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Ethereum's performance post-Shanghai has been 'disappointing' - JPMorgan

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(Kitco News) - The Shanghai upgrade to Ethereum (ETH) was expected to usher in a new era for the network as the ability to withdraw staked Ether was billed as the thing needed to boost institutional interest in the blockchain, leading to an increase in activity and the token's value.

However, according to a recent report from JPMorgan, Ethereum has fallen short of those expectations as daily transactions, daily active addresses, and the total value locked (TVL) on the platform’s various decentralized finance (DeFi) platforms have all experienced declines.

“While the shift from proof-of-work [PoW] to proof-of-stake [PoS] that resulted from the Merge upgrade meant that the energy consumption for the Ethereum network collapsed by more than 99%, the Ethereum supply is shrinking and staking rose sharply (with the amount of ether staked up by 50% since the Shanghai upgrade), the increase in network activity has been rather disappointing," JPMorgan analysts led by Nikolaos Panigirtzoglou wrote in a note on Thursday.

Change in Ethereum metrics since the Shanghai upgrade. Source: JPMorgan

The analysts said the decline in activity on Ethereum suggests that “bearish forces” may have outweighed the positive impact of the Shanghai upgrade on Ethereum's network activity. These forces include the collapse of FTX and Terra/Luna, fading interest in crypto by institutional investors, regulatory uncertainty in the U.S., and the drying up of venture capital funding.

The Merge upgrade, which transitioned the Ethereum network from the more energy-intensive PoW consensus mechanism to PoS, was implemented in September 2022, and the Shanghai upgrade took place in April.

JPMorgan noted that Ethereum layer-two (L2) protocols such as Polygon, Arbitrum, and Optimism have also displayed mixed results. Activity is now higher on Optimism, but that came at a cost to Arbitrum, which has seen its activity decline, they said, and the TVL on both L2 networks has fallen since the Shanghai upgrade was implemented.

One metric that has seen a rise since Shanghai is participation in staking, which has risen 50%, but that has led to concerns of centralization in the liquid staking sector as protocols like Lido dominate the market.

The increase in staking helps to improve network security, the analyst said, but the “share of liquid staking protocols such as Lido remains uncomfortably high, raising questions about centralization.”

The upgrades also did little to solve the scalability problem on Ethereum as the cost to transact is still greatly impacted by the level of activity on the network. Data provided by Etherscan shows that the average gas fee continues to vary greatly and has climbed as high as 155 gwei in the past year, which represents a cost of 0.00465 ETH.

Ethereum average gas price chart. Source: Etherscan

With an Ether price of $1,600, that translates to a cost of $7.44 per transaction. While some may not see that as a large amount to pay for a transaction, especially when transacting millions in value or when compared to the transfer fees in the legacy banking system, it's a high amount for the average individual, especially for things like transferring and NFT or spending less than $10.

“The internet of money should not cost more than 5 cents per transaction,” Ethereum co-founder Vitalik Buterin famously said in a 2017 interview. In January, he reiterated this stance when he tweeted, “That was the goal in 2017, and it's still the goal now. It's precisely why we're spending so much time working on scalability.”

During a Friday interview with CNBC in the Czech Republic, Buterin once again stressed the need to reduce the cost to transact on Ethereum and to simplify the overall process to make it more accessible to the broader public.

“We need it to actually be possible to do Ethereum payments in a way where the transaction fee is less than five cents a transaction; in a way where the experience doesn’t suck and randomly fail 2.3% of the time; in such a way that you need a Ph.D. in ethereum sciences to actually figure out what’s going on,” he said.

Ethereum could see 200% growth in daily active users, $800B fair value by 2025 - RxR Analyst

Ethereum developers are currently working on the EIP-4844 upgrade, also known as Deneb-Cancun or “Dencun,” to help address this issue. Dencun deals with protodanksharding, which is a preliminary step towards the full implementation of danksharding, a scalability method that is expected to allow Ethereum to process more than 100,000 transactions per second.

Dencun was originally planned to be implemented in Q4 of this year, but those plans may be delayed until next year based on a conversation Ethereum core developers had during a consensus layer meeting on Thursday.

Ethereum Foundation developer Tim Beiko, who chaired the meeting, expressed concerns about a potential delay in Dencun's deployment on the mainnet due to the fact that the upgrade has not yet been introduced on public testnets such as Goerli, Sepolia, and Holesky.

“If we don’t launch a [public] testnet before DevConnect, it’s probably unlikely we can go live on the mainnet before the Christmas holidays,” Beiko said. DevConnect is an Ethereum-centric developer conference scheduled for November, which means that if a testnet launch is not completed before then, the Dencun upgrade might not take place until 2024.

JPMorgan said there is more hope of a material increase in the Ethereum network activity with the upcoming EIP-4844 upgrade, but “continued bearish crypto forces remain a headwind.”

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