On-Chain Insights #8: Ethereum Key Metrics

We are thrilled to release our latest Dashboard, Ethereum Key Metrics. The dashboard will provide you with important insights into Ethereum's Financial, On-Chain, DeFi, and NFT data, providing users and spectators with the real-time updated observations to help better understand the Ethereum economy.

Ethereum Key Metrics Dashboard: https://dune.com/21co/ethereum-key-metrics/

All of our On-Chain Dashboards: https://dune.com/21co

TL;DR:

• Volatility: Ethereum’s long-term volatility is decreasing over time, on par with Bitcoin
• Deflationary Asset: The Merge, combined with increased on-chain activity, has transformed Ethereum into a deflationary asset with a -1.13% yearly inflation rate
• Settlement Volume: Ethereum nearly matched the total volume processed by Visa in Q1 of this year by settling ~$3.08T as opposed to ~$3.01T for Visa,  and cementing the network as a global trustless settlement layer.
• Adoption of DEXs: Soared during times of market implosion by settling $70B and $85B monthly volume through the events of FTX and the SVB failures, respectively, and demonstrating their resilience as unyielding anti-fragile financial infrastructure.
• NFT volume: Dropped by roughly ~91% from ATH, as platforms face cutting-edge competition across networks in a market filled with artificial volume and subsidized demand.

Background:

Ethereum, the pioneering smart-contract platform, has emerged as a transformative force within the world of finance, revolutionizing traditional systems and introducing groundbreaking innovations for decentralized applications and real-world assets. As of 25 May, Ethereum dominates in both DeFi (70%) and NFT volume (54%) compared to other blockchains.

The network has facilitated the rise of decentralized finance (DeFi), an innovative ecosystem that offers open financial services. DeFi applications built on Ethereum enable users to borrow, lend, trade, and invest without intermediaries, providing increased financial inclusivity and autonomy. ETH also introduced the advantages of tokenization, where we’re seeing institutional participation in tokenizing a myriad of financial instruments.

Moreover, Ethereum's smart contracts have unlocked the potential for programmable money, enabling the creation of unique digital assets, non-fungible tokens (NFTs), and decentralized applications (dApps). These advancements have not only revolutionized the world of art, gaming, and collectibles but also introduced novel business models and new avenues for entrepreneurship.  

Our dashboard makes it easy to stay on top of the latest trends and developments — and possibly ahead of the curve.

Key Takeaways:

1. Ethereum’s Long-Term Volatility is Decreasing

Ethereum, much like Bitcoin, was considered to be a volatile asset in its early days. Limited supply, lack of regulatory clarity, and speculative traders are some of the few reasons that contributed to the volatility. Nevertheless, Ethereum long-term volatility has decreased in recent years. Currently, the 200-Day Annualized Volatility is at 52.6%, arguably less volatile than some single tech stocks such as Peloton (95.2%) and Tesla (65.2%).

The current levels of volatility are only matching those of January 2020 leading into the COVID-induced lockdown, and January 2021 when the Federal Reserve embarked on the largest quantitative easing program in its recent history. Finally, the decreasing volatility of Ethereum compared to the broader crypto market indicates a maturing and resilient asset that continues to gain recognition and confidence in traditional finance.

2. Ethereum’s Processing Volume Surpassed Visa by settling ~$3.08T

The failures of the past two years convinced people to move assets to non-custodial solutions. Namely, the events of May 2021, which marked the China ban, May 2022 with the Terra Crash and the subsequent failure of 3AC and Celsius, the FTX debacle in November of 2022, and finally March 2023, where SVB, Silvergate, and Signature banks were all taken over by the FDIC, all signaled that assets are better off taken on-chain as it allows retaining ownership while reducing counterparty risk. In that regard, crypto networks including Ethereum and its DeFi ecosystem continued operating as intended, where financial activities were processed without any unforeseen delays in deposits or freezing of transactions.

In addition, Ethereum has demonstrated its value proposition in serving as a trustless and secure settlement infrastructure. In fact, the total volume of transactions processed on Ethereum over the past quarter puts it on par with financial service companies like Visa, where Ethereum processed close to ~$3T over the first quarter of 2023 versus Visa settling close to $3.014T.

3. Ethereum is Becoming Increasingly Deflationary at a Current Yearly Rate of -1.13%

The introduction of EIP-1559 in August of 2021 and the subsequent transition to Proof of Stake (the Merge) in September of last year offered a new set of monetary policy ramifications for Ethereum. First, EIP-1559 introduced a base fee that would be burned rather than rewarded to miners. This removed a large portion of ETH from the circulating supply as the network activity proliferated.

The Merge also replaced the role of miners with validators. As part of the change, the total daily number of issued ETH has dropped from 13K to 1.7K as the network didn’t need to compensate miners for their expensive security and verification contribution with Proof of Work. Instead, Ethereum began running on a more energy-efficient system with Proof of Stake. The Cambridge Center for Alternative Finance demonstrated that Ethereum’s produced energy has dropped by 99.95%.

The banking failures in March of 2023, Ethereum didn’t experience high levels of demand that would exhibit its new deflationary mechanism. However, The meme coin craze of the past 3 weeks changed this dynamic. As most meme coins like PEPE, BOB, and WOJAK were tradeable on Ethereum, the network’s annual inflation rate dropped by a staggering ~0.5% in less than 3 weeks on the back of a buying frenzy. Further, the flurry of activity driven by the recent trend can contribute to burning a significant portion of ETH, below. The total amount of burned ETH over the past two weeks resembled levels corresponding to the activity during the Luna collapse.

4. Ethereum's Primary Sector Continues to be DeFi with DEXs soaring to 25% of Gas Consumption vs. Other Use Cases.**

Users' activity has flocked on-chain, particularly following the collapse of FTX in November. More than the previous failures, the FTX debacle has reiterated the notion of ‘not-your-keys, not-your-crypto’ as the event has fully displayed the risks of centralized ownership. Ethereum’s DeFi ecosystem thus enabled non-custodial ownership in times of extreme disruption.

This can be seen as the past 5 months saw rising activity on DEXs as investors took their money off exchanges fearing any further contagion that would lead to losing ownership of their assets. The migration has resulted in close to 25% of the total gas consumed in April by DEXs. The China ban in 2021, Luna collapse, FTX failures, and the shutter of SVB all saw huge spikes in the DEX activity, resulting in $142B, $109B, $71B, $86B of total volume processed, respectively, which indicated the rising trust and reliance on seizures-resistant financial railways.

5. Ethereum NFT Ecosystem Activity has retraced by ~91% from ATH Levels.

The total volume of NFTs processed on Ethereum gas started falling back to its FTX level following a slight surge in the first two months of the year, declining by close to 91%. Worth noting that the majority of the volume increase can be attributed to Blur’s incentive program, where they launched an airdrop to claim BLUR tokens for users who bought, sold, and listed their NFT prior to the token-generation-event (TGE) back in February, prompting 36% of volume to be led by wash trades. Token incentives from LooksRare and X2Y2 also drove the increased activity to their platforms in a bid to eat the market share of a sector that was dominated by OpenSea. More than 90% of the volume on LooksRare was identified as wash trade, whereas close to 80% of X2Y2 was artificial volume.

That said, users’ migration to other platforms can be attributed to cheaper trading fees and the proliferating network effects for certain collections on other chains such as MadLads on Solana or, previously y00ts on Solana. The recent meme coin trend could have also shifted capital away from the sector. The slump can be seen as the total number of traders has also retracted back to December 2021 levels during the conclusion of the metaverse-fueled rally. On the bright side, it’s worth noting that the NFT market still has legs when considering the non-wash trade volume, despite its significant drop from bull market heightened activity.

Closing Thought:

Ethereum is the world’s first global computing platform, allowing the development of censorship-resistant protocols. The innovations brought forward by Ethereum establish the concept of Web 3.0, a new generation of the internet that aids in deploying decentralized applications offering greater resilience, censorship resistance, transparency, and immutability as no single entity has control over the entire network.

Despite the lion share owned by Ethereum, we will also keep an eye on the other alternative smart-contract platforms including Solana, BNB Chain, Avalanche, or even Layer-2 Scaling solutions, which could be a rising force to challenge Ethereum status quo.

Ethereum Key Metrics Dashboard: https://dune.com/21co/ethereum-key-metrics/

All of our On-Chain Dashboards: https://dune.com/21co