Ethereum (ETH): What lies ahead for the protocol and its token?

What you need to know 🐳

Ethereum is by far the blockchain with the most locked value ($60 billion).

Its development is currently focusing on its layers 2, to make them more efficient and improve the overall scalability of the ecosystem.

Ethereum incorporates a singular philosophy in the crypto sector. It borrows both from Bitcoin's vision, which prioritizes security over scalability, while seeking to innovate via its layers 2 to promote performance. These two orientations, irreconcilable on paper, are sometimes difficult to understand.

Overview 🧬

The Ethereum blockchain was officially launched in July 2015.

The network was initially secured by Proof of Work (PoW) and later adopted Proof of Stake (PoS) in September 2022 during "The Merge" update.

At its launch, Ethereum was the first Turing-complete blockchain, meaning it could perform any function. This is made possible by the Ethereum Virtual Machine (EVM), an execution environment whose most popular programming language is Solidity.

Every operation on the Ethereum network requires paying a gas fee. The more complex the operation, the more gas is required. On top of that, the price of gas changes in real time depending on network activity. If the latter is congested, then the price of gas will be higher.

Ethereum's throughput is limited due to its highly decentralised network. The choice not to require expensive hardware to operate nodes encourages the presence of many validators, implying a heavier consensus system.

To overcome this lack of throughput, the Ethereum community originally wanted to incorporate "sharding" in order to divide the blockchain into several sub-networks capable of handling a greater number of transactions in parallel. However, sharding involves a number of security and interoperability challenges, prompting the community to pivot towards a roadmap centred on Layers 2.

Layers 2 are blockchains built on top of Ethereum that inherit its security properties. Ethereum can therefore focus on decentralising and securing its network, while layers 2 take care of optimising the throughput of their transactions and reducing their costs. To ensure their security, layers 2 simply pay Ethereum to publish their transactions on it.

Funding 💰

Ethereum was funded by an initial coin offering (ICO) that raised 31,591 bitcoins, worth around $18.5 million at the time.

Team and community 👾

Ethereum's founding team includes several well-known figures from the crypto ecosystem, including Charles Hoskinson (who went on to found Cardano), Gavin Wood (who went on to found Polkadot) and Joseph Lubin, now CEO of ConsenSys, the company behind the Metamask wallet and Layer 2 Linea.

Vitalik Buterin is one of the only founding members who continues to work actively on the development of the Ethereum protocol.

Aya Miyaguchi has been the executive director of the Ethereum Foundation since 2018. She previously worked as Japan area manager at exchange platform Kraken.

While the Ethereum Foundation continues to play an important role in the development of Ethereum, various communities and individuals also participate.

The Ethereum Foundation has 3.4 million followers on X.

Function ⛓️

Ethereum is based on proof of stake (PoS). To participate in its operation, validators must block 32 ETH. Every 12 seconds, a validator is selected to propose a valid block.

If a validator attempts to corrupt the network, the ETH they have blocked will be "slashed", i.e. destroyed.

Validators are remunerated by three major components: the issue of new ETH, transaction fees, and MEV (Maximum Extractable Value), which consists of ordering the transactions in a block in an optimal way.

The Dencun update, which took place in March 2024, introduced "blobs" to the Ethereum network. These allow data to be stored temporarily for a fortnight. This allows Ethereum layers 2 to make their transaction data available for a sufficiently long period to ensure that it is valid.

Previously, layers 2 had to post this data on Ethereum permanently, which cost them much more (because it was irreversible). This temporary storage system therefore improves network efficiency without increasing the weight of the blockchain and therefore avoids increasing the technical constraints on validators.

Ecosystem 🤝

Ethereum has by far the most varied ecosystem of applications whether in decentralised finance (DeFi), with its collections of NFTs and applications aimed at the general public.

> Read our report on the state of Ethereum DeFi for more details

As many blockchains are EVM-based, applications created on each of these chains can then be easily deployed on another EVM chain. To date, almost all of the industry's major innovations have been born within the EVM ecosystem.

Solidity remains by far the programming language with the largest developer community within the crypto ecosystem and has many resources that facilitate the development of new applications.

Ethereum's strength is that all of the projects that build layers 2 contribute to the research and development of solutions to improve the ecosystem's performance. The wide diversity of projects also promotes Ethereum's overall decentralisation.

In addition, the increase in the number of layers 2 and their performance translates into an increase in the value captured by Ethereum's validators.

The most popular current layers 2 are Arbitrum (read our analysis) and Base (read our analysis).

The number of layers 2 continues to grow faster and faster thanks to the proliferation of tools that facilitate their deployment.

Currently, most layers 2 are generalist blockchains based on EVM and don't have many differentiating features.

Future innovative layer 2s include:

• Eclipse which integrates the Solana Virtual Machine (SVM)
• Movement which integrates the Move language, used on the Sui and Aptos blockchains
• MegaETH, which aims to create the first "real-time" blockchain, meaning no latency
• Nil, which couples zero-knowledge proofs with sharding to create a layer 2 capable of increasing its performance according to network activity

Challenges 🥵

Many critics accuse Ethereum developers of having an approach and discourse that are too research-oriented, disconnected from the average user.

Ethereum's ambitious and complex roadmap makes it difficult to spread a simple and accessible message.

The choice of a roadmap focused on layers 2 creates several problems, including interoperability issues that degrade the user experience, while their security still depends heavily on the teams that develop them.

The success of Solana illustrates this problem well: it is much easier to use Solana because all operations take place on the same layer.

It will be crucial for the Ethereum community to make communications between the different layers almost invisible to users.

The ETH token 🌕

ETH is used to secure the Ethereum network through staking. Currently ETH staking offers an annual return of just over 3%.

Since the implementation of EIP-1559 in August 2021, part of the transaction fees of the Ethereum network is burned, i.e. destroyed. Thus, the more the Ethereum network is used, the higher the ETH burn.

The switch to proof-of-stake in September 2022 then drastically reduced ETH issuance, allowing ETH to become deflationary: there are more ETH destroyed than new ETH issued.

However, there has been an inflationary recovery since the Dencun update in March 2024. This reduced the fees paid by layer 2s to Ethereum to decongest the network and make them more efficient. The downside is that it has greatly reduced the number of ETH burned.

Currently, ETH has an annual inflation of around 0.6% (which can be measured on the Ultrasound Money site). An increase in activity on Ethereum or its layers 2 could allow a return to deflationary logic.

Regulation ⚖️

There has long been doubt about the legal status of ETH in the United States, mainly because it is the result of a fundraising. Some SEC voices have tried to portray it as an unregistered financial security, but several legal disputes (mainly with ConsenSys) have recently led to this being dropped.

In addition, ETH ETF filings on Wall Street by players such as BlackRock and Fidelity have been accepted by the regulator as "commodity", just like Bitcoin.

The staking mechanism is still up in the air, however.

Roadmap 🗺️

The next Ethereum update named Pectra is scheduled for early 2025. In particular, it will enable:

• The implementation of PeerDAS to improve the storage of blob data between validators: each validator will be able to store only a fraction of the blobs, thereby increasing the total amount of data stored and reducing layer 2 costs.
• An increase in the maximum quantity of ETH that can be stored by validators, from 32 to 2048 (with the minimum remaining at 32) to reduce the number of validators on the network and improve its efficiency.
• An improvement in smart wallets with the possibility of grouping several transactions into a single transaction.
• Preparing for the implementation of "verkle trees" in the next update, allowing validators to no longer have to store the entire blockchain and thus reducing their technical constraints.
• Implementing the EVM Object Format (EOF), an enhancement to EVM to strengthen the security of smart contracts on Ethereum and its layers 2 and facilitate their development.

In addition to developments on the blockchain itself, the Ethereum ecosystem as a whole will also see several developments.

One of these developments is the development of "based rollups" encouraged by the Ethereum Foundation. The advantage of these layer 2s is that they fully inherit Ethereum's censorship-resistant properties and are fully interoperable with it.

Taiko is currently the only based rollup already in operation. However, this system still suffers from a number of difficulties and requires the implementation of "based pre-confirmations" to guarantee the inclusion of rollup transactions within L1 without waiting for its state to be finalised.

Competition ⚔️

Ethereum does not really have any direct competitors. Projects that have described themselves as "Ethereum killers" have not survived the test of time.

However, we can note the return to prominence of Solana, which is not directly seeking to replace Ethereum, but to offer an alternative vision. Solana's strength is that it offers a simpler user experience by having everything on a single chain.

The downside is that Solana sacrifices its decentralisation, since the huge technical constraints on validators mean that they all have to be located in data centres.

Solana's approach is pragmatic in the short to medium term, as it currently offers a better user experience and has a more centralised development team that reacts quickly to problems.

Beyond that, it's questionable how far a single blockchain can support large quantities of transactions, as we've seen with the many network outages.

Below, the distribution of blocked value within the various blockchains.

Market analysis by Chadi El Adnani, Head of Content & Research at SUN ZU Lab 📈

ETH is a giant out of the box in terms of liquidity on centralised crypto exchanges. Daily volumes since the start of the year have ranged between $2 billion and $6 billion, even reaching $10 billion in early March. The average cumulative depth of market at 50 bps is $45 million on the main CEXs. ETH shares these characteristics only with Bitcoin (BTC) and the most liquid financial instruments in TradFi, such as certain ETFs (S&P 500 for example).

Rising from less than $1,000 in June 2022, ETH ended 2022, marked by the implosion of FTX, at around $1,200. The year 2023 saw a rebound, with ETH doubling in price to end the year at around $2,300. In 2024, after a month of January marked by some confusion about the direction of the crypto markets following the validation of BTC spot ETFs, ETH took off and broke the symbolic $4,000 barrier at the beginning of March. It came close a second time in May following rumours of the validation of Ether spot ETFs. ETH is currently trading at around 3300 dollars, with a performance of 45% in 2024.

We highlight the almost perfect correlation between the performance of ETH and BTC throughout the year, demonstrating that investors still treat these two assets in the same way, despite their very different fundamentals. This perception seems to have been consolidated with the validation of spot ETFs in 2024 and the entry of institutional investors en masse.

The Big Whale's opinion 🐳

Ethereum is in a difficult position as it finds itself between Bitcoin, which takes a minimalist approach in terms of performance and possibilities to prioritise security, and Solana, which maximises performance by sacrificing security.

This difficulty in articulating a unified discourse that is accessible to all may represent a brake on attracting new users.

On the other hand, this corresponds to the vision centred on layer 2s, which must become the entry point for these new users. Base is a perfect example of this, managing to accelerate the onboarding of users onto the blockchain thanks to Coinbase's immense distribution capacity.

The other advantage of layers 2 is that they allow the projects that build them to innovate without being restricted by Ethereum's evolutions. Thanks to this, the Ethereum ecosystem is seeing an explosion of innovations that can then be replicated.

Critics who accuse Ethereum network contributors of being too research-oriented and not pragmatic enough miss the fundamental aspect of blockchains, which is to enable value to be transferred and stored securely.

Ethereum manages to innovate not only to improve its performance, but also to strengthen its security. This evolution is part of a long-term vision capable of adapting as it goes along to incorporate new technological advances.

The next key steps within its ecosystem will be improving the security of its layers 2 as well as developing chain abstraction, which aims to erase the friction created by a multichain world and offer the best possible user experience.

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