Making the Ethereum Ecosystem Great Again, the Four Major Narratives of the New Cycle are Worth Focusing on

[TL；DR]

The Cancun upgrade is responsible for cost reduction, while the Prague upgrade is responsible for efficiency improvement. Ethereum is expected to undergo a Prague upgrade this year, enabling the Ethereum eco to carry larger-scale applications.

If we draw on historical patterns, it is evident that the current period is in a period of ETH/BTC volatility. However, whether the structural changes in fund circulation will slow down the strong rise of ETH remains to be further observed.

The four major narratives of spot ETFs, scalability and upgrading, Resting, and modularity will become the core driving forces of the Ethereum eco.

Introduction

The rapid development of BTC and Solana ecos in recent times has raised concerns about the ETH eco, as it may overlap with the eco of Ethereum. Moreover, the recent Cancun upgrade of Ethereum has been overshadowed by many other areas of positive news, reflecting the continued weakness of Ethereum compared to Bitcoin in terms of price performance.

However, it should be pointed out that the strong rise of other ecos represents the overall prosperity of the crypto market, which is not a zero sum game, so it may not necessarily weaken Ethereum, as Ethereum also has unique value manifestations. This article will delve into this in depth.

Cancun Upgrade and Prague Upgrade

Firstly, it is necessary to introduce the recent Cancun upgrade and the upcoming Prague upgrade of Ethereum.
We have previously written several articles to explore the background significance of the Cancun upgrade, and here we will briefly describe it again to make the writing logically coherent.

As early as the end of April last year, the Ethereum Foundation identified the following important change as the Cancun upgrade. At the 160th Core Developer Conference call, it was pointed out that the plan was expected to be officially launched in November of that year, and the Cancun upgrade was ultimately achieved in mid-March of this year.

Why is the Cancun upgrade important? Because it will play a crucial role in the expansion of Ethereum, including reducing Layer2 costs and improving efficiency, which will greatly enhance Ethereum’s competitiveness on Layer2.

Among the five Ethereum improvement proposals (EIPs) involved, the proposals that received more attention include the core EIP-4844, as well as EIP-1153 and EIP-4788.

EIP-4844, as the core proposal for upgrading, is the key to achieving Ethereum scalability. Simply put, developers are attempting to provide more scalable space for blockchain by introducing a new transaction type called Blob, thereby reducing the transaction costs of Layer 2 blockchain.

Based on the cost of each L2 after the upgrade, it is cheaper, which will further enhance the competitiveness of the Ethereum eco.

Source: Vitalik Buterin

What we look forward to next is the Prague upgrade.

Based on the currently revealed content to be discussed, the Prague upgrade is expected to be implemented on the Ethereum testnet in the third quarter of 2024 and completed on the mainnet by the end of the year. The goal is to promote further development and optimization of the Ethereum network and improve network scalability, security, and performance.

The Prague upgrade is expected to include four Ethereum improvement proposals, namely EIP-2537, EIP-6110, EIP-7002, and EIP-7549. This upgrade involves multiple staking-related EIPs (Ethereum Network Improvement Protocol), such as EIP-7002, that support re-staking and trust-free staking pools, as well as other individual EVM (Ethereum Virtual Machine) changes.

In this upgrade, the Paradigm team proposed an understanding of the important EIPs included in the Prague fork, and they agreed that priority should be given to EIP-7002, 6110, and 2537. At the same time, they support the Ethereum Object Format (EOF) described in the specification and hope to quickly determine the scope and create a meta-EIP dedicated to that scope.

However, the Prague fork also faces some challenges and issues that require in-depth research, such as issues such as Verkle Tries and DAS on CL.

Overall, after the Cancun upgrade and cost reduction, the upcoming Prague upgrade is expected to achieve increased efficiency and enable the Ethereum eco to carry larger-scale applications, bringing positive impacts.

Where is ETH Weak?

Although Ethereum is undergoing continuous upgrades and optimizations according to established plans, its coin price performance has been sluggish.

As shown in the figure, since the bear market at the end of 2021, the ETH/BTC exchange rate has declined, dropping from the highest of 0.088352 to around 0.050339.

Source: Gate.io

Especially since August 2022, the ETH/BTC exchange rate has continued to weaken and decline, with no apparent signs of recovery or rebound. According to technical analysis, once it falls below the current support level, it is highly likely to drop to around 0.041 to seek support.

Since the Bitcoin L2 and Inion eco became popular last year, the Ethereum eco has appeared relatively quiet. ETH, which used to be a leading benchmark for Altcoin products, has recently seen a strong rise in Altcoin tokens such as SOL, NEAR, FANTOM, and some MEME, RWA, DePIN, and AI. Especially in the context of the Cancun upgrade in March, whether ETH passively follows the rise of BTC or a group of L2 tokens hastily rise and quickly complete speculation expectations, all of these show the lackluster nature of the Ethereum eco.

Even the author has seen that some market observers use SOL or BNB as a benchmark for Altcoins instead of ETH.

If we look back at history, we seem to be able to find clues.

In the bull market wave initiated by DeFi Summer in 2020, ETH/BTC continued to rise, but after September of that year, ETH quickly weakened. Until the end of the year, BTC reached a historic high, and ETH finally ushered in a year of sustained strong BTC, commonly known as Altcoin Season.

If we draw on historical patterns, it is obvious that the current period is in a period of ETH/BTC reversal. However, it should be noted that in this bull market, Bitcoin ETF has brought a massive amount of funds exclusively belonging to Bitcoin, while Ethereum’s ETF is still far away.

So, whether the structural changes in the current Flow of funds will slow down the strong rise of ETH remains to be further observed.

ETH Eco New Narrative Worth Focus

The strengthening of the ETH price depends on its eco innovation, and we have found some new keywords about Ethereum.

Spot ETF

On February 17, VanEck and ARK/21Shares submitted the filing and application documents for the Ethereum ETF. Previously, multiple institutions have also submitted relevant applications.

The person in charge of Grayscale predicts that the probability of Ethereum Trust converting to spot ETF in May this year is 50%.

According to a research report by US investment bank Bernstein, Ethereum is ready to be adopted by mainstream institutions due to its staking revenue, environmental design, and institutional practicality.

However, it appears that Ethereum has been recognized by the SEC as having securities characteristics, which conflicts with the CFTC’s conclusion that it is a commodity. The promotion of spot Ethereum ETFs will be a tug of war.

EIP Upgrade

In the Cancun upgrade of Ethereum, EIP4844 reduces user costs by temporarily storing and retrieving off chain data, further enhancing Ethereum’s scalability and efficiency, laying the foundation for large-scale applications. The upcoming Prague upgrade will also continue to improve L2 ution efficiency from the main chain.

This has been emphasized in the previous text and will not be further discussed here.

Modularity

Modular blockchain is the latest concept related to scalability, which decomposes blockchain functions into different levels such as settlement layer, relay layer, ution layer, consensus layer, etc., allowing specialized processing of different functions, reducing the cost of user access to blockchain space, and providing better products and security guarantees.

The current mainstream approach is to use blockchains such as Ethereum as the settlement layer, while other projects such as Celestia can serve as the data+consensus layer to achieve specialized processing of different functions.

Source: public information

The rise of modular blockchain will bring a paradigm shift in blockchain technology and Web 3.0, providing new possibilities for building more efficient, secure, and specialized blockchain networks.

Restaking

Restacking is a complex product form that emerged after the deepening development of DeFi, and it is also a new DeFi track that emerged after the Ethereum consensus mechanism was converted to PoS.

The reason why Ethereum has become the most recognized first-layer blockchain after Bitcoin, attracting a large amount of transaction volume and liquidity, is largely attributed to its excellent security. EigenLayer interfaces with Ethereum’s security and liquidity through its Active Verification Service (AVS), and the security verification of its token model is directly handled by Ethereum nodes, a process known as re-staking.

As of the writing date, the TVL on Eigenlayer has reached $11.8B, second only to Lido.

Source: DefilLama

Through this flywheel-like nesting method, the track protocol of EigenLayer and even Ether.fi has injected new vitality into the entire Ethereum eco.

To Sum Up

With the official landing of Bitcoin spot ETFs, the Ethereum eco is expected to experience a significant rebound in 2024. In this process, the four major narratives will become the core driving forces of the Ethereum eco: first, the Cancun and Prague upgrades, which will directly benefit the L2 eco, significantly improving the efficiency, scalability, and security of blockchain; Secondly, the EigenLayer re-staking eco, providing investors with more opportunities to participate and profit. Finally, modular facilities will bring about larger-scale Web3 projects for mass applications, such as gaming and payment, which will drive the application of Ethereum in a wider range of scenarios.

Therefore, we have reason to believe that ETH’s significant upward trend marks not only the recovery of the market but also the beginning of new development opportunities for the Ethereum eco.