Following The Merge update to the Ethereum blockchain, on-chain demand and validator responsiveness metrics are plummeting, as ETH 2.0 custodians still have their heads under water, accusing a average latent loss of -30%. On-chain analysis of the situation.
The Merge concludes with a remarkable technical success
More than a month after The Merge and the transition of the Ethereum network from the PoW (Proof of Work) consensus mechanism to the PoS (Proof of Stake), the price of Ether (ETH) fell to a low of $1200 before recently rising towards $1500.
Following our analysis of positioning of speculators in ETH derivatives markets Just before The Merge, today we will observe the state of health of the Ethereum network following the transition to PoS, through various metrics in order to paint a large-scale picture of the on-chain situation of the second cryptocurrency in the sector.
Figure 1 – ETH daily price
Today we will study:
- On-chain activity and validator engagement ;
- The financial health of ETH 2.0 custodians.
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A relatively lackluster post-Merge on-chain activity
On September 15, 2022, at block 5,537,393, the last PoW block of the Ethereum network was mined and the Beacon Chain took control of the chain’s consensus.
Ethereum’s The Merge update was a success and resulted in the collapse of the chain’s PoW fundamentals.
The following graph illustrates this point by highlighting the sudden descent into hell of hashrate measurements and mining difficulty of the Ethereum network after September 15.
Figure 2 – Ethereum hashrate and mining difficulty
One era ends and another begins, welcome to Ethereum 2.0 and its Proof of Stake consensus algorithm, which we will continue to observe and analyze on Cryptoast.
In response to these events, the solicitation of the Ethereum chain has contracted slightlyreaching an hourly transaction rate of almost 43k transactions.
Figure 3 – Number of transactions
This drop, also visible through the active addresses metric, indicates a certain caution from Ethereum userswhich limit their interaction with the protocol for various reasons:
- Investor mistrust following the very pronounced downward bias on derivatives markets ETH;
- The pause of part of the economic activity while waiting to observe the potential adverse effects caused by The Merge;
- The bear market environment, pushing investors to adopt a conservative behavior by limiting risk.
Corroborating this finding, the transfer volume circulating on the Ethereum chain has also experienced a significant drop, indicating a low engagement from network users.
Note, however, that current values remain anchored in conventional averages of bear market activity. This fall, although circumstantial, should not be over-interpreted.
Figure 4 – Transfer Volume
A positive signal could be seeing on-chain usage and on-chain engagement metrics push upin concert with a recovery in the price of ETH.
This would signal that the relief in market prices would cause a new pulling force pulling users and investors back, eventually pushing adoption to new highs.
Finally, the participation rate, a metric exclusive to ETH 2.0, which is the ratio between the number of blocks produced successfully (i.e. not missed) and the total number of slots available, signals a drop in validator engagement.
Figure 5 – Validator participation rate
Resulting in an increase in the number of missed blocks, this measure demonstrates the decrease in activity of some validators following the transition from Ethereum to PoS.
This signal of fundamental deterioration is not welcome but does not constitute a definitive conclusion.
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Diminishing Returns & Underwater ETH 2.0 Custodians
During this time, the evolution of the number of active validators continues to grow, now standing at almost 450k. Although this observation is constructive at first glance, it is also a sign of increased competition for awards.
Potentially pushing validators to turn to performance optimization solutions such as MEV-boost from Flashbots to maximize their performance.
Figure 6 – Active validators
Note thata strong influx of validators was recorded around The Merge eventsignaling operators’ interest in participating in the consensus building of ETH 2.0.
Illustrating the dynamics of competition for yield that validators on the Ethereum network have experienced since the Beacon Chain went live, the following graph shows the estimated annual yield of these entities.
It is striking to notice that this measure has been divided by almost 7 since the end of 2020dropping from an annual return of 21% to just over 4% currently.
Picture 7 – Estimated annual yield of validators
This dynamic is an additional catalyst that can push Ethereum node operators to favor solutions for optimizing and selecting blocks containing the highest transaction costs.
Furthermore, ETH 2.0 contract custodians are currently incubating an unrealized loss persistent. By measuring the price at which ETH has been locked into the ETH 2.0 contract, it is possible to calculate the aggregate realized price of ETH 2.0 custodians.
Currently located near $2200 and therefore above the spot price, it indicates that the value of ETH at the time of deposit is lower than the current price of Ether, signaling an unrealized loss of around 30% for the average depositor.
Figure 8 – Profit/Loss of ETH 2.0 custodians
In conclusion, note that, following the recent rise in the spot price of ETH, the latter is approaching the realized price, representing the overall base cost of ETH circulating on the network.
If the spot price breaks above this on-chain level on the upside, this would signal a return to overall market profitabilitywhich would be a very constructive recovery signal in the medium term.
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Summary of this onchain analysis
Finally, the on-chain data presented this week indicates that following The Merge, the Ethereum network has successfully implemented the consensus algorithm by Proof of Stake (PoS) and that the Beacon Chain has welcomed the traffic with flying colors. on-chain of the second cryptocurrency on the market.
Measurements of on-chain activity and the responsiveness of validators indicate a drop in engagement and use of the chain, a not encouraging signal but influenced by the deleterious context of the bear market and degraded macroeconomic components.
Moreover, it seems that the decreasing annual return of validators and the negative profitability of locked deposits in the ETH 2.0 contract put significant financial pressure on participantswhich could be partially dissipated if the spot price of Ether crosses above the realized market price of ETH.
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Sources – Figures 2 to 8: Glassnode
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On-chain analyst, fervent fighter of informational asymmetry.
My goal is to inform everyone about the state of Bitcoin (as an asset and a distributed network) through the prism of on-chain analysis.
