part due to increased market volatility as of late and has led to increased on-chain activity.
“Ultrasound Money”

  • Thanks to the increased on-chain activity and high gas prices, Ethereum experienced its first-ever deflationary week since its inception. In addition to more liquidity leaving exchanges and being locked up in smart contracts, a sustained deflationary scenario will likely contribute to a supply shock as ETH becomes scarcer amid rising demand.
  • If we expect volatile price action to continue in the coming months it could keep gas prices high, which risks pricing out a large cohort of smaller retail users. There’s also a balancing force at play here; when gas prices on Ethereum are too expensive, on-chain activity (and therefore demand for block space) may fall, reducing demand for ETH, which can have an adverse impact on price (all else held equal).
  • Therefore, it is critical that Ethereum scaling solutions like StarkNet, zkSync, Arbitrum, and Optimism gain traction soon, otherwise steep transaction costs will increase activity on alternate L1s such as Solana, Avalanche, Fantom, and Polygon (to name a few).
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Jeremy Ong + 2 others