In our Discord community for members, we received several requests for analysis of Ethereum (ETH) in the last few days. So we thought it would be a good idea to put this project in the spotlight and dedicate a series of premium articles to it. In this series, we dive into the fundamentals behind crypto projects and will be back periodically to monitor developments. As you are used to with us, we analyze various statistics to paint a clear and realistic picture. If you still have questions after reading this article, you can easily ask them in our Discord community, here our analyzes are usually shared 48 hours in advance and you can easily get in touch with experienced analysts and traders.
Ethereum is an open source platform that facilitates decentralized applications on the blockchain. Through so-called smart contracts, developers can write code that has access to the Ethereum blockchain. These dapps (decentralized applications) are publicly accessible and transparent at all times. Examples of dapps on the Ethereum blockchain are tokens (alternative currencies on the Ethereum blockchain) like Chainlink and non-fungible tokens (NFT) like Bored Ape Yacht Club NFT and DeFi (decentralized finance) like the decentralized exchange Uniswap. Smart contracts are expected to further develop their disruptive potential in the future in virtually all other markets where intermediary parties are present. Ethereum is the largest altcoin in terms of market capitalization and has been firmly in second place for several years.
In this section, we look at the key fundamental metrics. The fundamentals focus on the underlying technology, development, and number of users of a blockchain network to give an idea of the long-term potential of a project. This forms the basis for estimating risk and making investment decisions.
Ethereum is the largest altcoin in terms of market cap and it has been an established order in the crypto community for quite some time. That’s why we use the fundamental analysis (FA) of Ethereum as a reference framework for the FA of other tokens.
|Project||Ethereum 1.0||ethereal 2.0||Visa|
|Number of transactions||15 – 30rps||100,000 tps||1,700rpm|
|transaction costs||$4 – $21||†||0.2 – 1.5%|
|consensus mechanism||work test||proof of stake||centralized|
Figure 1: Source; Solwealth and towardsdatascience.com and finance.yahoo
*Ethereum transaction costs fluctuate a lot due to strong network demand. In some cases, transaction fees at the $100 address are not unheard of.
Scalability is an important long-term indicator for a blockchain project. To go mainstream, Ethereum must be able to handle high demand. In general, it is difficult for blockchain projects to grow and reach a high market value. Important indicators for scalability are transactions per second (tps), transaction costs, and consensus mechanism.
Ethereum currently has a relatively low capacity in terms of transactions per second at 15 to 30 tps. This is significantly lower than current transaction processors like Visa, which process more than 1,700 transactions per second. This has been a strong criticism of Ethereum for quite some time now. With the sharp increase in activity (due to the emergence of DeFi and NFT), this has resulted in very high transaction costs. As a result, the Ethereum community and developers are developing Ethereum 2.0.
As you can see in Figure 1, Ethereum 2.0 is potentially a huge improvement in terms of transactions per second. By moving to Proof of Stake, Ethereum 2.0 is not only greener, but also faster. With an estimated 100,000 transactions per second, Ethereum 2.0 is over 3,000 times faster than Ethereum 1.0.
However, with proof of stake there are concerns about security and decentralization of the network. Proof-of-work networks are more difficult to “hack” since a hacker must control 51% of all nodes. Criticisms of Proof of Stake and the degree of decentralization stem from the fact that Proof of Stake draws power to the highest net worth. The number of nodes and voting rights are related to the amount of Ethereum you stake. This makes it difficult for small parties to exert influence.
Depending on the price of Ethereum and the activity on the blockchain, transaction costs can vary greatly. Ethereum has a lot of activity, and coupled with the low number of transactions per second, it often has extremely high costs (higher than almost all other blockchains). Ethereum 2.0 promises to significantly reduce these costs by introducing a new gas fee system in which part of the gas fees will be “burned”. This means that a small part of the transaction costs spent is “burned”, with a lot of blockchain activity this can result in a reduction in the circulating supply of Ethereum and thus deflation.
Developers on the web
The number of developers is an important factor. metric to determine the growth of a network. Many developers also mean that a project is flexible because it can better grow with the market through updates and innovations. A good example of such innovation is Ethereum 2.0. Figure 2 shows the total growth of developers for different blockchains.
With over 4,000 developers, Ethereum is the largest blockchain project in terms of number of developers. Polkadot (DOT) is number two with 1,400 developers. Ethereum developer growth is very strong, as you can see from the strong exponential growth line on the chart. This is positive and shows that Ethereum continues to grow rapidly despite the rise of many other altcoins. It is clear that Ethereum is head and shoulders above the rest in terms of developer count (nearly as many developers as all other altcoin projects combined) and is expected to continue to grow strongly based on the trend in Figure 2 and the rise of Ethereum 2.0.
|Developers Dec 2020||~190||~3000||~850||~200|
|Developers Dec 2021||~375||~4000||~1400||~900|
Figure 2: Source; Electric Capital
Users on the network
The number of users on the network and its growth/trend is a good reflection of the demand on the network and possible future demand. With heavy use, the demand for the underlying token will also increase to fulfill the functions of the blockchain, eventually leading to an increase in the price of the token.
Figure 3 shows the number of unique wallet addresses on the Ethereum blockchain. Keep in mind that many people have several or even dozens of ethereum wallet addresses, so each unique wallet address is not equal to 1 person. The number of unique addresses has grown significantly in recent years in just 6 years, Ethereum has grown to almost 200 million addresses. Despite the current market crash, Ethereum continues to grow. If the trend continues, Ethereum could have over 500 million unique addresses in 5 years.
Total value locked
the total value locked shows how much value of the specific token is locked on the network. This is a good indicator of the demand for network functionality (like DeFi) and long-term trust because the coins are locked on the chain and cannot (always) be traded directly.
With the rise of staking on Ethereum 2.0 and Decentralized Finance, where users can lend their tokens and, for example, provide liquidity for (decentralized) exchanges like Uniswap, the total value locked has increased significantly. Figure 4 clearly shows how Ethereum has risen sharply over the last 2 years in total value locked. Very positive is the fact that, despite the recent drop, the total value locked (expressed in Ethereum) has remained relatively stable. This shows that users are generally positive about the long-term power of Ethereum.
As described earlier in this article, Ethereum 2.0 has been in the works for quite some time. Ethereum 2.0 promises to solve many of Ethereum’s problems. Of proof of stake (Y fragmentation) will greatly improve the scalability of Ethereum 2.0. However, the project was recently postponed again, from June 2022 to Q3 2022. The hope is that Ethereum 2.0 will go live in 2022, then we can really see if the network issues have been resolved.
Low operations per second
At the moment, Ethereum still has a very low transaction capacity. This increases costs and users move to other projects. For example, for blockchain games, where many small transactions are required, developers and users (sometimes) move to other blockchain networks.
Delay Ethereum 2.0
Ethereum 2.0 is still delayed. June 2022 seemed to be the start date for Ethereum 2.0, but the expectation has now been revised to Q3 2022. With Ethereum 2.0 postponed, uncertainty remains as to whether Ethereum 2.0 can deliver on its promises. Furthermore, the competition threatens to facilitate projects that might otherwise have been built on top of Ethereum 2.0.
Proof of Stake Criticism
With Proof of Stake, Ethereum is moving away from work test. With Proof of Stake, Ethereum 2.0 promises to solve many problems of the Ethereum network, but there are also criticisms of Proof of Stake (as mentioned above). The transition to Proof of Stake may favor wealthier Ethereum holders and make the network less decentralized.
Despite criticism of Ethereum’s transaction costs, Ethereum remains the largest smart contract platform by head and shoulders. The large number of users and developers and the continued growth is a positive indicator for the future. With the arrival of Ethereum 2.0 it is promised that many of Ethereum’s problems will be resolved, with the continued delay here it remains a risk. Similarly, it is not yet clear whether Ethereum 2.0 will actually deliver on its promises.
Buy or sell Ethereum?
For an answer to your buy or sell question, we’d like to refer you to our Discord group for members. There, our experienced analysts and traders analyze their own entry and exit points on a daily basis. We also regularly share additional course reviews and project updates that we’ve discussed earlier in this section. Through Discord we are able to share knowledge with each other 24/7 and we try to stay ahead of the market together with our members.
Investing involves risks. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and advice provided on this website is based on the knowledge and experience of our own analysts and is for educational purposes only.
Disclaimer: Investing involves risks. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and advice provided on this website is based on the knowledge and experience of our own analysts and is for educational purposes only.