AReportontheDevelopmentofEthereumEcosystemQ12022

As “the Merge” further heightens the deflationary prospects, decentralized staking pools have seen a sharp rise in the number of staked ETH, a whopping 89.52%, in a single quarter.

The Federal Reserve introduced the long-awaited interest rate hike in March 2022, which improved the crypto market at a macro level and further stabilized the market performance. By the end of March, the overall value of cryptocurrencies staged a comeback to $2 trillion, and ETH bounced back to $3,500 and above, accounting for 17.9% of the total market value.

Ethereum is now in the crucial run-up to the Merger between PoW and PoS. As the second most valued cryptocurrency in the market, it makes up 17%-22% of the total market cap, which speaks volumes about its significance to the entire crypto industry. This report comprehensively sorts out Ethereum related data in Q1, in particular the application layer overview and historical development cycles, and observes potential development trends in the ecosystem for future reference.

1. Ethereum: Before the Merge

1.1 Data overview for Q1

The first quarter of 2022 saw the overall return rate drop by about 10.8%, fluctuating from -27% in January, to +8.4% in February, and +12.4% in March. Major lost grounds were recovered in late March to $3,000 and above. The market share of BTC was 40%, and ETH 20.1%, largely unchanged from the previous quarter. The ETH/BTC ratio fell back to 0.072 from 0.0835 after hitting a 3-year high last quarter. ETH softened some of the blow when BTC plunged in value by hedging against possible risks.

In Q1, Ethereum overall proceeded with smooth development. According to Cryptomiso, over 100 developers actively contributed to the ecosystem by submitting 115 code updates, ranking 40th in terms of active participation. Figures from Stateofthedapps showed that there were 3,198 DApps and more than 4,890 smart contracts running stably in the system. About 46 DApps were newly added in Q1, same as previous quarter.

When it comes to TVL, Ethereum enjoyed a fairly large share of 60.98% among other major public chains, with its quarterly growth of 27.18% far surpassing the share of other chains. But the proportion of Terra, BSC, and Avalanche creeped up faster than expected. In early March, TVL in Ethereum hit a record low of 55%, showing the multi-chain trend was not just burgeoning, but flourishing.

The average number of Ethereum active addresses was about 578,732, a slight decrease of 3.92% compared to 602,388 in the previous quarter. Late March also saw the number surge to a high of 875,201 (within 24 hours), with user activity making a comeback as well.

1.2 Ethereum 2.0

Ethereum is at a critical juncture, increasingly edging towards Ethereum 2.0. In theory, there are four development stages before attaining the visionary ambition of becoming a world computer: Frontier, Homestead, Metropolis, and Serenity. The fourth stage is what we refer to as “Ethereum 2.0” (the Consensus layer), designed to extend and improve the scalability of the system, where the transition from PoW to PoS consensus will be very crucial.

In the above roadmap, ETH 2.0 will be achieved in three phases. The first has been completed as the “beacon chain” was launched in December 2020 which incorporates native staking mechanism into the system and paves the way to the Serenity stage. The second phrase is “the Merge”, and the third sets eyes on the “shard chain” that focuses on the sharding technology.

(The Ethereum Foundation is phasing out terms like “ETH 1.0” and “ETH 2.0”, replacing with the Execution layer and the Consensus layer. That’s to say, Ethereum will consist of an Execution layer and a Consensus layer.)

The second half of 2021 saw the upgrade of “EIP-1559” in ETH 1.0 and Altair in ETH 2.0, which lays the foundation for the Merge.

In Q1, the market heightened its anticipation for the Merger between the beacon chain of ETH 2.0 and the network of ETH 1.0, and responded in advance to possible deflation that might be brought.

The Merge, according to credible sources, is to take place in June or July. After temporary coexistence, the PoW consensus will be slowly but surely phased out, along with existing mining groups, and PoS will establish its absolute dominance, reshaping the fields of deflationary currencies, decentralized staking, and GPU mining.

Whether the transfer to ETH 2.0 will materialize in Q2 depends on the testing of the Merge on the Kiln testnet. So far everything goes according to community expectations. On March 15, the Kiln testnet went live, marking a successful transition and upgrade to a complete Proof of Stake (PoS) consensus. The next step for developers is to merge the existing PoW testnets, and then mainnets. Official data shows as of late March, there are more than 106,000 validators and 3.4 million ETH on testnets that are operating under the POS consensus.

Ethereum core developers have shifted their focus to “the Verge”, a stage after the Merge. It is expected that the Merge will be less difficult to implement and will be delivered on time and smoothly.

The white paper stipulates the supply of ETH increases every year at a certain proportion. As the total amount goes up, the proportion of new issuance becomes lower. Under PoW, the annual issuance rate of ETH is about 4.2%-4.3 %, with daily circulation 12,000–13,000 pieces. After switching to PoS whose beacon chain has an annual issuance of 0.6%, the daily output will be around 1280–1500, a drop of 90%. When the Merge is done, the rate will further decrease to 0.3%-0.4%, and what’s more, staking will dispense with electricity cost, which theoretically reduces sell-offs.

Currently, the inflation rate of ETH is about 3%, with 1 million pieces burnt annually, and only about half that amount will be issued annually after the Merger. As of March, the total supply was about 118.5 million, of which staking claimed 14.5 million, accounting for 12.2%, and the supply in contracts was 21.6 million, about 18.22%. The Merger will deflate the supply to a point where the inflation rate will be 4 times lower than that of Bitcoin which currently stands at 1.73%.

Ultrasound ran a simulation of the changes in ETH burning, supply, and issuance after the Merge:

In Q3 last year, the London & EIP-1559 proposal adjusted the gas fee mechanism, which contributed to ETH deflation by increasing basic fees and reducing circulation.

During the same period, the amount of staked ETH in deposit contracts continued to increase steadily, reaching over 10,000,000 pieces (worth approximately over $27 billion), accounting for 9% of the current circulation, among which 66% were deposited by exchanges and staking service agencies, with the largest contribution made by Lido (22%) and Coinbase (15%), exceeding the share of centralized exchanges such as Kraken and Binance. This clearly shows the trend of staking institutionalization.

Under PoS, the return rate is determined by the amount of ETH staked. It’s widely expected that the upcoming merger will further scale up ETH staking, and those staked will be locked and cannot be circulated (Staking derivatives are not included).

Technical improvements and performance optimization under PoS will surely drive up the demand among developers, which in return contributes to the scarcity of ETH as a consumer product, with the amount staked and burnt adding additional fuel to the flames. All of these trends set by the Merge will be captured and displayed in a more direct form through data in the future.

1.3 Before the Merge: Deflation is widely anticipated, and possible staking agreement attracts widespread attention.

Deflation is widely anticipated after the Merge. This expectation shores up the rebound of ETH in value in the first quarter. The following shows the supply and demand of ETH in Q1, 2022:

Asset property of ETH is more complicated than that of an early stage which was simply described as:

● Currency in the crypto market;

● Gas consumption;

● Interest-bearing asset;

The induction of staking makes ETH a “means of production” (giving ETH holders the right to earn income). This newly assigned attribute is among the first to drive up demand. As exchanges, DeFi protocols, wallets and ETH staking services dive deeper into the field, both the market and the community have raised the staking return forecast after the Merger. It is believed that the amount staked should remain within an appropriate range of 20–25% of the circulation. Future supply constraints are expected given the fact that more ETH will be locked, and only limited amounts of blocks will be generated in the short term.

On the other hand, the flourishing DeFi community, the entry of mainstream institutions, and the rise of public chains all reflect the “asset” attribute of ETH which is used as a trust-less collateral in DeFi transactions to provide liquidity to the market. The amount locked in DeFi peaked at nearly 10 million during good times, and the figure in Q1 was about 4.907 million, all very critical to the DeFi ecosystem.

Institutional investors use ETH as a store of value. Grayscale’s holding of ETH strikes a very optimistic note:

While the overall market operates smoothly, well sought-after fields like NFT and DeFi clearly lack momentum amid a variety of factors including the Merge, a critical step in the upcoming consensus transfer, that looks set to ratchet up the ETH scarcity. The interplay of all these lays the groundwork for a highly anticipated deflation, which may lead to reconstruction of existing ecosystem relations and gradual withdrawal of miners, and give birth to new products in new fields that can take up the baton:

(1) Staking derivatives

Staking derivatives means staking ETH for tradable ERC20 Tokens as earnings, attracting liquidity to ETH with premium effect.

● Centralized staking

Centralized staking mainly consists of ETH 2.0 Staking service providers, namely centralized exchanges, mining pools, wallets and custodians. Such platforms already enjoying strong ETH liquidity are able to provide this kind of services without increasing costs for users. Integration of these services is expected in the future to generate more streamlined models for greater market share.

Trading platforms represented by Kraken and Binance charge over 15% commission fees for custodial services. Custodial agencies such as Coinabse, Midas, SwissBorg, and Bitcoin Suisse AG, also charge institutional users more than 15%. By contrast, ETH 2.0 staking service providers like Stakefish, P2P Validator, and Stakewise that have not issued tokens yet charge a commission of about 10%.

However, centralized staking platforms might be too centralized that certain risks cannot be ruled out. For example, early days saw collusion and bribery plague the voting system.

● Decentralized staking

In decentralized staking pools, users deposit ETH into a smart contract, receive receipts or proof tokens, and get staking rewards in return which contribute to user balance over time. In Q1, ETH staked in decentralized pools increased by 89.52%.

Lido

Lido is the largest decentralized staking pool in the market, allowing users to earn rewards without locking up assets or compromising infrastructure maintenance. Lido claims the lion share of the ETH 2.0 staking market, over 80%. It adopts a multi-chain expansion strategy, in addition to ETH, also providing liquid staking of LUNA, SOL, KSM and MATIC. It receives a total of 140 million dollars in previous financing, mainly led by a16z and Paradigm.

RocketPool

RocketPool is one of the earliest Ethereum staking protocols and enjoys rapid growth recently. It aligns the interests of the protocol and the node operators by requiring the latter to stake RPL tokens. It de-trusts the network by automating the joining process. It focuses on Ethereum, with ConsenSys Ventures being its publicly disclosed investor.

SSV.network

SSV.network is a fully decentralized and open ETH 2.0 staking network based on Secret Shared Validator (SSV). It provides an open infrastructure for users, staking pools, and big institutions that need to run Ethereum validators.

It received $188,000 in grants from the Ethereum Foundation, and $10 million in financing from Coinbase, Lukka, and DCG.

(2) GPU mining

Existing mining machine vendors and miners may be inclined to look for new GPU mining projects and continue to use GPU as the core of mining machines.

Take Aleo as an example:

Aleo is a GPU mining project that receives lots of attention recently. It uses zero-knowledge proof to build an underlying blockchain with strong privacy and scalability. It moves smart contract execution off-chain to support a variety of Dapps, making application completely private and scalable. What’s more, Aleo miners don’t need to rerun every transaction, just verify that it is correct.

It raised $28 million in Series A round, led by a16z; and $200 million in Series B, led by Kora Management LP and SoftBank Vision Fund 2, with pledges from Tiger Global, Sea Capital, Samsung Next, Slow Ventures, and a16z. This has become the largest financing round in the field of zero-knowledge proof, with the valuation surging to $1.45 billion. More than 10,000 test nodes took part in its most recent testnet event.

(3) ETC (Ethereum Classic) ecosystem

ETC was born through a hard fork that happened after the smooth generation of 1,920,000 blocks. It bears remarkable resemblance to Ethereum by inheriting the same chain and opposing consensus transfer from PoW to PoS. It once modified its token supply policy in accordance with the Bitcoin model, adopting rules like mining decrement and quantity cap.

ETH mining machines can also be used to mine ETC. The week from March 16 to March 23 witnessed an upsurge in ETC value of 87.65%, mainly propelled by imminent output reduction and shifting of purpose in idle machines.

2. Development of Ethereum Ecosystem

2.1. Review of Ethereum cycles

Ethereum published its white paper in 2013, and became the first smart contract platform in blockchain. The market value has gone through several cycles: 2013–2014, 2017–2018, 2020–2021, and 2021 till now. The development trajectory of and incentive mechanisms in the ecosystem provide a textbook example for other public chains.

Timestamp and key events:

End of 2013: The Ethereum white paper was published, along with the launch of the first blockchain smart contract platform.

2014: The non-profit Ethereum Foundation was established.

2015: Joseph Lubin, co-founder of Ethereum, launched Consensys.

2016: Ethereum had a hard fork. The development team was split up.

2017: The ICO turbocharged the market value to over $100 billion.

2018: Technical focus was shifted to expansion and scalability, and the number of core protocol developers increased.

2019: Constantinople upgrade.

2020: The ETH 2.0 mainnet deposit contract was launched.

2021: Ethereum scored a new record high; London upgrade (including EIP-1559 proposal).

Q2 2022: The Merge is expected to be delivered in Q2 2022.

Major shifts in the landscape of Ethereum ecosystem:

2013–2014

2013 embraced the first peak of crypto market which saw exponential growth in the number of developers and startups, and Ethereum was one of them.

2017–2018

The end of 2015 saw the induction of ERC20, laying the groundwork for a bull market that finally materialized in 2017 through the ICO. The launch of smart contract in 2017 expanded the boundaries of blockchain technology which entered the public domain as an underlying technology. This cycle saw Ethereum further consolidate its ranking in market value, second only to BTC, driving up the valuation of other smart contract platforms and infrastructure sectors. DAPPs sprang up exuberantly all over the ecosystem, and sectors like NFT, gaming, and fork coins all basked in upward trends. All of these put ETH on a pedestal for other copycat coins.

2020–2021

The total value of cryptocurrencies reached a record high of $3 trillion, and the trading volume on Ethereum exceeded $3.6 trillion. ETH’s share of market capitalization rose from 11% in early 2021 to around 20%. During this period, sectors that prospered including DeFi (DEX, AMM, liquidity mining, mortgage loans), NFT, Meme, GameFi, Metaverse, etc.

2021 till now

Due to limitations imposed by macro policies, cycles are subdivided to better reflect market trends. NFT and DeFi managed to maintain their popularity. Public chains with the reconstruction of valuation logic in place also welcomed new growth.

Newly emerged projects in above cycles need to weather the storm of a bearish market. Only 10%-20% will re-emerge after the reshuffle and grow to become blue-chip projects that form part of the infrastructure for the following cycle.

The Ethereum Foundation guides and supports quality projects, offering grants and incubation services to community-born innovations. The Foundation manages part of the recruitment efforts for community infrastructure and main software, and appropriates funds for developer and user experience related programs and brand awareness campaigns, but it ceases to exert influence on technological developments.

The Foundation has an annual budget of $30 million, and its Branch Ecosystem Support Program (ESP) provides additional non-financial support to complement the Grants (self-help) Program.

The Foundation, attaching great importance to developers, is the organizer of the Annual Developer Conference (DevCon), inspiring and fostering a wave of new projects through conferences, funding support, and hackathons. There are multiple outlets to reach out to communities including the official website, Reddit, Blog, Twitter, Youtube, Facebook and other channels, with the ETH-themed sub-forum on Reddit being the most encompassing platform, buzzing with core developers.

Developers are particularly active in Ethereum. No platform can display this enthusiasm better than GitHub where the word “Ethereum” is cited far more than that of others. It often tends to enjoy faster progress in development than others when programming documents, infrastructure, and tools are mature enough to be deployed.

The Foundation shores up the ecosystem mainly by issuing funds which in return guide the attention of developers to specific areas. The theme of the fund is often closely related to current development status. For example, a subsidy program was introduced in 2018 to incentivize developers to improve the scalability of the system.

The Foundation funded a batch of projects in the fields of DeFi and NFT in 2018, among which Uniswap, at that time an experimental project, received $100,000. In 2019, the market turned bearish, the focus was then shifted to ETH 2.0 client, ETH 1.0 upgrade, Layer 2, and zero-knowledge proof (privacy-oriented). In November 2020, the “ETH 2.0 staking Community Fund” was launched. All the above-mentioned fields later form the very foundation of sought-after projects in the following upward cycles.

The Foundation later leveled the playing field for internal teams and external contributors, meaning the former also needs to compete for resources.

In addition to the Foundation, Consensys to a large extent also props up the Ethereum ecosystem. Its business portfolio covers a wide range from programming tools, to consulting and training services of platforms, to industry resources aggregation, and to institution-grade incubation services and technical support. It has increasingly become an indispensable bridge between Ethereum and large institutions.

Consensys also plays a big role in the Enterprise Ethereum Alliance (EEA), a global industry standards organization which promotes the adoption of ETH technologies to enterprises. EEA covers 45 countries, with over 3,000 global developers. It has forged partnerships with more than 300 companies around the world including very well-known ones like Intel, JP Morgan, Microsoft and IC3. Among them, banks and financial institutions account for about 24%, blockchain companies 5%, and native crypto projects 17%, forming a rock-solid foundation of quality resources in the ecosystem.

2.2. Ethereum application layer

Ethereum adopts a layered architecture, namely the application layer, the contract layer, and the protocol layer from top to bottom. The protocol layer includes basic components like EVM virtual machine, block management, KV database, consensus algorithm, and P2P network, and the smart contract layer consists of various DApps.

Smart contracts in the contract layer can be classified into 21 categories according to different application scenarios:

DApps can be defined into different categories according to their function and property: exchange, gaming, finance, development, storage, wallet, governance, asset, identity, media, NFT, DeFi, social networking, security, energy, health, and insurance.

DApp features like trustlessness and transparency have galvanized the greatest landing in DeFi (decentralized finance). The market capitalization of DeFi has been through ups and downs, surging to $6.291 billion before retreating to $998 million in 2017, renewing record highs several times before reaching $10 billion for the first time in August 2020, and scoring the historic record of $143.953 billion in September 2021. History has been made again and again. This prompts DeFi to claim the most coveted title of the most successful application scenario on Ethereum. Preliminary data shows the annual revenue of DeFi is about $ 4.5 billion, contributed largely by public chains, with sufficient liquidity benefitting both the market and users alike.

NFT is another fast-growing sector. Before 2017, the market value was stuck below $300 million for quite a long time. Things began to turn around in 2021 that saw the figure exceed $40 billion. Daily sales of Ethereum-based NFT steadied over $100 million in Q1 2022, accounting for 90% of the total NFT transactions. Catching the tailwinds of several upward curves in Ethereum, NFT and chain games were among the first to grow and flourish, with outstanding projects like Enjin and Opensea injecting huge impetus to the already prosperous ecosystem.

Each cycle, new products emerge on the basis of technical breakthroughs and market base left by the last. Over 50% of the Top 20 will experience reshuffles. More than 80% of DeFi blue-chip projects in this cycle are based on Ethereum. It is expected that gaming, DeFi and social networking will continue to dominate the market in the next round.

2.3. Top 10 DAPPs

The top 10 Dapps by usage frequency are:

The top 10 Dapps by user base are:

Briefs on representative projects:

● OpenSea, an NFT trading platform

OpenSea is the largest NFT trading platform and the most used DApp on Ethereum, mainly based on ERC-721 and Polygon (a layer 2 scaling solution for Ethereum). It provides services like NFT generation, trading, and auction.

In 2018, OpenSea received its seed capital from Y Combinator, and another $2.1 million mainly pledged by Animoca Brands in November 2019. The year 2021 saw it secure $23 million in venture capital led by A16z in March, and another $100 million in financing in July. September the same year witnessed the release its own mobile apps for Android and iOS. Then in January 2022, it raised another $300 million by Paradigm and Coatue Management, prompting its value to reach $13.3 billion.

● Uniswap, a Decentralized trading platform

Uniswap is one of DeFi’s blue-chip projects. It has released 3 versions, with the second and third being the second and third most popular DApps on Ethereum. It enables automatic token trades through smart contracts, pioneering the concept of Automated Market Maker (AMM).

Uniswap has received investments from Andreessen Horowitz, Paradigm Venture Capital, Union Square Ventures LLC, ParaFi and so on. Data provided by Coinmarketcap shows the daily trading volume averaged around $2 billion in the first quarter of 2022.

● Polygon

Polygon, born in 2017, positions itself as a Layer 2 aggregator, providing a variety of Layer 2 solutions, including Optimistic Rollups, zkRollups, and Validium. Its scaling solutions have been adopted by over 400 Dapps, processing over 350 million transactions, and used by more than 1.5 million users.

In February 2022, Polygon raised $450 million in strategic financing by Sequoia Capital India.

● Metamask

MetaMask is a software wallet based on the Ethereum blockchain that allows users to access the wallet through browser extension or mobile application. It was launched in 2016 by ConsenSys Software Inc., a blockchain software company focused on Ethereum-based tools and infrastructure, whose latest valuation has reached $6.5 billion.

As of 2022, its browser extension has over 30 million monthly active users.

● 1inch Network

1inch Network is an NFT-enabled decentralized trading aggregation platform that seeks the optimal DEXs for LPs to provide liquidity to multiple markets on three blockchain networks. The protocol finds the best market price by splitting orders across multiple DEXs, and boosts investors’ DeFi rewards through bots and other algorithms.

The seed capital of $2.8 million was pledged by Binance Labs and Galaxy Digital, and series A round took in $12 million. Recently, its pre-money valuation in Series B has reached $2.25 billion.

2.4. Layer 2 Overview

As of March 3, the total locked value on Ethereum Layer 2 was estimated by L2BEAT to be $7.399 billion, exceeding that of most public chains. Layer 2 is an indispensable part of the Ethereum ecosystem, with its daily trading volume exceeding that of Bitcoin in September 2021.

Layer 2 is a scaling solution designed to improve the operation efficiency of blockchain while reducing costs. It has a separate execution layer on top of Layer 1 (Ethereum). It massively reduces on-chain data processing by moving calculations off-chain. Main scaling technologies include state channel, side chain, Plasma, Optimistic Rollup, ZK Rollup, and Validium. Among them, Rollup is deemed matured enough to be inducted into the mainstream.

DeFi’s meteoric rise to fame attracts an influx of Layer 2 projects that actively seek cooperation with DEX and DeFi to reduce transaction costs and improve user experience.

Data from L2Beat highlights the market lead of the Rollups technology, accounting for 70% of the total market value. Arbitrum takes the top spot with the market cap of $4.1 billion, and dYdX, an L2 application using ZK-Rollup, ranks the second at $986 million. Validium is also embracing new developments as Immutable X, an NFT market and Sorare, an NFT game, adopt it.

Take Arbitrum as an example. The ecosystem, at an early stage, has managed to attract 74 projects including well-known ones like Uniswap V3, Aave, Curve, and MakerDAO, giving it an obvious first-mover advantage. Those joining later like GMX, Dopex, Tracer, Premia, Umami Finance, Swapr, and Cap have also sustained the momentum to attain even faster growth, with each having locked value worth over $20 million. So far the trading volume of Arbitrum continues to rise steadily.

3. Funding Priorities

The Foundation has earmarked funds for Web3.0 and Metaverse, and continues to keep keen observation on recent activities, events, hackathons, and fund recipients.

In Q2 last year, the Foundation provided $7.794 million in funding to 40 projects, mainly focusing on market awareness education, zero-knowledge proof, and Layer 2, and another $13.82 million in total in Q3 and Q4 to popular projects like DAO Drops, Zero MEV, L2BEAT, and EthStaker. Q4 also saw the launch of a client incentive program whose eligible applicants include Besu, Erigon, Go-ethereum (geth), Lighthouse, Lodestar (50% stake), Nethermind, Nimbus, Prysm, and Teku.

In early March 2022, the EF Ecosystem Support Program announced a $750,000 research grant aimed at promoting academic research on Ethereum, blockchain, cryptography, and zero-knowledge proof. In mid-March, metaverse, digital currency and Web 3.0 were officially chosen to be the theme of Ethereum Rio 2022.

A wave of new projects emerged in BuildQuest, a Ethereum Metaverse Hackathon that concluded in March: Parcels, a metaverse game, Clash of Cards, an NFT monster card game, Ollie Verse, an NFT card game, NiftyGuilds, an NFT group chat platform, Shake Shock, an NFT MMORPG game, Shattered Realm, a 90s-style RPG game, GeoNFT, a geolocation-based NFT collection game, NF3D, a 3D NFT generator, NFT bonfire, an app that burns idle NFT, and MetaverseMusic, a music space in Metaverse.

“ETH Amsterdam” is the upcoming hackathon that’s to be held on April 22, 2022. The theme is to promote quality applications and projects in the Web3 ecosystem with the assistance of global developers. It’s widely expected that Web 3.0 will be increasingly put under the spotlight.

4. Development Trends and Risks

Ethereum has long been operating under the legal framework of European and American laws, with DeFi, NFT, and USD stablecoins flourishing within such a system. It’s also been providing the most secure underlying technology for the entire crypto industry for a long time. It’s well expected that deflation will set in shortly after the Merge, gathering momentum for future performance improvements. In the following weeks and months, the new focus will be to enhance security and maturity of the underlying technologies under PoS, and chart a course for the sharding technology.

ETH, a trustless collateral asset, rises through the ranks to become the required underlying asset in DeFi protocols. The more frequently used as a settlement network, the more fluid the circulation in the ETH blockchain ecosystem will be. As GameFi games, Metaverse, and Web3.0 rapidly grow and develop, and Layer 2 grows mature enough for large-scale user groups, a multi-chain pattern is burgeoning and gradually takes form, which illustrates how important the communications and exchanges with other chains are for Ethereum.

Other chains seeing eye to eye on this rush to accommodate the overflow of Ethereum: Polygon apparently emerges as one of the winners. Close cooperation with the Ethereum community hands it the precedence over others in deploying leading ETH projects.

Other lucky winners include NEAR, a Layer 1 public chain, which also adopts a “pro-Ethereum” strategy by simplifying code copying through compatible EVM, and Solana and Algorand, both striving to clear impediments for developers in building startups through cross-chain bridges and close cooperation with stablecoin providers. The above-mentioned have also partnered with Circle to introduce USDC into their ecosystems.

At present, lots of new ETH projects are under development, giving birth to more successful cases as appealing as BSC and Solana. It’s estimated that cross-chain bridge that has seen leaps and bounds in its security and performance will become part of the infrastructure of blockchain.

In Layer 1, the success of Flow, a public chain, makes a perfect example to be elaborated upon. Even Ethereum pales in comparison with it when it comes to certain development needs in NFT’s vertical application. But Flow is not the silver bullet after all. Lots of differentiated and vertical application scenarios still go unaddressed, a sign that the application layer needs embrace more rapid growth.

The transfer to PoS may also usher in a period where public chains prepare for the upcoming miscellaneous new deployments on the application layer. After DeFi makes a solid landing on Ethereum with a vision to become the “world computer”, a lesson has been learnt that more efforts are needed to accommodate the increasingly differentiated application scenarios, a trend that’s expected to deepen in the following three to five years, during which, Ethereum will continue to compete with other chains for DAPPs and developers.

Potential risks:

* Unexpected disruption to the transfer process of PoW to PoS.

* Unknown effects to the ecosystem when no opposition side left after the roles of miners and token holders are merged under PoS.

* Potential dilution of the Total Value Locked (TVL) on Ethereum when multiple chains are thriving.

* Controversial centralization still hovering over the Ethereum ecosystem and staking nodes

* Possible forced liquidations and liquidity crises in DeFi lending pools. March 12, 2020 saw the plunge in value of all cryptocurrencies. ETH, as the underlying asset in DeFi, when facing acute and rapid price fluctuations was immediately thrown into a liquidity crisis.

* Personal influence by Vitalik Buterin, founder of Ethereum, whose remarks and positions may have unexpected impact on the ecosystem.