Only half a month into 2022, ETH has experienced ups and downs. After reaching a high of $3,900.01 on January 4, it fell as low as $2,933 on January 10, and is currently hovering around $3,300. In half a month, the biggest drop of Ethereum was nearly 25%.
Looking back at the market conditions of Ethereum last year, it set an all-time high price record in early November 2021, reaching $4,871.42. In just three months, ETH has lost 39% of its value from its peak. Since the end of last year to January this year, not only Ethereum, but also the crypto market has almost been stagnant, and has been shrouded in a gloomy mood, which may be mainly related to the continuous strengthening of the recent Fed rate hike expectations. So as Ethereum will officially switch to PoS this year, what will Ethereum face? Under the macroeconomic environment, can Ethereum surprise the market this year?
Rate hike expectations hit crypto markets
On January 11, Fed Chairman Powell said at the nomination hearing held by the U.S. Senate Banking Committee that inflationary pressures may continue until mid-2022. interest rates and shrink its balance sheet earlier and faster in response to persistent high inflation. Powell gave a roadmap for the normalization of U.S. monetary policy this year: net asset purchases will end in March, interest rates will be raised this year, and the balance sheet may begin to shrink later this year. If the recovery progresses as expected, the Fed is ready to move quickly.
During Powell’s speech, the yields of European and American government bonds rose together, and the yield of 10-year U.S. Treasury bonds hit a daily high, but after the hearing, all gains were reversed. On the contrary, due to Powell’s mild remarks and appeasement of U.S. stocks, the S&P 500 reversed. With the five-day losing streak, technology stocks continued to support the rebound of the U.S. stock market. Crypto assets represented by Bitcoin and Ethereum also rebounded quickly after the hearing, which also reflects the stronger correlation between crypto assets and major stock indexes in the post-epidemic era.
As early as last week, the minutes of the Fed’s December meeting on interest rates released last week showed that Fed officials were considering starting to raise interest rates at an earlier point in time. Most Fed officials expect three rate hikes in 2022 to control the pace of inflation. In addition, the Federal Reserve announced that it will reduce monthly purchases of US Treasuries and mortgage-backed securities by $30 billion (original plan to reduce by 15 billion per month), a rate that is twice the previous level. The data shows that the size of the Fed’s balance sheet is currently more than 8.7 trillion US dollars.
At that time, the news triggered a drop in technology stocks across the board, and the three major U.S. stock indexes also fell sharply. Meanwhile, employment data released by the U.S. Labor Department further boosted expectations that the Federal Reserve is about to start raising interest rates. It was also affected by this that the crypto market responded, most of the mainstream coins fell, and during this period of time, there were many voices of “the bear market is coming” in the crypto community.
The impact of the macroeconomic environment on the entire investment market is global. Since the epidemic, the downward pressure on the economy has led to the continuous release of water by the central bank, which has brought huge opportunities to the investment market. This is one of the reasons why the crypto market has enjoyed a bull market boom since 2020. But on the other hand, as one of the world’s major central banks, the Fed’s monetary policy has always affected the nerves of investors. When to raise interest rates, how many times to raise interest rates, and whether to tighten them will profoundly affect investors’ sentiment and risks. preference. If the Fed’s tightening expectations become stronger and the US bond yields rise rapidly, risk assets such as gold and encrypted assets will be under pressure. Powell also emphasized in this hearing that he will try to keep the policy neutral, possibly tightening it. Considering that the Fed often “puts pigeons”, there is no need to be overly nervous about raising interest rates for the time being. Of course, it is undeniable that, whether it is Ethereum or other mainstream assets, the market trend will inevitably be affected by changes in the macroeconomic environment and the Fed’s policies, and investors need to pay close attention. The schedule of the Fed meeting on interest rates in 2022 is attached for your reference.
Ethereum (ETH) Status
The year 2021, which has just passed, has been an extraordinary year for Ethereum. On the one hand, ETH price hit an all-time high, reaching a high of $4,871.42. The development level of Ethereum has also made some progress. The most notable is the upgrade of the Ethereum London hard fork and the introduction of a destruction mechanism, which makes ETH turn to a deflationary model and has a significant impact on the value of Ethereum.
According to the data of the masters on the Ouke cloud chain, the current destruction of Ethereum is 1.449 million ETH, and the average 24-hour Base Fee is 187 Gwei; the last day (January 10) The destruction of Ethereum is 17,871.42 ETH, setting a new record for single-day destruction. . The top three protocols in terms of burn volume in the past 24 hours are OpenSea, Uniswap V3 and LooksRare.
At present, according to Tradingview data, the market value of Ethereum accounts for 19.33%, which has fallen by 3% since the high point on December 8 last year, which is directly related to the recent decline in the market.
From the current state of the chain, Ethereum still dominates the crypto ecosystem. According to the analysis report of blockchain development activities released by Messari on January 4, since last year, the growth rate of Polkadot ecological development activities has reached 147%, which is higher than that of Cosmos (56%), Ethereum (21%) and Solana (2 %). But at present, Ethereum is still the most active L1 platform among mainstream protocols. Ethereum has the most active developers, with 250 monthly active developers as of last November, almost five times that of Polkadot, Cosmos and Solana.
The growth of the Ethereum, Cosmos, Polkadot, Solana protocol developer communities
But it should be noted that it is undeniable that Ethereum also faces the “threat” of other public chains and L2 platforms. Data shows that Ethereum’s share of the decentralized finance market has been steadily shrinking over the past year. According to DefiLlama data, in January last year, the Ethereum protocol accounted for more than 97% of the total value locked in DeFi protocols, but due to the rapid growth of competitors such as Terra, Avalanche and Solana, Ethereum’s share has now shrunk to 62.19% .
The proportion of TVL share of DeFi protocol of each public chain Source: defillama
This is mainly due to Ethereum’s congestion and high gas fees limiting its rapid expansion in the market. Since the sharding chain is not expected to be implemented until 2023, the “heavy task” of short-term expansion falls on L2. So, can this situation improve as the Ethereum 2.0 process progresses this year?
What will ETH 2.0 look like?
Ethereum 2.0 has indeed made some progress in the past year. Since the launch of the beacon chain, the pledge amount has exceeded the original target by about 17 times. OKLink data shows that the current balance of Ethereum 2.0 deposit addresses has exceeded 9.07 million ETH, accounting for 7.71% of the supply of Ethereum, and the number of verification nodes on the beacon chain has exceeded 280,000.
And when will Ethereum 2.0 be implemented? According to the process plan, this year we will see the merger of Eth1 and Eth2 first, and start the post-merger cleanup work one after another to solve the unnecessary legacy functions of the PoW and PoS hybrid model. At the same time, the function of redeeming the pledged ETH will be enabled at this stage. . Recently, the Ethereum beacon chain community security consultant Superphiz said on his personal social media that the Ethereum fork Bellatrix (formerly known as Merge) will activate the current PoW chain to merge with the PoS beacon chain, but will not immediately enable the beacon chain. Withdrawals of pledged ETH are expected to be open for pledged ETH withdrawals approximately six months after the merger (i.e. around December).
After the implementation of the merger, Ethereum will officially transition from PoW to PoS (Proof of Stake) mechanism. This means that traditional GPU mining will no longer be carried out on Ethereum, and the network will be maintained by PoS verification nodes and rewarded with corresponding transaction fees.
How will this affect Ethereum? First of all, from the perspective of monetary policy and token value, turning to PoS may mean that more ETH is pledged, and the role of miners as validators will allow less ETH to be created, thereby reducing the circulating supply of ETH. From the perspective of supply and demand, the theory can push prices up. Therefore, it is expected that in the first half of this year, Ethereum may be mainly affected by its monetary policy. But considering the factors at the Fed level we mentioned in the first part, it remains to be seen whether Ethereum can meet our previous expectations and imaginations.
Fernando Martinelli, co-founder and CEO of Balancer Labs, believes that the merger of the Ethereum chain in 2022 will be a wake-up call for the market, making people aware of the solidity of ETH as a store of value, which will allow the “big reversal” to still happen in 2022. .
On the other hand, the merging of chains does little to change the performance of Ethereum. The real improvement in network transaction processing speed, transaction throughput, gas costs and other indicators may depend on one of the main functions of the Ethereum 2.0 upgrade – sharding. But the sharding chain is not expected to be implemented until 2023. At that time, Ethereum will be divided into 64 shards to process transactions and data in parallel. With the cooperation of Rollup, it is expected to solve the problems of high gas fees and network congestion.
Although it will take a long time for the arrival of the sharded chain, the switch to PoS may allow more projects to choose to rely on Ethereum again. In the face of many competitors, Ethereum may be able to recover the situation. Joey Krug, co-chief investment officer of Pantera Capital, an American cryptocurrency investment agency, believes that within 10-20 years, more than 50% of the world’s financial transactions will be connected to the Ethereum network in some way. Even the explosion of so-called ‘Ethereum killers’ will not threaten the market dominance of the Ethereum blockchain.
In any case, the entire route planning for the Ethereum 2.0 upgrade is still very grand and requires many small stages and upgrades to support. Maybe three or five years away. Therefore, the switch to the PoS mechanism is not the end of the Ethereum upgrade, but a new starting point.
We will wait and see what kind of surprises the Ethereum upgrade can bring us. Once it can bring lower fees and better network performance, it will have the potential to subvert L1 competitors and continue to dominate. From this year, it is expected that with the growth of DAO, DeFi, NFT and other fields, the L2 network will still play a major role, and Ethereum will continue to play a role as a blockchain for the interaction between these L2 networks.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/will-the-feds-rate-hike-expectations-strengthen-ethereum-2-0-as-we-expect/
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