The crypto landscape has shifted significantly with the new bull market narrative centering around Bitcoin. Ethereum, once the darling of the bear market, has seen its momentum wane, especially with the explosive rise of Solana. The industry seems to be kicking off 2024 with the narrative of "new public chain emergence."
Although Ethereum's price doubled over the past year, it has faced criticism and even Fear, Uncertainty, and Doubt (FUD) directed at Vitalik Buterin's decision-making. This sentiment stems from the community's high expectations for ETH—particularly to outperform Bitcoin—and Solana's remarkably strong performance. Let's delve into the key changes within the Ethereum ecosystem over the past year.
Ethereum Has Become Deflationary
Since the beginning of the year, the total supply of Ethereum has decreased from 120.5 million to 120.1 million ETH. Approximately 340,000 ETH, valued at around $750 million, were burned over the year. As the bull market progresses, the burn rate is expected to increase significantly.
The Rise of the LSD Sector
Following Ethereum's Merge in September 2022, the Liquid Staking Derivatives (LSD) sector became a hot topic in the first quarter of 2023. In the late bear market, the stable annualized yield of about 4% attracted substantial capital. Projects like Lido, Rocket Pool (RPL), and SSV saw significant growth, driving up Ethereum's staking rate. As of early January 2024, the staked amount reached 28.8 million ETH.
As the staking volume expanded and the Shanghai upgrade approached, some projects began targeting these staked funds, launching DeFi products that layered on top of each other to improve capital efficiency. This led to the emergence of the LSDFi sector, gradually完善ing LSD infrastructure.
However, with Lido controlling over one-third of the staking market share, concerns about centralization arose. The community debated whether Lido's growth threatened Ethereum's consensus security. In response, Vitalik Buterin highlighted Distributed Validator Technology (DVT) as a potential solution. Notably, Lido DAO started adopting DVT solutions from Obol Network and SSV Network in November 2023.
As the bull market continues and Ethereum's price rises, the staking sector is poised to become a trillion-dollar market. Stable yield products will likely become a necessity for many investors, driving further innovation in this space.
The Diversification of Layer 2 Solutions
Layer 2 networks have become integral to Ethereum's ecosystem, each with unique developments and characteristics.
- Optimism: After a rocky start, Optimism found its niche with OP Stack, a modular, one-click chain deployment technology. Collaborations with projects like Base, opBNB, Manta Network, and DeBank have bolstered its position. Recent confirmation of the Dencun upgrade timeline has brought renewed attention to Optimism and other L2s.
- Arbitrum: The release of its token in early 2023 triggered an "Arbitrum Summer," with projects like GMX, MAGIC, RDNT, and GNS gaining traction. However, both Arbitrum and Optimism face criticism for their high fully diluted valuations and low circulating supplies, leading to stagnant token prices despite growing ecosystems.
- zkSync & StarkNet: These zero-knowledge rollups have been criticized for their approach to token distribution and fee structures, frustrating the airdrop community. Technical progress has been slow, with no major breakthroughs in 2023.
- Base: Gained traction through meme coin frenzies and the viral success of Friend.Tech. However, many of its生态 projects lacked longevity, and Friend.Tech has since cooled significantly.
- Blast: Launched in November 2023, it quickly attracted over $1 billion in TVL by offering yield and airdrop incentives, despite concerns over centralization.
- Manta Pacific: Saw TVL soar from $30 million to $650 million in under three weeks through a similar incentive model to Blast, offering shorter lock-up periods.
- Metis: Rose to prominence ahead of the Dencun upgrade by focusing on decentralizing its sequencer, a core component where other L2s are more centralized.
- ZKFair: Gained attention with a 100% gas fee airdrop to users, a stark contrast to other ZK projects. It quickly onboarded hundreds of thousands of users, though its long-term sustainability remains to be seen.
The trend is clear: Layer 2 projects are using aggressive, capital-efficient strategies to gain market share quickly. Whether this leads to long-term success is still uncertain.
The Emergence of Dex Bots
Before the rise of BRC-20 ordinals on Bitcoin, the majority of new token launches occurred on Ethereum. This created a need for tools to snag early investments. Dex trading bots emerged to meet this demand.
Unibot became a phenomenon in mid-2023, generating millions in profits during the bear market. However, it faced stiff competition from bots like Banana Gun, which offered a superior user experience. While activity has slowed with the shift of attention to Bitcoin and Solana, Dex bots remain a notable innovation from the past year.
Ethereum Inscriptions and Meme Coins
The Ethereum inscriptions protocol, Ethscriptions, was a direct replica of Bitcoin's Ordinals. Initially met with skepticism, it was carried upward by the overall buzz around Bitcoin inscriptions.
Beyond the initial ETHS inscription, the sector has seen little sustainable innovation, with most activity resulting in short-lived pumps. The same pattern held for inscriptions on other new chains—initial excitement tested network capacity but ultimately left latecomers at a loss. The future of this niche depends on new narratives and technological developments.
Meme coins, a dominant narrative from the previous cycle, made a comeback with PEPE on Ethereum. They addressed a growing user sentiment against "VC tokens" perceived as dumping grounds for insiders. Meme coins offered fair launches, community-driven growth, and low barriers to entry—a theme also seen in the popularity of BRC-20 tokens. While most are fleeting, they represent one of the most accessible sectors for retail investors.
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Other Sectors: A Mixed Bag
Other sectors within the Ethereum ecosystem showed less dramatic movement:
- DeFi: Projects like MakerDAO expanded into Real-World Assets (RWA), but uptake was muted. Established players like Uniswap focused on internal innovations and cross-chain expansion plans to capture more market share.
- GameFi: This sector largely cooled off. While some new games launched on various chains and the concept of fully on-chain games gained some traction, no break-out hit emerged to reignite widespread interest.
- NFTs: Yuga Labs attempted to innovate in gaming with limited success, and its core NFT collections stagnated. Azuki faced significant backlash after a controversial element reveal, damaging liquidity in the NFT market. The marketplace OpenSea saw its valuation plummet from billions to a fraction of that, while Blur continued to eat into its market share. The Ethereum NFT space is a competitive red ocean, while Bitcoin NFTs present a new, less saturated frontier.
Summary and Outlook
The past year saw Ethereum innovate in areas like LSDfi and Layer 2 scaling, though sectors like account abstraction and AI integration are still in development without a flagship application.
Recent underperformance has sparked debate about Ethereum's strategic direction, including concerns about value capture for the mainnet as Layer 2s proliferate. The community remains divided on these issues.
Looking ahead, two major events hold promise for Ethereum: the Dencun upgrade (expected to significantly reduce Layer 2 transaction costs) and the potential approval of a spot Ethereum ETF following the precedent set by Bitcoin ETFs.
Frequently Asked Questions
What does it mean that Ethereum is deflationary?
It means the net supply of ETH is decreasing over time. This happens because the amount of ETH burned through transaction fees (EIP-1559) exceeds the new ETH issued to stakers. A decreasing supply can be bullish for the asset's value if demand remains constant or increases.
What is LSDFi?
LSDFi refers to Decentralized Finance (DeFi) applications built on top of Liquid Staking Derivatives (LSDs) like stETH or rETH. These protocols allow users to leverage their staked ETH to earn additional yield through lending, borrowing, or providing liquidity, thereby increasing capital efficiency.
Why are people concerned about Lido's centralization?
Lido controls a very large portion of all staked ETH. If a single entity controls too much of the staking power, it could theoretically compromise the network's censorship resistance or even its security through collusion or attack. Solutions like DVT aim to mitigate this risk by decentralizing the operation of validators.
What is the main goal of the upcoming Dencun upgrade?
The primary goal of the Dencun upgrade is to dramatically reduce transaction costs on Ethereum Layer 2 rollups. It introduces "blobs" of data (via EIP-4844) that are much cheaper for rollups to use for storing transaction data, making L2s faster and more affordable.
What is the difference between a Layer 1 and a Layer 2?
A Layer 1 (L1) is the base blockchain network, like Ethereum or Bitcoin, which provides ultimate security and decentralization. A Layer 2 (L2) is a separate protocol built on top of the L1 that processes transactions off-chain before batched data is settled on the L1. L2s aim to scale the L1 by improving speed and reducing costs.
How do meme coins differ from other cryptocurrencies?
Meme coins typically derive their value primarily from community sentiment, internet culture, and viral trends rather than underlying technology or utility. They often feature fair launches with no pre-allocation to venture capitalists, making them highly speculative but popular with retail investors.