ETH vs. BTC Performance and On-Chain Data Overview
Since October, up to December 15, Bitcoin (BTC) has surged by 57.5%, while Ethereum (ETH) has increased by 48.34%. Although the difference isn't massive, ETH has been underperforming compared to BTC for nearly a year.
BTC's strong performance stems from expectations around a spot ETF, the approaching halving cycle, and the recent rise of the BTC ecosystem. While ETH lacks similar short-term catalysts, its on-chain data reveals positive signals.
Analyzing Sell Pressure and Exchange Balances
From a sell-pressure perspective, BTC balances on exchanges have consistently declined since June. However, a noticeable rebound occurred between December 5 and 12. Following this peak, BTC's price temporarily dropped to $41,000.
In contrast, ETH exchange balances have shown less volatility. Since February 2023, the amount of ETH held on exchanges has been on a steady downward trend. A minor rebound happened from December 11 to 13, but this occurred during and after a market price dip. This suggests some investors moved ETH to exchanges to realize gains after the brief downturn.
Social Sentiment and Market Value Metrics
Data from Santiment indicates that social media trends for both assets are similar, though BTC's discussion volume is significantly higher. The MVRV ratio (Market Value to Realized Value), often used to gauge buying and selling pressure, also follows a comparable trend for both cryptocurrencies, but with different magnitudes. As of December 15, BTC's MVRV stood at 41.17%, while ETH's was 26.45%. Both values are at their highest points in six months.
Growing Institutional Interest in Ethereum
Despite its recent underperformance versus Bitcoin, a notable shift in institutional interest toward Ethereum began emerging, particularly after November 2023.
Charts from on-chain analytics firm CryptoQuant show a significant rebound in ETH held by institutions while its price was consolidating between $1,800 and $1,900. CryptoQuant analysts interpret this surge as growing interest from institutional investors, signaling recognition of Ethereum's long-term value and market growth potential. This trend is driven not only by ETH's price stability and the potential for a spot ETF but also by its strong fundamentals and ongoing technical upgrades.
JPMorgan's 2024 Outlook on Crypto
JPMorgan's recent 2024 financial outlook report shared its stance on the cryptocurrency sector. The report suggests that despite BTC's approaching halving, ETH is expected to outperform BTC next year. JPMorgan cites the upcoming EIP-4844 upgrade (Proto-danksharding) as a key potential catalyst. This upgrade is anticipated to enhance Ethereum's network efficiency and scalability, giving it a market advantage.
Conversely, the positive effects of Bitcoin's halving may already be priced in. The block reward halving is expected to increase production costs and could lead to a 20% drop in its hash rate. According to JPMorgan, this might raise operational costs for miners and push less efficient operators out of the market.
Key Steps Activated Ahead of Ethereum's Dencun Upgrade
Based on reports from core developer consensus calls, developers activated critical final steps for the Dencun upgrade near the end of 2023. Ethereum developers announced plans to initiate a Goerli shadow fork with all client teams within one to two weeks to test the Cancun/Deneb upgrade.
Testing for the Cancun/Deneb upgrade on Devnet 12 is currently underway. All execution layer (EL) and consensus layer (CL) client combinations, including Prysm, have been loaded onto Devnet 12. The MEV-Boost software has been activated for most client combinations, with the exception of those involving Prysm.
The Dencun upgrade will introduce changes to both of Ethereum's mainnet layers. The execution layer upgrade is named Cancun, while the consensus layer upgrade is called Deneb, hence the portmanteau "Dencun."
This upgrade aims to further scale Ethereum and its Layer 2 (L2) solutions by implementing a key improvement proposal known as EIP-4844. The Dencun upgrade represents a significant milestone in Ethereum's roadmap. Once completed, transaction fees on L2 networks are expected to become substantially more competitive.
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Returning L2 Functionality to L1 via Encapsulated zkEVMs
Layer 2 networks improve Ethereum's scalability by processing transactions off-chain in batches before submitting them back to the main chain. This approach was a key focus for Vitalik Buterin back in 2020, when gas fees on the Ethereum network were soaring.
Recently, Ethereum co-founder Vitalik Buterin suggested that the next step for Ethereum involves returning some functionality from L2s back to the main Layer 1 (L1) chain through "encapsulated zkEVMs," as "light clients" become more powerful. This concept of bringing some functions of L2 networks or rollups back to the main Ethereum chain contrasts with his earlier vision of offloading computational burden from L1 to L2.
In a recent blog post, Buterin emphasized the growing importance of light clients—stripped-down versions of client software. These light nodes request data only as needed instead of independently verifying changes to the blockchain by keeping a full copy of all data. Typically, light clients or nodes primarily handle block headers, only occasionally downloading full block contents.
Buterin believes that as their capabilities and access to data improve, these light clients will become powerful enough to fully validate L1 transactions, much like L2 networks do today. At that point, the Ethereum network would effectively have a built-in ZK-EVM.
Zero-Knowledge (ZK) proofs are a cryptographic protocol that allows one party to prove to another that a transaction is valid without revealing any specific details about it. The Ethereum Virtual Machine (EVM) is the environment that executes smart contracts, acting like a computer that runs programs.
Currently, L2 networks like Polygon, Scroll, and Matter Labs utilize zero-knowledge proofs and are major stakeholders in the DeFi ecosystem. Therefore, Buterin's concept of encapsulated zkEVMs could reduce the leverage these platforms hold. So, what would happen to the functionality of L2s if zkEVMs were encapsulated and became part of Ethereum's core protocol?
According to Buterin, these L2 projects would still be responsible for several crucial functions. These include providing fast pre-confirmations, implementing MEV mitigation strategies, and enabling extensions to the EVM. Furthermore, the encapsulated zkEVM approach would also handle user and developer-facing conveniences. He stated, "L2 teams do a lot of work to attract users and projects into their ecosystems and make them feel welcome; they can get some profit compensation by capturing MEV and congestion fees within their networks. This relationship will continue."
Key Ethereum Trends to Watch in 2024
The Dencun upgrade is scheduled for deployment in March or April 2024. Through EIP-4844, gas costs on Ethereum L2s are expected to drop significantly, greatly improving the network's scalability.
Activity on Ethereum L2s is continuously growing and has recently reached an all-time high. According to recent data from L2Beat, the total value locked (TVL) across the entire L2 ecosystem has reached $16 billion.
The current L2 landscape is dominated by EVM-compatible chains like Arbitrum, Optimism, and Metis. Additionally, non-EVM L2s such as Eclipse and Flyent are launching, which are expected to bring new types of applications and developers to the ecosystem. Crypto gaming is anticipated to primarily base itself on L2 ecosystems. Wallet user experience will continue to improve, helping the Ethereum ecosystem onboard new users more effectively.
Finally, the tokenization of real-world assets (RWA) continues to gain momentum, bringing more traditional "old world" financial products onto the Ethereum blockchain.
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Frequently Asked Questions
What is the main reason Ethereum (ETH) has been underperforming against Bitcoin (BTC)?
BTC's stronger performance is largely driven by specific catalysts like the anticipation of a spot ETF and its upcoming halving event. While ETH lacks identical short-term drivers, its fundamentals and on-chain data remain strong, indicating potential for future growth.
What is the significance of the Dencun upgrade for Ethereum?
The Dencun upgrade, specifically through EIP-4844 (Proto-danksharding), is a major milestone aimed at significantly reducing transaction costs on Layer 2 networks and improving Ethereum's overall scalability and efficiency.
How does Vitalik Buterin's concept of "encapsulated zkEVMs" affect existing Layer 2 solutions?
Buterin's idea involves bringing some verification functions from L2s back to the main Ethereum chain using advanced light clients. While this could change their role, L2s would still be vital for functions like fast pre-confirmations, MEV mitigation, and fostering developer ecosystems.
What are the key factors driving institutional interest in Ethereum?
Institutional interest is growing due to Ethereum's price stability, the potential for a spot ETF, its robust fundamental technology, and continuous upgrades like Dencun that enhance its utility and scalability.
What is Real-World Asset (RWA) tokenization on Ethereum?
RWA tokenization involves converting rights to a physical or traditional financial asset (like real estate or bonds) into a digital token on the blockchain. This expands Ethereum's use cases by connecting decentralized finance with traditional markets.
Will Layer 2 networks become obsolete after future Ethereum upgrades?
No. Even with advancements like encapsulated zkEVMs, L2 networks are expected to continue playing crucial roles in providing scalability, specialized features, and improved user experiences that complement the base layer.