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Tom Rodgers
Tom Rodgers Head of Research
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ETC Group Crypto Minutes Week #32

Ethereum’s London hard fork wows markets as $10,000 ETH burned every minute. $20bn is now locked in the ETH2 contract. $1m Bitcoin transactions double in 12 months. And even equity hyperinflation induced by incessant central bank money-printing cannot compete with the returns posed by crypto.

Buoyant markets boom as ETH hard fork burns $10,000 per minute

We’ve been saying for months that Ethereum’s highly-anticipated London hard fork — which introduces a new, deflationary tokenomics to the blockchain — would have a seismic impact on the market. That appears to have come to fruition. London went live on 5 August 2021 at 1.15pm GMT. Anticipation of the wide-reaching impacts of this network-wide upgrade has helped the spot price of ETH soar in the last seven days, up by more than 27%, to $3,100.

This price point is now just 31% below Ethereum’s all time high, which (briefly) spiked to $4,158 in late May 2021.

It is hard to overstate the impact of the London hard fork on the Ethereum blockchain and on crypto markets in general. First and foremost, through the successful integration of the Ethereum Improvement Proposal (EIP1559) fee burn mechanism, it means the supply of ETH on the market is now being programmatically reduced.

EIP-1559 initiates a total overhaul of Ethereum’s transaction (gas) fee structure. Users now pay miners in what are called priority fees. But in addition, base fees are also required for any transaction to be included in a block. When blocks of transactions are added to the Ethereum chain, these base fees are ‘burned’ (removed from the circulating ETH supply).

Every interaction that happens on the Ethereum blockchain requires users to pay gas fees to compensate whoever is carrying out that work for expending their computing power.

For years, users have been complaining that the gas costs to initiate and clear transactions on Ethereum have been unworkably high. This has certainly been the case at times when the blockchain has experienced heavy workload.

And when the gas fee to carry out an action — for example depositing crypto into an ETH-based DeFi protocol — costs more than the total value of the deposit? This has infuriated users and slowed adoption to a crawl.

For months, developers have been working to sound out the implications of the London upgrade to the Ethereum mainnet. In the blockchain’s testing grounds for code changes, the testnets Ropsten, Rinkeby, and Goerli, volunteers have been analysing, examining and scrutinising how London would impact on the main chain.

What does the London hard fork do?

A hard fork is a backwards-incompatible software update to the way a blockchain functions.

The package of upgrades in the London hard fork makes some major alterations to how the protocol calculates the transaction fees that should be paid to miners for mining blocks. Crucially, it smooths out the fee volatility that has, at times, left the base layer incredibly congested.

Ethereum has been a victim of its own popularity as a foundational element supporting and transacting tens of billions of dollars of value in DeFi and NFT markets

London introduces the mechanism noted above, EIP1559, that programmatically ‘burns’ (destroys) the base fees that are collected.

Burning or destroying tokens is a format analogous to share buybacks in traditional equities.

Just as a public company might buy back its own shares, taking them out of the hands of market makers and thereby improving the price of the shares still left in public hands, blockchain protocols can set conditions where they burn, or automatically remove, tokens from their ecosystem. The ETH left in investors’ hands? It is now worth substantially more.

This new deflationary mechanism has inspired investors and users alike.

How much ETH is being burned?

Every system that uses Ethereum — that means every DeFi protocol based on the blockchain — also burns tokens. That includes lending markets, decentralised exchanges, asset swaps, futures and derivatives markets. And as we know from data analysis site DeFiPulse, 113 of the top 116 projects in the $80bn space use Ethereum as a foundation.

Just hours after London went live, the inventor of the Uniswap protocol, Hayden Adams, tweeted that at current rates Uniswap alone would burn $1bn of ETH per year.

The burn rate also appears to be increasing rapidly. Cointelegraph reported on 6 August 2021 that 2.3 ETH was being removed from the system every 60 seconds.

Using the blockchain explorer etherchain we can see that as of 10 August 2021, 3.12 ETH (almost $10,000) is being burned every minute.

graph

$20bn locked in ETH2 contract

Another major Ethereum milestone was reached on 9 August: now over $20bn in ETH is locked in the ETH2 deposit contract.

More than 6.6 million ETH are now locked in the contract. For the uninitiated, the ETH2 deposit contract is an address where Ethereum users send their ETH if they want to stake the tokens in the new Proof of Stake Ethereum blockchain.

Those who stake ETH on the network, directly or through a DeFi wallet like Argent, can receive rewards of up to 23%

The numbers here look similarly impressive.

As Coindesk reported, by February 2021, 3 million ETH, worth around $5.5bn had been staked in the contract. To see the amount of crypto double, and its value almost quadruple inside six months, is testament to future confidence in the blockchain’s switch to a Proof of Stake consensus mechanism.

Ethereum’s hard fork success has dragged markets out of the doldrums, with the ripple-effect of such confidence adding $300bn to the total crypto market cap in the last seven days. Ethereum’s contribution to the total $1.8trn value of all cryptoassets on the market has also steadily increased, reaching 19.99% on 10 August 2021, its highest since January 2018. At today’s price of $3,100, and with a market cap of $310bn, ETH is valued higher than the total market cap of all cryptos outside the top 10 for the first time since July 2017.

Large Bitcoin transactions more than double in 12 months

Bitcoin transactions with a value of over $1m have risen sharply as a proportion of total transactions on the network, according to Glassnode. Such transfers suggest that large and high net worth institutions — the primary source of weighty capital transactions — are playing an ever greater part in using the Bitcoin network.

These charts clearly demonstrate a new era of institutional and high net worth capital is flowing through the Bitcoin network since 2020. Glassnode, The Week On-Chain, 9 August 2021

In fact, 65% of Bitcoin transactions are now worth more than $1m, up from 30% across 2020.

graph
Larger investors, as represented by large-value dollar transactions, fuelled Bitcoin’s nearly 20% price gains since last week. A number of analysts say the trend shows that these organsations are focusing more on the cryptocurrency’s upside than potential obstacles. Muyao Shen, markets reporter, Coindesk

On-chain transaction value has soared just as the US is making major regulatory moves to define Bitcoin once and for all. We have the Digital Asset Market Structure and Investor Protection Act now working its way through the US Congress, which is intended to clarify rules for DeFi markets and create a single standardised charter for cryptoexchanges, as well as defining which cryptoassets will be considered commodities, and which securities.

And intense debate continues over a $28bn crypto tax reporting provision in the upcoming $1trn US infrastructure bill.

The regulatory certainty that has long been a driver of greater adoption and utility for disruptive technologies could finally be here. And this is big.

Even the wholesale asset price hyperinflation induced by incessant central bank money-printing cannot compete with the returns posed by crypto.

graph
Source: Skew Analytics Macro

Markets

BTC/USD

Bitcoin climbed strongly against the US dollar this week, pulled upwards by the success of Ethereum’s London hard fork. A weekly high of $46,780.43 represents a climb of 20.8% on the start of the seven-day cycle, with prices nudging down just 3.3% from this high point. Here, we appear to have a secular bull market positivity in what has been for the past two months, a rather bearish near-term outlook for the world’s largest cryptoasset.

BTC/USD graph
Data as of 10 Aug 2021 | Source: TradingView

ETH/USD

Ethereum is the poster child for successful cryptoasset technology upgrades, as its deflationary tokenomics change instituted a 27.4% climb from a low of $2,443.41 to a peak at the week’s end of $3,114.25. We are not yet in uncharted territory for the programmable money blockchain — that would come with a near-term drive into the mid $3,500s, but the strong sentiment around its development and wider move to Proof of Stake has created a difficult market for bears and short-sellers to operate in.

ETH/USD graph
Data as of 10 Aug 2021 | Source: TradingView

LTC/USD

Litecoin, fresh from its adoption win last week, added a hefty 19.4% in this seven-day cycle and climbed strongly in line with the wider market. The early-$100s seem to have been left behind, for now, with a new baseline of support at the $135 mark. A peak of $171.01 marks a two-month high for LTC against the US dollar.

LTC/USD graph
Data as of 10 Aug 2021 | Source: TradingView

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