Ethereum Status Report Q2 2022

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: Protocols, DeFi , NFTs , and Layer 2, and compares Q2 2021 and the performance of Ethereum in the second quarter of 2022.

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

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

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The average daily active addresses dropped from 593,404 to 471,447, a drop of 20.6%. This tracks the average number of wallet addresses transacting on Ethereum per day during the quarter. Like network revenue, the decline was likely due to a decline in user speculation against the bearish backdrop of the quarter.

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The pledged ETH increased from 6.01 million to 12.98 million, an increase of 116%. This measures the amount of ETH staked on the beacon chain ahead of the network’s imminent transition from proof-of-work (PoW) to proof-of-stake (PoS). As of the end of Q2, about 10.86% of the total ETH supply was pledged.

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DeFi ecosystem

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

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

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

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

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The liquid pledge share of deposits increased by 177.5%, from 12.0% to 33.3%. This metric measures the share of ETH pledged through noncustodial protocols that issue liquid collateralized derivatives (LSDs). This increase is likely due to the secular increase in ETH staked on the Beacon Chain in Q1, as well as the increased integration of LSD (like Lido ‘s stETH) with different DeFi protocols.

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NFT Ecosystem

The NFT market transaction volume surged by 2439.2%, from $509.36 million to $12.93 billion. The indicator tracks trading activity on markets 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 rising popularity of PFP collectibles.

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

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The floor price of Bored Ape Yacht Club (BAYC) 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.

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L2 Ecosystem

TVL on L2 increased from $374.17 million to $3.72 billion, an increase of 896%. This metric measures the value of the Ethereum L2 ecosystem, whose growth may be driven by increased usage, liquidity, and deployment of applications on networks such as Arbitrum and Optimism .

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

Ecosystem Highlights

DeFi proves resilient

Despite the decline in TVL and a slowdown in spot volume, the Ethereum DeFi ecosystem continued to prove its resilience through a considerable stress test throughout the second quarter.

The major upheaval started with the implosion of UST in May 2022, at its peak, UST was the third-largest stablecoin in the world with a market cap of around $18.78 billion. While the on-chain damage was largely confined to the Terra blockchain itself, the fallout of the UST downfall spread to the wider crypto industry, with the market down 45% in the aftermath.

This led to the collapse of numerous CeFi entities. Overleveraged hedge fund Three Arrows Capital and lending platform Voyager are both locked in a bankruptcy battle, putting considerable pressure on other lenders such as Celsius and BlockFi, which was acquired by FTX .

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Despite the CeFi carnage, DeFi on Ethereum weathered the storm without a hitch.

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

Interestingly, the transparency of DeFi protocols enables market participants to monitor the positions of entities such as Celsius, and analysts on Twitter warn of the shaky financial health of lenders.

While liquidity may have dried up and activity slowed during this bear market, the value proposition of the on-chain financial system throughout the second quarter has never been clearer.

NFTs stay hot

Ethereum’s NFT ecosystem has been hot throughout 2022.

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

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

The sale resulted in massive congestion on Ethereum, resulting in a record gas price (and ETH burn).

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Another famous collectible series that rose to fame in the second quarter was Goblintown. Goblintown’s floor price hit a high of 7.1 ETH in a matter of weeks.

The NFT space also saw several high-profile acquisitions and agreement launches in the second quarter. This includesUniswap Labs and OpenSea buying 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 has experienced one of its most important milestones with the launch of Optimism’s governance token, OP.

OP is the first of the “Big Four” L2 to issue a token. The model assumes that holders are able to vote on network upgrades and the distribution of ecosystem incentives. In the future, the token will likely also be used to decentralize and accumulate revenue from Sequencer , the entity responsible for batching transactions to L1, currently operated solely by Optimism PBC.

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

Since going live, Optimism’s DeFi TVL share in aggregate has grown from 17.26% to 30.42%.

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In another notable token announcement, Immutable-X, a gaming-focused second layer built using StarkEx, announced plans to begin charging a portion of its “protocol fee” to its IMX token. Once the protocol fee is activated, holders will be able to receive 0.8% of all primary and secondary NFT sales on the network.

Arbitrum recently started the Arbitrum Odyssey campaign, which aims to bootstrap the usage of popular applications on the network while rewarding participants with NFTs. The event was postponed until after the Arirum Nitro upgrade was completed due to a spike in gas fees amid the record transaction total.

Despite some hiccups, the inevitable launch of the Arbitrum token — coupled with Optimism’s upcoming incentive program — should help increase L2 usage and speed up user migration from Ethereum.

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

Looking to the future

Merger is coming

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

Why does the merger represent the most important event in Ethereum history?

It is known that 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 call data storage and implement danksharding, respectively. Additionally, it will implement Proposal Builder Separation (PBS), which aims to separate block construction from block verification to mitigate the negative externalities of MEV.

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The merger certainly promises 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 about 5.5 million ETH to about 600,000 ETH, a drop of about 89%.

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

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

Competition heats up

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

These competitive forces are underscored by dYdX’s recent announcement that it plans to migrate from StarkEx and launch its V4 protocol as its own Cosmos chain. As early adopters of new technologies, the migration of DEXs is a validation of Lisk theory and a leading indicator that teams and protocols may follow suit and pursue higher sovereignty.

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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, reaching 20.3 million. Despite the bearish headwinds, Solana has continued to execute and grow its user base.

L2s such as Optimism and Arbitrum have struggled with increased usage, and other ecosystems appear to be opening the door to continued competitive pressure on Ethereum and its network of scalable 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 the internet.

Posted by:CoinYuppie,Reprinted with attribution to:
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