Greetings from the CryptoHawk Team!
Understanding, tracking and trading cryptocurrency can be overwhelming. What drives price action? Why do certain coins outperform others? Where is crypto headed from here? In this series of publications, our team presents a variety of topics, current events, and sector deep-dives to aid you in your cryptocurrency education, research and investment decisions. In this second edition, we’ll be discussing Ethereum, the “Driver of DeFi”. Let's go!
Ethereum & its Place in the World of Crypto
Ethereum is the genesis of “DeFi” – Decentralized Finance. Ethereum is also the prolific “Layer 1” – a platform that supports a network of decentralized apps (dApps).
Let’s back up a few paces – what is DeFi?
DeFi is a coverall term applied to web-based applications that interface with financial instruments without requiring intermediaries (banks, brokerages, exchanges) through the use of Smart Contracts. These “instruments” include NFTs, digital real estate, video-game characters and items, membership rights to organizations, DAOs, digital identifiers, data, and much much more. “Smart Contracts” are the means by which these assets are created & exchanged, and are facilitated via use of their respective Layer 1’s (ETH) ecosystem and currency. Layer 1s like Ethereum provide design & asset creation infrastructure, liquidity, operational support, transactional efficiency, blockchain accounting, access to tokens and projects not available on centralized exchanges (ex: Coinbase) and, by virtue, a collective of millions of users, creators, and investors around the world.
Ethereum is not the only Layer 1. Others like Solana, Luna, and Avalanche have their own respective networks and ecosystems. To date, Ethereum remains the dominant leader – we’ll explore other Layer 1 ecosystems in a later edition.
Price Discussion: Intrinsics & Drivers
Vitalik Buterin first conceived Ethereum in 2013 before formally launching the network in 2015, effectively inventing DeFi in the process. Ethereum’s growth and adoption has cemented its place as the launchpad for DeFi ecosystems and applications and has since led to the astronomical growth of smart contracts. Today, Ethereum is the #2 cryptocurrency in terms of market capitalization, accounting for ~18% of the near $2 trillion cryptocurrency market cap.
Now that we’ve established that Ethereum is the dominant Layer 1, let's discuss what drives its price. Unlike Bitcoin, Ethereum does not have a fixed, maximum supply. Ethereum’s circulating supply is ~120 million, and is constantly fluctuating through legacy creation (Proof-of-Work mining) and burn mechanisms involved in asset creation and network facilitation. Technically, the total supply of Ethereum is uncapped, or unlimited. However, Ethereum’s burn mechanisms mitigate colossal waves of new token creation, allowing for price sustainability and growth.
Smart contracts are the basis of DeFi, and are the means of transacting, staking, creating assets, voting, and all other activities available within the space. Smart contract utilization and staking are constants in DeFi and directly correlate to Ethereum’s price action. That said, Ethereum, like all other cryptocurrencies, is still influenced by Bitcoin’s price action. Some hypothesize that Ethereum has the potential to “flip Bitcoin” in terms of price/market cap, but that is far from a certainty at this point in time.
Price Discussion: Ethereum 2.0
There is a huge change on the horizon for Ethereum: ETH2. I mentioned “Proof-of-Work” mining as a “legacy” creation mechanism for new tokens. PoW isn’t quite a legacy system just yet, but it’s about to be. “Ethereum2” is the next giant, multi-phase iteration in the crypto’s journey, and will eventually mark the end of PoW mining as a means of both token mining and network facilitation. ETH2 will see the entire network switch to “Proof-of-Stake” (“POS”) as a means of “consensus”: the protocols that ensure that devices contributing to the network are acting in accordance with its rules.
One of the biggest ETH2 implications is that Ethereum Mining will largely become a thing of the past. To date, ETH has dominated the broad GPU mining allocation share as one of the most profitable & liquid currencies. Due to the growth of the industry and network, PoW mining has become increasingly inefficient and energy-intensive, resulting in high transaction costs and a high barrier to entry for new miners to help facilitate the network. Proof-of-Stake changes everything: instead of running GPU hardware to validate the network, ETH users/holders can stake the currency to become validators and will be rewarded in the process.
This is huge! Over time, the ETH network will become less expensive to transact on, further incentivize holders to stake their ETH for yield, and increase the burn rate in the process. Although ETH is likely to become increasingly sought after (to participate in network validation for APR), the ETH2 switch enables far more users to contribute, which may gradually reduce price volatility over time.
Ethereum Price Outlook
Since Bitcoin achieved all-time-highs in November ‘21, cryptocurrency has been on a bit of a choppy ride. Even with an earth shattering update like ETH2 on the horizon, the broad cryptocurrency marketplace has been down/flat for some time, affecting ETHs price alongside. This price action seems it may continue as global economic uncertainty and U.S. inflation continue to influence market sentiment.
Regardless of the immediate price action, the ETH2 upgrade will continue to progress, and its effects on the value of Ethereum will be realized for years to come. With that in mind, it is always best to tread lightly when buying & selling cryptocurrency. Ethereum can be decisively considered as one of the best, long-term crypto investments with strong near-term tailwinds resulting from the largest platform update since its initial launch in July 2015.
CryptoHawk’s Long-Short Vertical
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