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This report is a collaboration between Poloniex and Hong Kong University’s blockchain club
Table of contents
1. Executive Summary
2. Background
- 2.1 The Birth
- 2.2 The Key Events
3. Price Performance
- 3.1 Before and After the Fall of Terra & FTX
- 3.2 Before and After the Merge
4. Top Competitors
5. Conclusions
Executive Summary
After transitioning to the Proof-of-Stake (PoS) consensus layer on September 15, 2022, Ethereum, the second largest blockchain in the world, now depends heavily on validators to verify on-chain transactions through staking so that a new block can be added onto the network.
Under the new mechanism, the validators will be rewarded, which is different from that of the previous consensus layer — the Proof-of-Work (PoW) — which requires miners to verify transactions through complicated algorithms and powerful computing devices.
However, the aforesaid key event in the Ethereum community, which is widely known as The Merge, only allows users to stake their ETH tokens to secure the network, but they can’t withdraw the staked tokens as well as the rewards that they have received/ will receive during the verification process.
Therefore, the developers of the Ethereum community plan to conduct another upgrade, dubbed the Shanghai upgrade, in mid-March, during which users will be able to withdraw the staked ETH on top of other goals including making the network more scalable and adaptable to the new PoS mechanism.
To dive deeper into the upcoming upgrade, this white paper will explain the following events in the Ethereum community since its establishment in 2015: 1. The birth of the community; 2. The major events which affected the price of its native token, Ether (ETH), especially before and after the collapse of Terra and FTX as well as the Merge; 3. The major competitors could compete with Ethereum in terms of scalability.
Background
The birth
Ethereum was launched in 2015 by¹ Vitalik Buterin, the co-founder of Ethereum, who is also a programmer and co-founder of Bitcoin Magazine, and his team published an introductory paper in earlier 2013 to describe a way to build decentralized applications (dApp/dapp) on the network. In the white paper, Buterin proposed the idea of using the underlying blockchain technology to craft application-specific programming language(s).
Buterin’s vision later became true, and Solidity, an object-oriented programming language, was developed by some core contributors to the community, that’s why the language has become a primary language for Ethereum and has been widely used in the blockchain industry for implementing smart contracts on various blockchain platforms later.
To forge ahead with the idea, Buterin promoted Ethereum to the world at an international conference in 2014 with a yellow paper — named “The Yellow Paper” — authored by Dr. Gavin Wood, the co-founder of Ethereum, to dive deeper into the technical definition of the protocol.
Subsequently, a Swiss non-profit foundation, the Ethereum Foundation was founded in early 2014, and the development was funded by public sales between July and August of the same year — which officially went on for 42 days, during which participants were able to buy Ether (ETH) with Bitcoin (BTC), the world’s first cryptocurrency.
Although questions were also raised about the network’s security and scalability, some were excited about the Ethereum projects and praised for its technical innovations.
In mid-2016, a vulnerability was discovered by the DAO (Decentralized Autonomous Organization) contract, leading to approximately 3.6 million ETH being drained.
To respond to the attack, the development team planned to conduct a hard fork, which intends to branch out of a cryptocurrency’s blockchain that splits a native token into two.
Source: Ethereum Foundation
Although the decision on forking has reached over 85% of the votes, some miners were against it because the DAO incident wasn’t a defect in the protocol and they went on to form Ethereum Classic later, and its token, ETC, is completely different from the technological and philosophical goals of ETH.
However, the splits didn’t hinder Ethereum to thrive. Throughout the eight years, Ethereum Foundation has developed nearly two dozen codenamed prototypes, including The Merge (Paris) on September 15, 2022, and The Shanghai upgrade, which will be conducted in mid-March this year.
Over the years, the Ethereum foundation has raised a total of $18.4M in 8 rounds of funding, with the latest one raised from a secondary market on May 1, 2017.
Until now, Ethereum houses over 350 projects with many famous projects including Uniswap the DEX, MakerDAO the DAO, OpenSea the NFT marketplace, and beyond due to its smart contract and decentralized finance (DeFi) functionalities, which enable developers to issue Initial Coin Offerings (ICOs) and Non-fungible tokens (NFTs), as well as develop wallets, derivative contracts, games and beyond on the blockchain.
Therefore, Ethereum is hailed as “The World Computer ‘’ by the media, making the ecosystem one of the largest and most popular Layer 1 (L1) blockchain protocols.
¹ Although Vitalik Buterin is the well-known founder of Ethereum, the network was also founded by others, including Anthony Di Iorio, Charles Hoskinson, Mihai Alisie and Amir Chetrit, in December 2013. Hence, they are called “The Initial 5”.
The key events
🔹 2022 The Merge- On September 15, 2022, The Merge upgrade was triggered by the PoW blockchain passing a terminal total difficulty of 58,750,000,000,000,000,000,000, which indicated that the PoW mining algorithm and associated consensus logic were officially replaced by PoS to mark a historic moment in the Ethereum community.
🔹 2016 DAO attack- The DAO fork was in response to the 2016 DAO attack where an insecure DAO contract was drained of over 3.6 million ETH in a hack. Although the decision to fork reached over 85% of the votes, some miners were against it because the DAO incident wasn’t a defect in the protocol and they went on to form Ethereum Classic later.
🔹 2015- “Genesis block”- “Frontier”, the first execution protocol layer, was launched to become the official launch of the Ethereum platform, and the “genesis block” of the Ethereum ecosystem.
🔹 2014 Crowdfunding- Ether officially went on sale for 42 days and interested parties could purchase it with BTC.
Famous projects on Ethereum (as of Feb 8, 2023) (Source: DappRadar)
Note: The term “Eth2.0” (or Ethereum 2) was commonly used before The Merge, but it’s being phased out. (Source: Ethereum Foundation)
Price Performance
Hailed as “The World Computer”, Ethereum houses over 2,970 projects thanks to its smart contract and DeFi functionality, hence it has become one of the largest and most popular L1 blockchain protocols.
Meanwhile, its native token, ETH, is a reward given to validators who help to verify the transaction process, add new blocks to the ledger, as well as safeguard the network.
With a market capitalization of $190.43 billion according to CoinMarketCap, ETH is the second largest cryptocurrency, and its trading history is relatively steady since its inception in 2015.
Officially launched in 2015, ETH’s trading history has been relatively steady, but its price skyrocketed to an all-time high (ATH) at $4,811 in 2021 for various reasons. Although the reasons are unknown, many assume that the spike during that period was related to the boom of NFTs and the application of smart contracts, which has drawn a lot of attention all over the world.
Nevertheless, the upward trajectory was reversed in mid-May 2022 after the implosions of TerraUSD (UST), the algorithmic stablecoin issued by Terraform Labs (Simply Terra), as well as its sister token, Luna (LUNC), which caused the crypto to drop below $1,500.
As shown in the #1 Chart, the ETH’s price was further down to $978 in mid-June 2022, six weeks after the aforesaid event before going up above $1,500 again in the following months, and the upward trend of ETH remained unchanged before the Merge, which saw the open-source and public network switching from the energy-intensive PoW to an environmentally-friendlier PoS consensus mechanism on September 15, 2022.
#1 Chart: The ETH price history between August 2015 and December 2022. (Source: Statista)
Although the collapse of FTX along with its aftermath last November created uncertainty in the crypto space, the ETH’s price was merely affected, and it mostly traded flat, as shown in the #2 Chart. Most importantly, it’s nowhere near the all-time low (ATL) throughout its price history.
#2 Chart: The ETH price history in 2022 (From January to December 22 only). (Source: Statista)
While the crypto market is still digesting the aforesaid news and gauging its impact on the industry, ETH has already broken the $1,600 resistance (see the #3 Chart) a few times in less than one month to kick off 2023 with a fresh start.
#3 Chart: ETH broke the $1,600 resistance a few times in less than one month to kick off 2023 with a fresh start. (Source: Poloniex)
Resistance to the Terra event
2022 was a bit bumpy for the crypto industry because of the fall of Terra and FTX which made the ETH’s prices slightly fluctuated.
Although the crypto was struggling a bit at the beginning when the two respective events broke out, it avoided huge losses.
The first ripple effect started on 9 May 2022 after UST began to break its peg to the USD, and ETH fell to $1,760 three weeks later from $2,867, the highest price in the same month.
While the market was still digesting the shocking news, ETH’s price further dropped below $1,500 in June with the lowest price at $978 to a point in the same month.
Not until mid-July, ETH’s price went back up to above $1,500 again (see #4 Chart).
#4 Chart: The ETH price history between May and August 2022.
#5–8 Charts (from top left to bottom right): The ETH price experienced up and down between May and August 2022, and the red frames indicated its performances during which Terra’s tokens made headlines after the de-pegging (in May); and the drop of ETH below $1,000 first time after the event (in June); as well as the first appearance of Do Kwon, the co-founder of Terraform Labs, in an exclusive interview with Coinage (in August).
Price rallied before the Merge
Overall, ETH reversed the downward trajectory with an increase of almost 0.6% on August 31, 2022, compared to the lowest price in June, which dropped to $978 at one point (seen #5–8 Charts).
But, a few weeks later, the overall market conditions rebounded with the ETH’s prices rallied due to the long-anticipated and oft-delayed Merge happening on September 15, 2022, during which the PoS consensus layer, named The Beacon Chain, was merged with the mainnet to deprecate the PoW consensus engine, which had been used for the security and block production of the network since its inception in 2015.
The Merge would see the Ethereum community entering into a new era because users always complained about the network’s low processing rate as well as high energy consumption. Hence, the switch will make the network more scalable and sustainable.
Thanks to the media hype, the tech giant Google also recognized the historic moment and created a new “doodle” on the homepage for a countdown, during which two white and black bears were displayed to approach each other with outstretched arms at different stages, and they were eventually merged into one as a panda.
With the hope of reshaping the crypto world, many were optimistic about the Merge. Starting from early September 2022, the crypto market was in an upward trend with ETH trading above $1,500 most of the time. Moreover, the price went up to $1,700 seven days ahead of The Merge.
Google came up with the trend to make a doodle to count down the historic moment with the Ethereum community ahead of the Merge. Source: Google
Little to no impact after FTX
Nevertheless, the ETH’s price traded flat after the historic moment that it didn’t break through $1,500 even after two weeks.
Surprisingly, the collapse of FTX, the once-second largest crypto exchange, had pushed the ETH’s price up to $1,500, at least six days after the first report published by CoinDesk on November 2, 2022.
Although the news had temporarily rocked the industry, there was no big drop in the crypto and its price lingered between $1,100 and $1,301.
However, ETH has had a fresh start in the new year and it broke the $1,600 resistance (see the #3 Chart) a few times in less than one month. By the time of writing, ETH is trading at $1,586, and people now focus on the Shanghai upgrade, which will allow validators to stake and withdraw their tokens.
#9- 12 Charts (from top left to bottom right): These pictures show the performances of ETH before and after the Merge as well as the collapse of FTX between September and December 2022.
Top Competitors
Hailed as “The World Computer “, Ethereum is undoubtedly one of the most successful DAOs in the blockchain industry. Therefore, many large companies have chosen Ethereum to explore any Web3-related projects, including Google, Fidelity, HTC, and beyond.
With the endorsement of many big conglomerates, many stakeholders hope that the price of ETH will spike with some hope that the token will one day “flippen” BTC by market capitalization (or market cap).
According to Blockchaincentre.net, the term “flippening” refers to the hypothetical moment of ETH overtaking BTC as the biggest cryptocurrency, and the main metric to determine “the flippening” is the market cap with other factors including active addresses, transaction count, transactions volume, trading volume, total transaction fees, node count and popularity on Google.
However, the data from the aforesaid website indicated that the accumulated metrics stand at 44.6% only, which is still a long way to go before hitting 100% to show that ETH and BTC have the same market capitalization. Currently, the market cap of ETH stands at $199.5B as shown on CoinMarketCap. Meanwhile, according to the same coin ranking site, the market cap of BTC is at around $441B by the time of writing.
While the world is watching closely the future developments of Ethereum, crypto enthusiasts also want to see whether the transaction speed and gas fees of Ethereum will change over time, and they should also pay attention to the “Ethereum killers” (see the #1 Table below), which are building up momentum with the potential to occupy the NFT market share, although the tokens might not be able to replace ETH anytime soon.
#1 Table- Top 10 “Ethereum Killers”
1. Solana (SOL)
5. Tron (TRX)
7. Near (NEAR)
8. Cosmo (ATOM)
8. Cosmo (ATOM)
9. Fantom (FTM)
10. Chainlink (LINK)
Conclusions
As many big firms, including Microsoft, IBM, JPMorgan Chase, Deloitte, Barclays, UBS, Credit Suisse, Amazon, Visa, and many more are experimenting with the possibility and profitability of Ethereum. Hence, it is expected that the collaboration and the upcoming Shanghai upgrade, which is a crucial moment to allow validators to withdraw their staked ETH, might further push the price of ETH up. With the continuous growth of the Ethereum ecosystem, the network will foreseeably address the concern of scalability.
Special thanks to👏
Justin Tsui@Blockchain@HKU
Martin Ko@Blockchain@HKU
for conducting research
About Poloniex
Founded in January 2014, Poloniex is a global cryptocurrency exchange to support spot and futures trading. With a world-class trading platform, Poloniex received funding from H.E. Justin Sun, Founder of TRON, in 2019 to widen its international customer base. Poloniex now provides services in over 100 countries and regions, in various languages. In 2022, Poloniex launched its new trading system with higher speed, stability, and usability. Joining hands with TRON, which was designated as the national blockchain for the Commonwealth of Dominica with TRX granted statutory status as legal tender in the country, Poloniex will continuously connect users to the power of cryptocurrency.
Ethereum’s Shanghai upgrade: what should we expect? was originally published in The Poloniex blog on Medium, where people are continuing the conversation by highlighting and responding to this story.
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