Ethereum Q4 report: Metaverse explosion, DeFi 2.0 rises

Note: The original author is Ben Giove, and the following is a full translation.

This article was originally inspired by Ethereum Announces First Quarter 2021 Results, written by James Wang

One of the key documents for assessing the health of a company is the quarterly earnings report. These reports include cash flow, profit and loss statements, and key growth metrics.

Ethereum is not a company…it cannot publish its own quarterly report. So we’re going to do it for it.

The data below shows the massive year-over-year growth of the Ethereum protocol and the Ethereum ecosystem between Q4’20 and Q4’21. All of this is available on-chain for anyone to audit.

These are economic figures for an emerging digital nation. An economy that has seen a staggering leap in growth over the past 12 months.

The state of Ethereum is strong.

Agreement Overview

• Network revenue‌ grew 1,777% from $231.41 million to $4.34 billion. Network revenue refers to fees paid by users in ETH for transactions on the network. Of this, $3.78 billion (87%) worth of ETH was "burned" and removed from the circulating supply via EIP-1559.

• Average daily active addresses ‌ grew 35% from 425,636 to 572,700. This measures the average number of individual wallet addresses that interacted with the network each day during the quarter.

• The ETH inflation rate‌ fell 64% from 1.13% to 0.46%. This tracks the increase in ETH supply, minus fees burned, due to block rewards issued to miners as compensation for confirming transactions.

• ETH staked‌ increased by 471%, from 1,545,486 to 8,818,933. This measures the amount of ETH staked on the “beacon chain,” which will eventually merge with the current Ethereum network when it switches from proof-of-work (PoW) to proof-of-stake (PoS). Currently, about 7.40% of the total ETH supply is staked.

• The average transaction fee, which represents the average price users pay per transaction on the network, rose 557% from $4.09 to $26.89.

Ecosystem Overview

• DeFi TVL, which measures the value of assets deposited in Ethereum-based DeFi applications, grew 770% from $17.73 billion to $154.20 billion.

• DEX volume grew 495% from $48.97 billion to $291.53 billion. This tracks the volume of Ethereum’s largest decentralized exchanges, such as Uniswap, SushiSwap, and Curve.

• BTC on Ethereum grew 133%, from 138,190 to 321,730. This represents Bitcoin tokenized in various forms, such as wBTC, renBTC, and tBTC, with approximately 1.69% of the BTC supply now on Ethereum.

• OpenSea sales increased 50,078% from $71.57 million to $35.91 billion. This tracks sales volume on the network’s largest NFT marketplace.

• Layer 2 TVL increased 11,002% from $5.01 million to $5.55 billion. This measures the amount of value that has been bridged from Ethereum to L2 scaling solutions such as Optimistic and ZK Rollups.

Ecosystem Highlights

Metaverse Explosion

The fourth quarter was defined in part by the explosion of awareness and speculation surrounding the metaverse.

The fourth quarter saw a parabolic rise in prices for assets related to the Metaverse, catalyzed by Facebook’s announcement of a rebrand to “Meta” in October 2021. This includes tokens used to manage virtual worlds and transactions, such as Decentraland (MANA) and The Sandbox (SAND), whose tokens appreciated by 337% and 635% respectively in the fourth quarter. In addition, both projects experienced record-breaking sales of land in their worlds, including $2.43 million in purchases for the former and $4.3 million for the latter.

MVI, a basket of metaverse tokens created by Index Coop, rose 88% from October 1 to December 31, 2021, at the end of the quarter, peaking at 197% in late November.

The frenzy surrounding crypto-native projects has overshadowed news of traditional companies like Microsoft’s intentions to get involved in the metaverse. This sets the stage for the ultimate showdown between the Web2 metaverse and the open, user-owned metaverse of Web3.

The rise of DeFi 2.0

Another major theme of the fourth quarter was the rise of “DeFi 2.0.”

This is a term used to broadly describe next-generation protocols and primitives, many of which emphasize improving capital efficiency, liquidity, and fund management, and pursue aggressive growth strategies by deploying to multiple chains and second layers. Along with their increasingly innovative designs, many of these protocols are completely grassroots and have not raised any funding from traditional venture capitalists in the space. These projects have pushed the boundaries of token design to reduce emission and drive demand for their native assets.

Several notable DeFi 2.0 examples stole the spotlight in Q4. These include the rise of Frog Nation, whose protocol ecosystem has accumulated over $7 billion in TVL; Olympus DAO, whose treasury holds over $203 million in risk-free value and launched numerous forks during the “OHM Fork SZN”; and the merger of Fei Protocol and Rari Capital into TribeDAO.

Future Outlook

Fiscal 2022 will be a critical year for Ethereum.

At the protocol level, Ethereum is expected to undergo the most significant network upgrade in its history in the form of a "merge", which is expected to be completed in the second/third quarter. This will include Ethereum replacing its Proof-Of-Work (PoW) consensus mechanism with Proof-Of-Stake (PoS), which will allow the network to drastically reduce its energy consumption, as well as the issuance of ETH required to ensure network security. In addition, the merge will also pave the way for sharding, which will make it easier for Ethereum to scale and achieve its ambition of becoming a modular blockchain.

Despite the merger, Ethereum will still face some significant headwinds this year. This will primarily come in the form of scaling, as gas fees have squeezed out all but the wealthiest users, and there will also be stiff competition from other ecosystems such as Solana, Terra, Cosmos, Avalanche, and Fantom. If Ethereum hopes to maintain and grow its market share in the future, it desperately needs a solution of its own. Thankfully, help may be on the way in the form of L2s such as Optimism, Arbitrum, zkSync, and StarkNet.

With each of these scaling solutions likely to launch tokens and incentive programs, there is a good chance that Ethereum will be able to capitalize on this momentum and use this newfound ability to drive growth.

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