Proof-of-Stake

Ethereum hit new all-time highs after a rocky April. Developers and analysts delve into the factors behind ETH price surge.

After a recent slump across cryptocurrency markets, Ether has surged to new all-time highs off the back of a number of important events and metrics. Overall, 2021 promises to be a crucial year for the Ethereum blockchain as developers continue to work toward the network’s integration with Eth2, which will see the blockchain part ways with its original proof-of-work consensus algorithm in favor of the touted energy and cost-efficient proof-of-stake consensus.

While the technical details may not concern many day-to-day Ether (ETH) users and traders, the recent price action of ETH, coupled with a number of significant events, suggests that the momentum that has led to ETH hitting a new all-time high at the end of April could continue for some time.

The price of ETH has risen by around 15% over the past week, which is also noted as the world’s second-biggest cryptocurrency by market capitalization, reaching a record $312 billion. The price of ETH continued to rally on April 28 as news broke that the European Investment Bank is launching a “digital bond” sale on the Ethereum blockchain.

These bonds carry significant value, to the tune of around $120 million over two years, with financial service heavyweights Goldman Sachs, Banco Santander and Societe Generale leading the management of the bonds. Most importantly, the bonds have been registered directly on the Ethereum blockchain.

The Ethereum ecosystem celebrated another milestone toward the end of April, as major decentralized finance platforms Uniswap, Compound, Maker and other leaders are on the way to surpassing the $73-billion mark for the net value locked into their smart contracts on the Ethereum blockchain. This marks an $18-billion increase in one month.

Another factor driving the price of ETH to new all-time highs is record open interest in Ethereum options contracts, which reached an all-time high, valued at around $4.2 billion in April. As previously reported, $930 million of these options were set to expire at the end of the month, allowing buyers to acquire ETH at an already-agreed-upon price with the seller of each specific contract.

A combination of factors, it seems

Analysts seem to be in agreement that a multitude of factors has influenced Ether’s most recent push to new all-time highs. Simon Peters, a market analyst at eToro social trading platform, told Cointelegraph that the popularity and success of DeFi platforms and other Ethereum-powered applications and use cases are driving institutional investors to gain exposure to ETH. “Underlying this is demand from institutional investors, while they may now have some exposure to Bitcoin, institutions are now diversifying their exposure, and Ethereum is the natural next pick,” he said.

Johannes Rude Jensen, product and project manager at eToroX Labs, further highlighted the EIB’s Ethereum-based bond issuance as an important milestone in the adoption of blockchain technology within the traditional banking sector. Jensen told Cointelegraph that blockchain-based bond issuance has gained traction as a climate-friendly answer to the costly reconciliation processes in analog traditional bond markets. “By choosing Ethereum, the EIB is signaling the intention to play an increasingly active role in perpetuating EU policy on climate and innovation, in line with ECB’s recent emphasis on green banking,” he said.

Jensen agreed that the move is indicative of that by major banks and financial institutions toward using public blockchains for more traditional financial products in the future. This further singles toward the general trend of open standards in corporate banking:

“Having a single, consolidated source of data in the bond markets will reduce dependencies on intermediaries, which is likely to reduce cost and support risk mitigation in pre-issuance and post-trade processes.”

Jordan Stoev, head of crypto and trading at financial services providers Skrill & Neteller, highlighted that Ethereum’s users and active wallets are at all-time highs, which proves “strong network effects in the ecosystem,” leading to rising gas prices and a higher market value of ETH. Stoev told Cointelegraph that the rising popularity of DeFi platforms and decentralized applications is an important factor attracting investors to Ethereum:

“As opposed to previous cycles, when ICOs and speculation were main drivers of Ethereum growth, this cycle has legitimate use cases, like DeFi and NFTs and others, that people are actually using. Highly anticipated upgrades like EIP-1559 and Eth2 are also expected to drive Ethereum usability, speed and price even higher ,and investors want to get in before they happen.”

One step closer to London

Ethereum’s evolution toward a proof-of-stake future also continued this month as the latest Berlin upgrade introduced a couple of important Ethereum Improvement Proposals to the blockchain protocol.

With Berlin being live since April 15, the ecosystem has had some time to gauge the effects of the four EIPs that formed part of the latest upgrade. Ethereum analyst Viktor Bunin told Cointelegraph that EIP-2929 would eventually “guarantee a maximum size of the Merkle proof needed to verify a particular block” but would ultimately aim to accomplish two primary goals.

According to him, “it mitigates Ethereum’s largest remaining DoS vector, where an attacker could slow down the network by sending transactions that accessed storage in a way that was very cheap but took a long time for nodes to process.” Bunin further added that, ultimately, the “EIP gets us closer to stateless clients, which would enable devices like cell phones to trustlessly interact with Ethereum without needing to run a full node.”

Bunin also added that the change of gas costs that came with EIP-2929 could adversely impact some smart contracts that relied on previous gas cost figures. ConsenSys’ Mattison Asher, who conducts research on Ethereum, nonfungible tokens and decentralized finance, highlighted EIP-2930’s role in balancing out the gas increases caused by its preceding EIP, telling Cointelegraph:

“EIP-2930 mitigates some of the gas increases coming from EIP-2929 by introducing a transaction type that contains an access list, a list of addresses and storage keys that the transaction plans to access. Accessing these variables will be cheaper than accessing variables outside of the list. Effectively, this reduces some of the potential gas increase in EIP-2929.”

The next proposal, EIP-2565, will also introduce some fee-reducing measures for specific cryptographic functions. As Bunin explained, this will make it less expensive to perform functions such as signatures, verifiable delay functions, SNARKs and other executions. Asher summed up the importance of this EIP in lowering the gas cost associated with many functions that are required to utilize and build on Ethereum.

EIP-2718 introduces a way to expedite the addition of support for different transaction types. This is a useful improvement that will essentially reduce the complexity of certain smart contract transactions and their parameters. Bunin added:

“You could have a transaction type where someone other than the transaction sender can pay for the gas. Today, each new transaction type would need to be added individually, which becomes very complex over time, but EIP-2718 creates what can be thought of as a meta transaction type, serving as the envelope for future transaction types, making it easier to add and support them.”

Laying important blocks for Eth2’s integration

There’s often some notable community reaction to the latest improvements being made to Ethereum’s protocol, but the average user is unlikely to have noticed much change to the way they use ETH or interact with the blockchain through normal transactions. 

As Bunin told Cointelegraph, the changes brought about by these four EIPs may take some time to be implemented by Ethereum developers working on various decentralized applications, who may take advantage of the new proposals. “One of the transaction types being proposed is a layer-one multi-signature type. Bitcoin has this capability, but Ethereum does not, so multi-signatures on Ethereum can only be created via smart contracts, such as Gnosis Safe.”

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Nick Johnson, the lead developer of the Ethereum Name Service — a wallet naming tool — told Cointelegraph that an important function of EIP-2929 in the gradual transition to Eth2 will “make ‘stateless Ethereum’ more viable by reducing the maximum number of reads and writes that are possible in a transaction. Stateless approaches are a key part of the Eth2 roadmap.”

Meanwhile, Bunin pointed to EIP-2565 as an important foundation in Ethereum’s ability to integrate advanced cryptography in the future. “Justin Drake has coined the term ‘moon math’ to describe the advanced cryptography that makes the dream of Eth2 possible. Core among them is the thinking around shards being used as a data availability layer for layer-two scalability solutions.” Thus, according to him: “Very promising solutions like zk-rollups are dependent on Ethereum layer one supporting advanced forms of cryptography, so this EIP goes a long way towards that.”

Upcoming London hard fork is hot under the collar

The Berlin hard fork was implemented with fairly little reaction from the wider cryptocurrency community. Bunin believes this was largely because the upgrade did not contain any controversial EIPs, unlike the looming Ethereum London hard fork, which contains the divisive EIP-1559. According to him, this “will change how users pay for gas, which will improve the user experience and begin burning a portion of ETH spent on transaction fees. Around the same time, Eth2 will experience its first upgrade, called Altair.”

Bunin delved into the upcoming changes to the Ethereum network in his latest update for Bison Trails. The key takeaways are the 3.5 million ETH that is locked into the Eth2 smart contract, currently valued at around $6.5 billion or 3% of the total amount of ETH in circulation. There are currently 110,000 validators and counting.

Johnson placed particular emphasis on the impact that the London hard fork will have on transaction fees, as well as the importance of upgrades to smart contract functionality. “It will also make it possible for smart contracts to fetch the ‘base fee’ — effectively, the gas cost of the current block – which will make projects such as gas-price-derivatives and tokens possible.”

Sajida Zouarhi, a senior product manager for ConsenSys’ Besu mainnet client, gave an overview of the next steps in Ethereum’s evolution and the positive progress made in the march toward Eth2 in her correspondence with Cointelegraph. “The very next step is the London hard fork. Notable EIPs are 1559 (Basefee) and 3238 (Ethereum Difficulty Bomb Delay),” which will then lead to the “merge and sharding, which is Ethereum’s transition from proof-of-work to proof-of-stake.” She added:

“The goal is ambitious, but all core developers are dedicated to it. Early prototypes have already been implemented by multiple client teams, including Teku and Besu. We are currently testing them on a cross-client devnet. Things are moving forward very quickly and look good so far.”

Bunin’s final takeaway highlighted the overall stability of the Ethereum network — despite high fees driven by the burgeoning DeFi sector and increased usage of the network amid the ongoing bull run — as a promising sign of the ongoing move to a proof-of-stake-powered future. “Eth2 development is proceeding at a rapid clip in 2021, as there are multiple efforts in flight to get us to the Eth1<>Eth2 merge as quickly as possible.”