As we enter 2021, the cryptocurrency market is gaining energy. Although all cryptos have been around for quite some time, I’m particularly interested in the second-most valuable crypto.
Despite Ether’s (ETH) price plummeting by 68% in 2020, it has accomplished one of the most remarkable events in digital asset history. In September, developers of Ethereum successfully implemented The Merge, a code change that made the blockchain more energy-efficient and reliable.
While The Merge was a remarkable milestone in Ethereum’s development and set the foundation for more cases of use, it had no immediate effect on users.
A New Chapter
But now that we are in the post-merger era, we could begin to see some of the benefits of proof-of-stake. Ethereum used mining in the past to confirm transactions and produce new data blocks, but miners are no longer needed. The Ethereum Blockchain is guarded by validators who “stake” their funds in the network and use them as collateral.
As part of The Merge, Ethereum developers made it impossible to withdraw staked funds. This was a critical step in beginning the next chapter of Ethereum. It was possible that some people were discouraged from investing due to the absence of an expiration date for the withdrawal moratorium. This could be a year of transformation.
The next Ethereum update, Shanghai, is set to launch this spring and users will be able to withdraw their staked funds. Although it is unclear what effect this will have on the economy, the blockchain should benefit from short-term price fluctuations. Now that users know they can pull out their investments, there will always be funds available, leading to more people investing in the network. This would make the network more secure, decentralized, and a major advancement for both investors and the blockchain itself.
A Busy Blockchain
Although the introduction of withdrawals should be beneficial for Ethereum going forward, there are also signs that the Ethereum network is experiencing a boom, which can be a sign of a rise or drop in prices.
As the blockchains are now public, we can look at trends to see how they are used and what value they support. A good way to do this is to use links, where the activity of a blockchain is measured by the number and quality of the smart contracts created. Smart contracts are small pieces of code used by developers to create applications and often act as a measure of network demand. The need for smart contracts will continue as more are developed.
The amount of smart contracts created in 2020 was a large part of the year for Ethereum, with little activity. However, starting in October of 2020 and into the start of 2021, there has been a rise in the daily smart contracts. With 25,000+ contracts on certain days in 2020, Ethereum has been able to reach 100,000+ contracts on multiple occasions in the past few months and an average of 50,000 per day.
Image source: Messari.
The increases in activity are also reflected in its Total Value Locked (TVL), which is used to measure how many dollars a blockchain can support in the Decentralized Finance (DeFi) sector. Ethereum has taken over, with its market share in DeFi close to 60% at the end of 2020 after losing most of its market share over the past year. All other blockchains with DeFi capabilities only account for 10%.
I think that the advantage Ethereum has over its competitors will only increase in the coming months and years. This, combined with the fact that Ethereum is the only cryptocurrency to have gone through The Merge, should help its price rise. Events such as the closing of 2020 and the upcoming Shanghai update have contributed to the increase in activity and it looks like the crypto market may have finally bottomed out, making this a good time to invest in a crypto that has long-term potential.
RJ Fulton currently has holdings in Ethereum. The Motley Fool has positions and recommendations in Ethereum. The Motley Fool has a disclosure policy.
