Ethereum anomaly: market value doubles but ecosystem is sluggish

In two months, Ethereum's native asset ETH doubled in price in the bear market, rising from a low of $881 to over $2,000.

The current round of ETH rise lacks the momentum of the growing ecosystem on the chain. According to Dune Analytics data, the number of new smart contracts on Ethereum in the past two months has been less than 300,000, far lower than the 2.7 million in the same period last year. In addition, the gas fee, which directly reflects the activity of the Ethereum network, has also dropped to around 6 Gwei, which is about 90% less than the bull market period.

Some media have pointed out that Ethereum network activity has reached its lowest level in the past five years. Such on-chain performance is in stark contrast to its recent rising price trend.

Industry insiders analyzed that the reason for this phenomenon is mainly because Ethereum’s upcoming “merger” upgrade has raised market expectations, so some funds are speculating on ETH in advance.

Ethereum on-chain activity continues to be sluggish

After a long decline, ETH seems to be getting rid of the bear market downturn and returning to the upward channel. On August 15, Ethereum rose to more than $2,000, and then fell back to around $1,900, more than double the recent low of $881 on June 19.

This round of rise is due to both the recovery of market sentiment and the upcoming Ethereum merger. It is expected that in mid-September, the current Ethereum mainnet will merge with the Proof of Stake (PoS) consensus layer "Beacon Chain", and then switch from the Proof of Work (PoW) consensus mechanism to the PoS consensus mechanism.

It is generally believed in the industry that after the Ethereum merger is completed, the output of ETH will be significantly reduced, and more ETH will be staked on the chain, thereby driving up prices.

Expectations are positive and the rise in ETH prices is in line with market logic, but one thing that cannot be ignored is that the Ethereum chain ecosystem has not yet emerged from the shadow of the cold winter.

According to Dune Analytics, Ethereum’s recent network construction activities are particularly sluggish, and the number of new smart contracts on the chain continues to decline sharply. In the past June and July, the number of Ethereum contracts deployed in a single month was less than 300,000. In the same period last year, this number was as high as about 2.7 million.

The number of Ethereum smart contract deployments has been below 300,000 for two consecutive months

In addition, the Gas fee, which can directly reflect the activity of the Ethereum network, has not risen with the price increase. According to OKEx data, on August 15, the recommended Gas price for transfers on the Ethereum chain was 6 Gwei, which is lower than 94.93% of the time in history. At this time, a transaction on Uniswap only costs about $2 in Gas fees, while during the active period of the network, the same transaction would cost hundreds of dollars in Gas fees.

"Ethereum network activity has reached its lowest level in the past five years," foreign media U.Today pointed out that usually, a surge in the number of deployed contracts is a catalyst for price growth, which was also the main reason why ETH rose to nearly $5,000 last year.

Today, the price of Ethereum and its on-chain ecology show two completely different performances, which is also a strange sight in the recent crypto asset market.

Can “merger” lead to increased on-chain activity?

Industry insiders believe that the continued downturn in the Ethereum ecosystem may be caused by multiple factors. On the one hand, the entire crypto asset market is still in a bear market, and the inflow of funds is insufficient; on the other hand, the upcoming merger and the potential possibility of network forks have also made developers wait and see.

From the overall performance of the recent crypto asset market, except for Ethereum and related concept assets (such as ETC), the growth of other assets is generally not ideal. In particular, BTC, which has always been the bellwether of the crypto asset market, has only rebounded 28.9% from the lowest point of this round of bear market, which shows that most market funds are in a wait-and-see attitude.

According to OKLink data, the current total locked value on the Ethereum chain is US$61.59 billion, and has been in a state of slow growth in the past month, but this is mainly related to the price rebound of on-chain assets such as ETH, and does not mean that new funds continue to flow into the chain.

The total locked value on the Ethereum chain has been growing slowly recently

Without capital inflow, the activity of Ethereum, a value transmission network, is naturally not as good as before. For on-chain application developers, the Ethereum merger means a major change in the consensus mechanism. Deploying applications at this time may face a series of unknown problems after the merger, including possible network forks, so many developers choose to wait for the merger before developing.

In addition, after the successive implementation of application scenarios such as DeFi protocols, NFTs, DAOs, etc., such as transactions and lending, the entire blockchain industry has fallen into a bottleneck period of exploring application scenarios, which has also led to a decline in activity on the Ethereum chain to a certain extent.

Therefore, the sharp rise in ETH prices due to the "decoupling" from the on-chain ecosystem is more likely to be a result of the market's early speculation in anticipation of a "merger". Therefore, investors should be wary of "taking over at high prices" in the short term.

So, can the upcoming "merger" significantly increase the activity of the Ethereum chain ecosystem?

In the view of industry insiders, the "merger" is just a change in the consensus mechanism. It is difficult for Ethereum's network performance and gas fees to be effectively optimized in the short term, and it is highly unlikely to attract more developers and users on a large scale. "The merger is unlikely to fundamentally solve the problem of low on-chain activity unless Ethereum improves scalability through sharding in the future."

It is worth noting that with the continuous implementation of Layer2 solutions such as Arbitrum and Optimism, the second-layer network based on Ethereum has gained more participation recently.

According to L2BEAT data on August 15, the total locked value of the Ethereum Layer2 network has increased by 6.37% to US$6.1 billion in the past 7 days. The industry expects that before Ethereum's performance problems are resolved, the number of users and funds on the Layer2 network are expected to continue to grow, which will also increase Ethereum's adoption rate to a certain extent.