ETH/BTC exchange rate on-chain data comparison
Since October, BTC has gained 57.5% as of December 15, while ETH has gained 48.34%. While the difference isn’t huge, ETH price has been underperforming BTC for nearly a year now.
BTC’s strong performance mainly comes from the expectations of BTC spot ETFs, the approaching production halving cycle, and the recent rise of the BTC ecosystem. Although ETH does not have similar positive expectations in the short term, the on-chain data still shows relatively positive signals.
First of all, judging from the most intuitive selling pressure, the balance of BTC on the trading platform has been declining since June, but there were obvious signs of rebound from December 5 to December 12. After this peak, BTC price fell from as low as $41,000.
Compared to BTC, ETHs balance on trading platforms is less volatile. ETH balances on trading platforms have been on a downward trend since February 2023. ETH balances on trading platforms also rebounded slightly between December 11 and 13, but the rebound occurred during and after market price declines. This shows that some investors choose to transfer ETH to the trading platform for cash after a short-term market decline.
In addition, according to data from the Santiment website, in terms of social popularity, the overall trends of the two are similar, but the popularity of BTC is significantly higher than that of ETH. In terms of MVRV (the ratio of liquid market capitalization to realized market capitalization, often used to assess buying and selling pressure), the overall trends of the two are similar, but the magnitudes are quite different. As of December 15, BTC was at 41.17%, while ETH was at 26.45%, both at 6-month highs.
Although Ethereum has not risen as much as Bitcoin recently, it is still worth noting the trend change in the Ethereum market in terms of institutional interest, which will become more obvious after November 2023.
According to a chart from the on-chain data website Cryptoquant, some time ago, when the price of Ethereum stabilized at $1800-1900, there was a significant rebound in ETH held by institutions. Cryptoquant believes that the recent surge in the number of institutional holdings of ETH indicates growing interest from institutional investors and recognition of Ethereum’s long-term value and market growth potential. The reasons behind this phenomenon are not only the price stability of ETH and potential expectations for an ETH spot ETF, but also the solidification of Ethereum’s fundamentals and technical upgrades.
JP Morgan took a stance on the cryptocurrency industry in its recently released Financial Outlook 2024 report. The report pointed out that although BTC is approaching a production reduction cycle, ETH is expected to perform better than BTC next year. JP Morgan sees the upcoming EIP-4844 upgrade (Proto-dank sharding) as a potential catalyst for its performance, which will improve Ethereum’s network efficiency and scalability, thereby gaining an advantage in the market.
On the other hand, the positive factors of BTC production reduction have been realized in advance into the current price. The BTC block reward halving is expected to increase production costs and potentially cause its hash rate to drop by 20%. According to JP Morgan, this could lead to higher operating costs for miners and drive less efficient miners out of the market.
Key steps before Ethereum Dencun upgrade launched
Ethereum developers finally enabled the Dencun upgrade in late 2023, according to a report from the Core Developers Consensus Call. Ethereum developers said that they will launch the Goerli shadow fork with all clients in the next one to two weeks to test the Cancun/Deneb upgrade.
Cancun/Deneb upgrade testing on Devnet 12 is ongoing. Currently, all Execution Layer (EL) and Consensus Layer (CL) client combinations (including PRYSM clients) have been loaded into Devnet 12. MEV-BOOST software has been activated for most client combinations (except PRYSM client combinations).
The Ethereum Dencun upgrade will bring changes to Ethereum’s two mainnet layers (execution layer and consensus layer). The upgrade of the execution layer is called Cancun upgrade, and the upgrade of consensus layer is called Deneb upgrade, so they are collectively called Dencun upgrade.
The Dencun upgrade will further expand capacity for ETH and L2 by implementing an improvement proposal called EIP-4844. The Dencun upgrade represents an important milestone in Ethereum’s roadmap. Once the upgrade is completed, L2 fees will be even more competitive.
Return L2 functionality to L1 via encapsulation zkEVM
Since the L2 network can package transactions together for off-chain processing before bringing them back to the main chain, it is a method that can improve Ethereums scalability, and was the focus of Vitalik Buterins 2020 conference (at the time Fees on the Ethereum network are skyrocketing).
Recently, Ethereum co-founder Vitalik Buterin believed that as light clients become more powerful, returning L2 functionality to L1 by encapsulating zkEVM will be the next step for Ethereum. Vitalik Buterin proposed returning some functions of the L2 network or rollup to the Ethereum main chain. This method of encapsulating zkEVM (zero-knowledge Ethereum Virtual Machine) is consistent with his move of computing load from the Ethereum main chain to the L2 network a few years ago. The opposite view.
In a recent blog post, Vitalik Buterin pointed out the importance of light clients, light nodes that strip away the client software. These light clients only request data on demand, rather than independently verifying changes to blockchain data by retaining a copy of their data. Typically, light clients or light nodes primarily process block headers and only occasionally download the actual block content.
Vitalik Buterin believes that as their functionality and data increase, these light clients will become more powerful and can even fully verify L1 transactions like L2 networks. At that point, the Ethereum network will effectively have ZK-EVM built-in.
ZK Zero-knowledge proof is a cryptographic protocol that allows one party to prove the correctness of a transaction to another party without providing any specific transaction details. On the other hand, EVM is the virtual machine of Ethereum. Just like a computer is used to execute programs, EVM is actually responsible for executing smart contracts.
Currently, zero-knowledge proofs are used by L2 networks such as Polygon, Scroll, and Matter Labs, and these platforms are the main stakeholders in DeFi. Therefore, Vitalik Buterins approach to encapsulating zkEVM may take away some steam from these platforms. So, if zkEVM is encapsulated and becomes part of the original Ethereum protocol, how will the functionality of L2 change?
According to Vitalik Buterin, these L2 projects will still be responsible for many important functions. Some of these features include rapid pre-qualification, MEV mitigation strategies, and extensions to EVM. Additionally, the approach to encapsulating ZKEVM will address both user and developer-oriented convenience. He believes that “the L2 team has done a lot of work to attract users and projects into its ecosystem and make them feel welcome; by capturing MEV and transaction congestion fees in the network, L2 can obtain certain profit compensation. This kind of The relationship will continue.”
The main things to watch for ETH in 2024
The Dencun upgrade will be deployed in March or April 2024. Through EIP-4844, the gas cost of Ethereum L2 will be greatly reduced and the scalability of Ethereum will be improved.
Ethereum L2 activity is continuing to grow and is currently at an all-time high. According to recent data from L 2B eat, the total value of the entire ecosystem is $16 billion.
The current L2 is mainly EVM compatible, such as Arb, OP, Metis, etc. In addition, non-EVM L2s such as Eclipse and Flyent are being launched, which will bring new types of applications and developers. Crypto games will be mainly based on the L2 ecosystem, and wallet user experience will continue to improve, allowing the Ethereum ecosystem to absorb more new users.
Finally, the tokenization of real-world assets has been gaining momentum, bringing more “old world” financial products to the Ethereum blockchain.
