Exactly one week ago, the Ethereum mainnet transitioned to proof-of-stake Beacon Chain, ushering in an era where validators replace miners. The successful activation marked the completion of a milestone that has been in the pipeline for more than four years. The much-publicized event brings several merits to the network, including reduced emissions. However, it is only part of the journey (roughly 55%, an estimate from Ethereum co-founder Vitalik Buterin) to Ethereum 2.0.
The next item on the table is sharding which will address the scalability – a chain’s ability to sustain larger transaction throughput – challenge on the blockchain. Until then, Ethereum remains constrained in terms of a load of transactions it can support.
Beacon Chain performance
To gain validator status i.e. be able to participate in protocol consensus, Ethereum holders are required to deposit a 32 ETH stake, which can’t be withdrawn yet. This is because the Ethereum Beacon Chain deposit contract launched in November 2020 is one-way and doesn’t support unstaking. ETH staking has seen consistent growth since December 2020, as many investors have shown interest in its reward-based model that allows stakers to earn yields on their locked assets.
Dune Analytics data shows that more than 13,886,150 ETH is locked in Beacon Chain, translating to an 11.51 % staked share of ETH circulating supply. This volume of staked ETH is almost twice the equivalent figure one year ago. Thus far, 433,942 investors have staked the minimum 32 ETH with the distinct validating entities totaling 82,2 – roughly a fifth of the total depositors.
ETH deposited to Beacon Chain smart contract since launch
In a report published on Sept 12, Glassnode analysts noted that the locked supply in Beacon Chain can now be “meaningfully compared” to ETH in all smart contracts and centralized exchanges. The ETH supply in smart contracts and exchanges accounts for 27% and 16.8% of the total volume, respectively.
ETH Supply distribution
The staking ratio on Ethereum is currently the lowest among top PoS chains. However, crypto analytics firm Messari observed in a recent post that this ratio would increase after Shanghai, eventually reaching figures in the range of other chains.
September hype
Markedly, the rate of increase of validators has been notably steeper in September compared to the period between June and September. Dune Analytics data shows that this metric grew from 398,881 at the start of June to 419,173 at the end of August. Thus far in September, this figure has already swelled by more than 14,200 as of Sept 22.
The ETH locked in Beacon Chain weekly has been declining over the past four months and hit its weekly lowest level in the first week of August. According to Dune Analytics data, only 24,624 ETH was staked in the week ending on Aug 7. The dip followed the fourth noticeable spike of ETH deposits between March and May.
Weekly ETH deposits to Beacon Chain
The overall decline in staked ETH since May is attributable to the collapse of the LUNA-UST project, which shook investor confidence in cryptocurrency projects. On the other hand, the rising trend in September has primarily been driven by the Merge hype.
Dragonfly Capital’s Hildebert Moulié chalked up the slowdown across the last few months to speculations around the Merge as some investors expected a fork that could emerge at the time. Nonetheless, the weekly deposits have looked much healthier in September. The ETH deposits for the 7-day period between Aug 29 and Sept 4 totaled 130,937 ETH. This figure reduced slightly to 124,018 ETH across the Sept 5 – 12 week but increased to 155,206 in the gone week ending on Sept 19.
Shanghai upgrade contents
Earlier this week, there was controversy around when withdrawals of staked ETH will be enabled on Ethereum, but recent remarks from Micah Zoltu have helped clarify the matter. The general belief in the industry was that the Shangai upgrade, with a rough timeline of six to twelve months after the Merge, would allow for withdrawals. The upgrade is expected to unlock other changes in the blockchain and could be a potential price boost owing to the impact it will have.
Speaking to CryptoSlate, Zoltu explained that the contents of the Shanghai upgrade have not been finalized and thus, withdrawal may or may not come with the upgrade. The elucidation was corroborated by Core Devs Coordinator Trenton Van Epps, who added that the withdrawal of staked ETH is one of the items being reviewed in addition to other improvement proposals. Van Epps was also keen to point out that the contents of Shanghai will depend on general consensus.
Ethereum successfully switched to PoS but the move hasn’t boosted Ethereum’s market. This is down to traders taking a cautious approach.
Ethereum sees the fourth consecutive week of outflows
The world’s second-largest crypto asset posted outflows totaling $15.4M in the week ending on Sept 18, according to the latest CoinShares’ Digital Asset Fund Flows Weekly report. No other rival assets recorded negative net flows during this period. The outflow also marked the fourth consecutive – a streak that started after reaching cumulative inflows of $162 million across nine straight weeks of inflows. Ether recorded $2.9M of inflows in the week ending on Aug 21, followed by $0.9M, $2.1M and $61.6M of outflows in the next three weeks.
ETH hovers around $1,300 after bouncing from $1,280
Ethereum’s first week since the PoS transition has been great, but the same can’t be said for its native asset. Ethereum’s native token plunged after the Merge despite expectations that the event would provide upside momentum. Messari data shows that the premier alt sank to its lowest since July 16 during yesterday’s trading session when it slid marginally below $1,230.
ETH/USD 7-day trading chart
Though the ETH/USD pair quickly bounced from this nine-week low and briefly grazed $1,300 earlier today, it slipped below $1,280 again, driving weekly losses to over 20%. The pair has since returned to the green following recovery to $1,310 where it was spotted at press. The current price range translates to a 5.91% increase on the day but an 11% decline over the last seven days.
The recent dip has been in line with a previous forecast from CoinShares Chief Strategy Officer Meltem Demirors, who argued that the macro environment would not permit a bull run off the Merge. In an appearance on CNBC’s Squawk Box, the Coinbase executive predicted that Ether would not benefit massively from transitioning the Ethereum network into PoS consensus. Demirors is one of those that called the outcome as a ‘buy the rumor sell the news’ event.
The macro picture stymies a price breakout
Explaining her position, the strategy executives noted that the prevailing high inflation levels and the impact of Federal Reserve policies would not allow capital to flow massively into Ethereum. She said that such macro elements will be at the opposing end of the enthusiasm building up in the community “around the Merge as an event that will dramatically reduce supply while potentially driving demand.” Indeed, the ‘macro backdrop’ as described by Galaxy Digital researcher Christine Kim continues thwarting any recovery in the broader crypto market as well as traditional markets.
Earlier this week, analysts from Cumberland brought Ether’s correlation to the Nasdaq to the fore, highlighting it a deterrent to a price ascent.
“ETH/NASDAQ correlation is nearly back to the highs of the year – a feature which has overshadowed the idiosyncratic dynamics of the Merge (for now).” the crypto trading firm wrote on Tuesday.
Blockchain firm Santiment also recently observed that Ethereum’s largest group of whales i.e. addresses with 100,000+ ETH have been dumping since Sept 12. The analytics platform also noted that there has been a change in large address activity.
“In the past 6 days since the shift to #proofofstake, addresses holding 1k to 10k $ETH have dropped 2.24% of their cumulative holdings. 100 to 1k addresses have dropped 1.41%. “
While Ether (ETH) has largely traced a downtrend in the market, exchanges and similar platforms recorded increased trading activity around Ethereum, propelled by the hype around The Merge. The latest data, however, shows that Bitcoin has since dethroned Ethereum as the crypto asset with the largest exchange volume on many exchanges.
To learn more, check out our Investing in Ethereum guide.