The previous year was definitely one of the major breakthroughs for the Ethereum network. Well, not only in terms of development activity but acceptance as the industry’s leading smart contract platform. This growth can especially be attributed to the large-scale emergence of both the DeFi and NFT sectors. The total value of this transaction amounts to billions of dollars along with thousands of new users.
A case in point is the OpenSea NFT market, which hit a new all-time high in monthly Ethereum trading volume on January 17th by skyrocketing past the $3.5 billion mark. Similarly, the total value locked (TVL) in Ethereum smart contracts has also increased from $27 billion to over $144 billion in the previous year, according to DeFiLlama.
Source: DeFiLlama
With great anticipation, the network has reaped the benefits of this increased adoption. Notably, it raked in $4.34 billion in revenue in Q4 2021, a 1,777% spike from Q4 2020, as reported by the State of Ethereum. This spike in network revenue is not necessarily a positive indicator. However, that means users are paying inflated gas fees to use the platform.
The average gas fee itself has increased by 577% during that time, going from around $4.09 to $26.89.
Notably, the Ethereum community has managed to sidestep these issues by using Layer 2 protocols such as Polygon, which provide the network scalability needed to host the growing traffic. This resulted in a over 11,000% increase in the amount of value transferred from Etheruem to L2 scaling solutions, at over $6.8 billion at press time.
Merge to fix the mutation?
The previous year also saw the much-anticipated London hard fork, which implemented a fee-burning mechanism in the network. Bankless notes that up to 87% of the $4.34 billion in gas fees collected in the fourth quarter of 2021 was burned through EIP-1559. This burning has had a positive effect on the valuation of Ether; The inflation rate fell 64% from 1.13% to 0.46%.
The report further notes that while 2021 is significant for the network, 2021 is even more important in terms of ecosystem-focused development. ‘The Merge’ will take place this year where the Ethereum Beacon chain, which already has staking capabilities, will merge with the existing chain to make the network Proof-of-Stake. Anticipating this, 8,818,933 were booked at the end of Q4 2021, an increase of 471% year-on-year.
However, this may not give the much desired effect on Ethereum’s scalability, as was previously expected.
The Ethereum merger will happen around June 22, but it won’t affect the transaction fees you’re paying. After consolidation, the focus will likely shift to fees, but you can be proactive now by using tools like Polygon, xdai, Arbiturm, Optimism, and zksync.
– superphiz.eth (@superphiz) January 10, 2022
Ethereum developer Anthony Sassano similarly argued in an earlier blog post, noting that aside from the one-minute block time adjustment, any noticeable change in Layer 1 gas fees should not be expected. He further noted,
“I’m actually pretty worried about how bad the fallout will be once The Merge happens and gas prices don’t drop as many people expect. I could have imagined the amount of FUD that would go viral as a way to paint ‘eth2’ as a failure even though The Merge would be the biggest upgrade in Ethereum’s history. “