Ethereum State: Review of Ethereum 2022 Q1

This article will review the first quarter financial results of Ethereum, the world's leading smart contract platform, ending March 31, 2022.

01. Key Results

The data compares Ethereum’s performance in the first quarter of 2021 and the first quarter of 2022.

1. Ethereum Protocol

Above: Ethereum network revenue (total revenue) and fee destruction (protocol revenue), source: Token Terminal

Ethereum network revenue grew 46% from $1.6 billion in Q1 2021 to $2.4 billion in Q1 2022. This measures the value of transaction fees paid in ETH by users of the Ethereum network . $2.1 billion (87%) of this was removed from the circulating supply via the burn mechanism implemented by EIP-1559, which was activated in August 2021.

Above: Growth of ETH’s circulating supply. Source: Etherscan

ETH inflation fell 54% from 1.10% in Q1 2021 to 0.51% in Q1 2022. This metric tracks the net change in ETH supply . New ETH is created through block rewards (which are paid to miners as a reward for confirming network transactions), and ETH is destroyed through EIP-1559 mentioned above.

Above: Changes in the number of daily active addresses on Ethereum. Source: Etherscan

Average daily active addresses rose 4% from 507,662 in Q1 2021 to 529,018 in Q1 2022. This metric tracks the average number of addresses interacting with the Ethereum network on a daily basis throughout the quarter.

Above: Average Ethereum network transaction fee (USD), source: Etherscan

The average transaction fee on the Ethereum network fell 80% from $14.93 in the first quarter of 2021 to $2.98 in the first quarter of 2022. This metric measures the average fee that users pay for Ethereum block space in order to have their transactions confirmed.

Above: The growth trend of the cumulative number of staked ETH. Data: Dune Analytics

The total amount of staked ETH increased by 111% from 5.2 million in the first quarter of 2021 to 10.9 million in the first quarter of 2022. This metric measures the amount of ETH staked on the Beacon Chain before Ethereum transitions from using the Proof of Work (PoW) consensus mechanism to Proof of Stake (PoS). About 9.2% of the total ETH supply has been staked in the expected "merge".

2. DeFi Ecosystem

Above: TVL (total value locked) changes in Ethereum DeFi protocols. Source: DeFi Llama

The TVL (total value locked) of Ethereum DeFi protocols has increased by 82% from $49.1 billion in the first quarter of 2021 to $89.5 billion in the first quarter of 2022. This metric measures the value of assets stored in Ethereum-based DeFi protocols (such as decentralized exchanges, money markets, and option vaults).

Above: Growth in the total supply of stablecoins, source: The Block

The total circulating supply of stablecoins increased by 188%, from $42.3 billion in the first quarter of 2021 to $122.1 billion in the first quarter of 2022. This metric measures the value of centralized & decentralized stablecoins issued natively or bridged to Ethereum. Stablecoins included in the calculation include USDC, USDT, DAI, FEI, FRAX, MIM, UST, LUSD, HUSD, PAX, TUSD, sUSD, BUSD.

Note: The chart above includes stablecoins on all blockchains, not just Ethereum, as data for this metric must be sourced from multiple sources. However, this is still largely representative of the growth of the industry.)

Above: Changes in trading volume of Ethereum-based spot and perpetual contract DEXs. Source: Token Terminal

Spot exchange volume grew 667% from $513.4 billion to $3.9 trillion, and perpetual futures exchange volume grew 2,704% from $7.4 billion to $209.1 billion . They track the volume of DEX exchanges on the Ethereum mainnet and perpetual futures exchanges on Ethereum L2, respectively.

Note: The above chart does not include GMX, whose trading volume has been included in the calculation of perpetual contract DEX trading volume in the figure. The relevant data can be found here:
https://stats.gmx.io/

3. NFT Ecosystem

Above: NFT market transaction volume. Source: Dune Analytics

NFT market volume surged 19,290%, from $606.3 million in Q1 2021 to $116.4 billion in Q1 2022. This is a tracking of volume for the two largest general-purpose NFT marketplaces, OpenSea and LooksRare. A total of 226,176 unique wallets bought or sold NFTs in Q1 2022.

Above: Growth in the cumulative number of wallets holding NFTs, source: Dune Analytics

The number of unique wallets holding NFTs increased 306% from 981,315,000 in the first quarter of 2021 to 3.98 million in the first quarter of 2022. This metric measures the number of wallet addresses holding ERC-721 tokens at a certain point in time, ERC-721 is the token standard used to issue NFTs.

Above: Changes in the reserve prices of BAYC and CryptoPunks. Source: Dune Analytics

The base price of CryptoPunks increased by 513%, from $17.42 in Q1 2021 to 106.87 ETH in Q1 2022. This metric tracks the most recent lowest selling price of CryptoPunks. Although launched in Q2 2021, BAYC (Boring Ape Yacht Club), the most expensive profile picture NFT series, had a base price of 108.93 ETH at the end of Q1 2022 , worth approximately $351,000 at the time.

4. L2 Ecosystem

Above: TVL (total value locked) in the Ethereum L2s network, source: L2 Beat

The TVL of Ethereum L2s networks has increased by 964% from $686.9 million in the first quarter of 2021 to $7.3 billion in the first quarter of 2022. This metric measures the total value locked in Ethereum L2s scalability solutions (such as Optimistic Rollups, ZK-Rollups, and Validiums networks). As of press time, more than $23 billion in assets (including $4.2 billion in ETH) have been bridged from the Ethereum network to these L2s networks and other L1 blockchains.

Above: Monthly active addresses of the Optimism network. Source: Dune Analytics

The Optimism network had an average of 31,100 monthly active addresses, while the Arbitrum network had a cumulative unique address count of 483,077 . This metric measures the average number of addresses that transacted on the Optimism network (Optimism is an Optimistic Rollup built on Ethereum) and the total number of unique addresses on the Arbitrum network (Arbitrum is also an Optimistic Rollup built on Ethereum) per month during the quarter. Given that both L2 networks were launched in Q3 2021 and there is limited data available for both networks, we cannot make a year-over-year comparison.

Above: Arbitrum daily network revenue. Source: Cryptofees.info

Arbitrum network revenue was $9.4 million, while Optimistim network revenue was $5.7 million . This measures transaction fees paid using ETH by users on both L2 networks, Arbitrum and Optimistim respectively.

02. Ecosystem Key Points

1. Stablecoins, Curve Wars, and Bribery

There have been many exciting developments on Ethereum during the first quarter of 2022, perhaps the most important of which is the continued growth of stablecoins . As mentioned earlier, the circulating supply of stablecoins on the Ethereum network has increased by more than 188% year-over-year to over $122 billion . In particular, algorithmic stablecoins such as FRAX and UST have seen huge growth relative to their competitors. This growth suggests that despite market weakness, capital may not be fleeing the Ethereum economy en masse.

Above: 6-month growth rate of stablecoins, source: Coingecko & Bankless

One of the more notable second-order effects of the stablecoin boom is the ongoing development of the “ Curve Wars .” This is a battle between some of the major stablecoin DAOs to build liquidity on Curve , the largest decentralized exchange for DeFi . In Q1 2022, as these stablecoin DAOs increase their support for CVX, the market is expected to continue to grow. (Convex Finance’s native token) holdings (because the Convex protocol controls a large supply of CRV (Curve’s governance token) , its holdings exceed 73% of the total CRV, so controlling Convex is equivalent to controlling Curve), this “conflict” takes center stage.

Above: Amount of CVX tokens held by DAOs. Source: DAOCVX.com

To accompany their purchases of CVX, these DAOs paid over $89.2 million in “bribes” to CVX holders who locked up their CVX tokens to ensure their votes were awarded to direct CRV token rewards to different liquidity pools on Curve . With CVX bribes earning an annualized yield of over 40%, Q1 2022 solidified the notion that these bribe payments can be a significant source of cash flow for holders of strategically important governance tokens .

Additionally, Q1 2022 also saw many protocols (such as Ribbon Finance, Balancer, Yearn, etc.) propose or implement a transition to a voting custody token model , hoping to replicate Curve’s success.

Above: The value of bribes paid to CVX holders (blue bars) and the revenue received per CVX (yellow line). Source: Llama Airforce

Several exciting protocols were also released this quarter:

Alchemix V2 : This is the second iteration of Alchemix, the self-repaying DeFi lending protocol, including support for a large number of new collateral assets and yield-generating strategies.
Aave V3 : This is the third version of Aave, the multi-chain DeFi money market, with a new cross-chain lending portal, a feature that enables cross-chain minting and destruction of tokens.
Syndicate Protocol : Allows the creation of on-chain investment clubs.

2. NFTs seem to be heating up

Thanks to the explosive growth momentum in the first two quarters, the NFT ecosystem on Ethereum underwent several major changes in the first quarter of 2022.

Above: Revenue growth of NFT market LooksRare. Source: Token Terminal

One of them is LooksRare , a new general NFT marketplace and competitor to OpenSea, which launched in January 2022. LooksRare launched a vampire-like attack on this competitor by airdropping its native governance token LOOKS to OpenSea users.

The NFT marketplace also allows LOOKS token holders to stake their tokens to receive token issuance and ETH-based fee income generated by the platform. While this has led to allegations of money laundering transactions to obtain these rewards, LooksRare achieved over $22.1 billion in trading volume in the first quarter of 2022 , generating over $444 million in revenue for stakers. Although LOOKS' valuation is 79% below its all-time high at the time of writing, LooksRare appears to have transformed the industry from an oligopoly to a duopoly.

Another major development in the first quarter of 2022 was the addition of Yuga Labs Building an ecosystem powerhouse. Yuga Labs’ Bored Ape Yacht Club (BAYC) has become a celebrity favorite, and the series is now the most valuable NFT avatar (PFP) collectible in terms of BAYC’s base price. Yuga has also made several major moves to consolidate its position in this emerging area of the Ethereum economy.

Above: Distribution of APE tokens airdropped by Yuga Labs to BAYC and MAYC holders. Source: Apecoin.com

First, Yuga Labs acquired the intellectual property rights to Larva Labs’ NFT collections, including Cryptopunks and Meebits. Soon after, Yuga Labs announced the release of Apecoin (APE) tokens, with a portion of the token supply allocated to BAYC holders, with some airdrops exceeding six figures.

APE, currently priced at an all-time high with a fully diluted valuation of over $20 billion, will serve as a governance and utility token in Yuga Labs’ ecosystem of various metaverse projects , such as the recently released game Otherside. These developments make Yuga Labs a blue chip brand in the NFT ecosystem and a metaverse media giant.

3. L2 remains popular

Ethereum’s thriving L2 (layer 2) ecosystem continued to grow in the first quarter of 2022.

As mentioned earlier, as of the end of Q1 2022, the TVL locked in the Ethereum L2 network increased by 964% year-on -year to over $7.3 billion. In summary, how the TVL of these Ethereum L2 networks continues to rank with other L1 networks, the TVL of these Ethereum L2 networks ranks fifth. Arbitrum ranks first among Ethereum L2 networks with a TVL of over $2.1 billion .

Above: Arbitrum network TVL changes. Source: DeFi Llama

Among the many L2 network native applications, the most attractive one comes from the derivatives industry . With the advantages provided by the L2 network in terms of scalability, dYdX , Perpetual Protocol and GMX Such derivatives applications have become available on three of the top five decentralized perpetual swap exchanges by volume, running on StarkEx, Optimism, and Arbitrum.

Above: TVL changes of decentralized options exchange Dopex. Source: DeFi Llama

Like perpetual contracts, another type of derivatives, options , is beginning to gain meaningful traction on L2 networks. Dopex and Lyra , two decentralized options exchanges , run on Optimism and Arbitrum, respectively. The two applications have a total of over $119 million in deposits, and both are among the top five most used applications on their respective L2 networks.

Above: TVL changes of decentralized options exchange Lyra. Source: DeFi Llama

These derivatives protocols, along with other L2 native projects such as Tracer DAO, Jones DAO, and Vesta Finance, appear poised for further growth on the back of several favorable factors, such as an increased desire among DeFi native investors to hedge and find alternative sources of yield amid volatile market conditions, and the upcoming launch of native tokens for their respective Rollups networks (more on this below).

03. Outlook

While the market faces a swirl of macro headwinds, there are several catalysts on the horizon for Ethereum that appear to strengthen its fundamentals, competitive positioning, and token economics.

1. Merge, merge, merge

The most important is the upcoming merger of PoW to PoS, a transition that will bring many major changes to the Ethereum network and ETH assets. In terms of the Ethereum network, the merger will reduce the energy consumption of the Ethereum blockchain by an order of magnitude , as PoS consumes much less energy than PoW. This will help reduce Ethereum's environmental impact and increase its attractiveness to traditional institutional investors, who often consider ESG (environmental, social and governance) requirements when making asset allocation decisions.

Above: Estimated ETH issuance rate after the merger. Source: Ultrasound.money

The merger will also have a significant impact on ETH's supply schedule and value proposition . While EIP-1559 has already resulted in a significant reduction in ETH's inflation rate, the transition to PoS seems likely to result in a deflationary ETH. Based on the current amount of staked ETH, and the gas consumption since the activation of EIP-1559, ETH is expected to be deflationary, with an estimated issuance rate of -2.1%.

Although the currently staked ETH is in a non-transferable state and will be gradually unlocked and liquid after the merger, this huge supply shock may bring a long-term impact similar to the Bitcoin halving because it greatly reduces the selling pressure of ETH. The merger may also establish the ETH pledge rate, which is expected to reach a risk-free pledge rate of up to 10%+ after the merger, further increasing the attractiveness of ETH as a cash flow productive asset and Internet native bond.

In addition to changing Ethereum’s ESG profile and ETH assets, the merger will help pave the way for Ethereum’s future scalability upgrades, such as sharding and danksharding . This will allow Ethereum to better meet the growing transaction needs of its economy.

2. Rollups launch native tokens

Another major catalyst for Ethereum’s growth has been the launch of L2 tokens . While L2 networks have gained meaningful traction without native tokens or network-wide incentive programs, the launch of governance tokens for these L2 networks looks set to catalyze their growth and usher in the long-awaited “ Summer of L2 .”

The first domino in this regard fell this week on April 26, when Optimism announced that it would launch and use its native token OP in the network governance system and, most likely, incentivize activity in its emerging and rapidly growing DeFi ecosystem.

Above: Distribution of OP tokens. Source: Optimism Docs

As we have seen with the explosive growth of incentive-based ecosystems such as Avalanche, Polygon, and Fantom, this strategy has been very effective in bootstrapping network usage, liquidity, and developer activity. It stands to reason that Optimism would experience similar levels of growth if such a mechanism were implemented.

In addition to Optimism , two other general-purpose Rollups networks, Arbitrum and ZK Sync ( Optimistic Rollup and ZK Rollup, respectively), are also prime candidates to drive similar network usage growth by launching native tokens. While Arbitrum has not yet confirmed whether it will launch a native token, ZK Sync has revealed that they will have a token to decentralize their Rollup sequencer (the Rollup sequencer is responsible for publishing transactions in the Rollup L2 network in batches to the L1 network).

The launch and incentive programs of these Rollups native tokens should be an important catalyst for Ethereum to regain market share (the current Ethereum DeFi TVL total in this field has dropped from 80% in the same period last year to 51%) and increase the accessibility of everyday users to participate in this decentralized economy.