The State of Ethereum Q2 2022 Report

Q2 2022 is a real bear market for cryptocurrencies, but how does it affect Ethereum 's fundamentals? Bankless analyst Ben Giove takes a deep dive into the current state of the Ethereum network. This report examines the top metrics of the Ethereum protocol and ecosystem in Q2 2022 (as of June 30), divided into four categories: Protocol, DeFi , NFT , and Second Layer, and compares Ethereum's performance in Q2 2021 and Q2 2022.

protocol

Ethereum network revenue fell 33.4%, from $1.91 billion to $1.28 billion. This metric measures the value of transaction fees paid for using the network. Of this, $1.09 billion of ETH, or 85.4%, was burned, removing it from the circulating supply. The drop in demand for block space is likely due to market weakness during the quarter, which dampened speculative activity.

ETH inflation fell 37% from 1.12% to 0.71%. This metric measures the growth in ETH supply during the quarter. This drop is likely due to the fee burning mechanism implemented in Q3 2021 via EIP-1559.

Daily active addresses fell 20.6% from 593,404 to 471,447. This tracks the average number of wallet addresses transacting on Ethereum per day during the quarter. As with network revenue, this drop is likely due to a decline in user speculation amid the bearish backdrop of the quarter.

Staked ETH increased by 116% from 6.01 million to 12.98 million. This measures the amount of ETH staked on the beacon chain ahead of the network’s upcoming transition from proof-of-work (PoW) to proof-of-stake (PoS). As of the end of the second quarter, approximately 10.86% of the total ETH supply was staked.

DeFi Ecosystem

DeFi TVL fell 42.4% from $59.42 billion to $34.21 billion. The metric tracks the value of assets deposited in DeFi protocols deployed on Ethereum. The decline is likely due to falling crypto asset prices this quarter, as well as liquidity outflows due to yield compression and a decline in risk appetite among DeFi users.

Stablecoin circulating supply increased by 43.0%, from $76.58 billion to $109.5 billion. This measures the number of USD-pegged stablecoins issued and circulating on Ethereum. This increase can be attributed to increased demand for stable assets to trade or leverage, as well as the growth of newly issued stablecoins such as FRAX.

Spot DEX volume fell 9.0% from $350.54 billion to $319.13 billion. This metric measures the total volume traded on Ethereum on decentralized spot exchanges during the quarter. The decline in spot volume could be due to market conditions, as volume is highly correlated with bullish price action.

Perpetuals DEX volume increased by 598.5%, from $19.3 billion to $135.48 billion. This increase can be attributed to the growth of dYdX , which saw a 598.4% year-over-year increase in volume.

The liquid staked share of deposits increased by 177.5%, from 12.0% to 33.3%. This metric measures the share of ETH staked by non-custodial protocols that issue liquid staked derivatives (LSD). This increase is likely due to the long-term increase in ETH staked on the beacon chain in Q1, as well as the increased integration of LSDs (such as Lido ’s stETH) with different DeFi protocols.

NFT Ecosystem

NFT market volume surged 2,439.2%, from $509.36 million to $12.93 billion. The metric tracks trading activity on the marketplaces OpenSea , Foundation , LooksRare , Rarible , and Superrare. This increase is likely due to the long-term growth of the NFT ecosystem between Q2 2021 and Q2 2022 - especially the rise in popularity of PFP collectibles.

The average number of daily NFT traders increased by 1114.5% from 2412 to 29,289. This metric measures the average number of users who traded NFTs per day during the quarter. Like market volume, the growth of this metric is likely the result of long-term growth in the NFT ecosystem.

Bored Ape Yacht Club (BAYC) floor price surged 3844% from 2.50 ETH to 98.60 ETH. This growth is likely due to the growing popularity of PFP NFTs and the increasing adoption of BAYC by various celebrities and well-known public figures.

L2 Ecosystem

TVL on L2 increased 896% from $374.17 million to $3.72 billion. This metric measures the value of the Ethereum L2 ecosystem, and its growth is likely driven by increased usage, liquidity, and application deployment on networks such as Arbitrum and Optimism .

Arbitrum Network revenue hit $8.2 million. Optimism revenue hit $5.58 million. This metric tracks the value of fees users pay to transact on each L2.

Ecosystem Highlights

DeFi proves to be resilient

Despite falling TVL and slowing spot volumes, the Ethereum DeFi ecosystem continued to prove its resilience by withstanding considerable stress testing throughout Q2.

The major turmoil began with the implosion of UST in May 2022, which at its peak was the world’s third-largest stablecoin with a market cap of approximately $18.78 billion. While the on-chain damage was largely confined to the Terra blockchain itself, the impact of UST’s collapse spread to the broader crypto industry, with the market falling 45% in the aftermath.

This has led to the collapse of numerous CeFi entities. Overleveraged hedge fund Three Arrows Capital and lending platform Voyager have both been embroiled in bankruptcy battles, putting considerable pressure on other lenders such as Celsius and BlockFi , the latter of which was acquired by FTX .

Despite the CeFi carnage, DeFi on Ethereum weathered the storm fairly well.

The three largest lending protocols , Compound , Aave, and Maker, successfully processed $462.25 million in liquidations and continue to operate with 100% uptime, with negligible bad debts at this time.

Interestingly, the transparent nature of DeFi protocols has enabled market participants to monitor the positions of entities such as Celsius, with analysts on Twitter sounding the alarm about the lender’s shaky financial condition.

While liquidity may have dried up and activity slowed during this bear market, the value proposition of on-chain financial systems has never been clearer than it is now throughout Q2.

NFTs keep the heat

Ethereum’s NFT ecosystem has been hot throughout 2022.

NFT prices peaked in the second quarter, with Nansen ’s Blue Chip-10 (a market-cap-weighted index tracking the top 10 collectibles by market cap) reaching an all-time high on May 2.

Meanwhile, Otherside, the upcoming metaverse being launched through Yuga Labs , the company behind Bored Ape Yacht Club (BAYC), is selling land for $317 million.

The sale caused massive congestion on Ethereum, leading to all-time highs in gas prices (and ETH burns).

Another notable collectible series that rose to fame in Q2 was Goblintown. The reserve price for Goblintown reached a high of 7.1 ETH in a few weeks.

The NFT space also saw several high-profile acquisitions and protocol launches in Q2. This included Uniswap Labs and OpenSea purchasing NFT aggregators Genie and Gem , respectively. OpenSea also announced the launch of its decentralized marketplace protocol Seaport.

L2 Token Season Begins

Ethereum’s L2 ecosystem experienced one of its most important milestones with the launch of Optimism’s governance token OP.

OP is the first of the “big four” L2s to issue a token. The model assumes that holders are able to vote on network upgrades and ecosystem incentive distribution. In the future, the token will most likely also be used to disperse and accumulate revenue from Sequencers , the entities responsible for sending transaction batches to L1, currently operated separately by Optimism PBC.

OP has demonstrated the potential of L2 tokens to drive increased interest, usage, and activity on the network.

Since its launch, Optimism’s share of aggregated DeFi TVL has grown from 17.26% to 30.42%.

Another notable token announcement was that Immutable-X, a second-layer focused on gaming built using StarkEx, announced plans to start charging a portion of its IMX tokens for “protocol fees.” Once protocol fees are activated, holders will be able to receive 0.8% of all primary and secondary NFT sales on the network.

Arbitrum recently kicked off the Arbitrum Odyssey event, which aimed to bootstrap usage of popular applications on the network while rewarding participants with NFTs. Due to a spike in gas fees amid record transaction totals, the event was postponed until the Arirum Nitro upgrade is complete.

Despite some hiccups, the inevitable launch of Arbitrum tokens — combined with Optimism’s upcoming incentive program — should help increase L2 usage and accelerate user migration away from Ethereum.

As it stands, only 0.40% and 0.22% of L1 addresses use Arbitrum and Optimism respectively, leaving incredible room for growth in the future.

Looking ahead

Merger is coming

Ethereum’s long-awaited transition from PoW to PoS seems to be finally complete. The merging of the Ropsten and Sepolia testnets has been successfully completed, leaving only Goerli as the last testnet before the mainnet launch.

Why does the merge represent the most important event in Ethereum’s history?

As we all know, PoS Ethereum will be able to complete scalability upgrades such as the implementation of EIP-4488 and EIP-4844, which will reduce the cost of L2 calls to data storage and implement danksharding, respectively. In addition, it will also implement proposal builder separation (PBS), which aims to separate block construction from block verification to mitigate the negative externalities of MEV.

The merger is certainly expected to be a huge bullish catalyst for the ETH asset. Based on the current amount of ETH staked, the issuance required to secure the network after the merger is expected to drop from ~5.5M ETH to ~600,000 ETH, a drop of ~89%.

Based on the past 30 days of network revenue — the lowest since summer 2021 due to pullbacks and fee burns — ETH is expected to experience net deflation, with its supply expected to decrease by 0.6%.

Combined with the removal of structural selling pressure due to upgrading from miners to validators, this represents a significant improvement in ETH’s long-term value proposition.

Competition heats up

While many competitors have lost momentum during the bear market, Ethereum and its L2 continue to face stiff competition from alternative ecosystems.

These competing forces were highlighted by dYdX’s recent announcement of plans to migrate from StarkEx and launch its V4 protocol as its own Cosmos chain. As early adopters of new technologies, the DEX’s migration is a validation of the app-chain theory and a leading indicator that teams and protocols may follow suit and pursue greater sovereignty.

Another network that is putting increasing pressure on Ethereum is Solana . With the rapid development of the NFT ecosystem, the network has the most blockchain users in the past 30 days at 20.3 million. Despite facing bearish headwinds, Solana continues to perform and grow its user base.

As L2s like Optimism and Arbitrum struggle as usage grows, the door appears open for other ecosystems to continue to exert competitive pressure on Ethereum and its network of scalability solutions.

Ethereum is an open-source, decentralized blockchain network. The community has built a thriving digital economy, giving creators bold ways to make money online and more. It's open to everyone, no matter where you are - all you need is an internet connection.