The rise of ETH Staking would kick-start the DeFi Renaissance

23-03-02 18:12

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Alan is an encryption researcher

Smart contract calls are back up

After the winter of 2022, ETH prices have recovered somewhat, but are still down more than 65% from the bull market high of $4800. Still, smart contract activity on the Ethereum blockchain remains relatively healthy.

According to Glassnode, an encrypted data analytics firm, the number of intra-contract calls to Ethereum rose back to 4 million, very close to the highs of previous quarters during the bull cycle.

The number of calls to Ethereum external contracts has also recently remained at record highs between 600,000 and 800,000 per day.

Note: Ethereum trading involves performing smart contract calls that have been deployed on the blockchain. When a contract is initiated by an external address (EOA), it is called an external contract invocation, which usually refers to the user who initiates a specific smart contract, such as an ERC-20 token transfer, DeFi transaction, or NFT transaction. Contract calls initiated from within an executing smart contract are called internal contract calls, which allow developers to build and design more complex and composable systems.

NFT, ERC-20, Stablecoin, DeFi activity change

Historically, the continued intensity of smart contract activity on the Ethereum blockchain has been largely underpinned by activities such as NFT, ERC-20 tokens, stablecoin transactions, and DeFi.

On Feb. 27, for example, NFT transactions accounted for 15.8 percent of all transactions made on Ethereum, according to a chart provided by Glassnode. ERC-20 token transfers, which accounted for 11.4% of all Ethereum transactions, with stablecoin transactions accounting for 12.4%. ETH Transfer (Vanilla) accounted for 28.5 percent and other types 31.5 percent.

By comparison, two years ago NFT accounted for only about 1.7 per cent of transactions, while Stablecoin and ERC-20 tokens accounted for 16 per cent and 12 per cent respectively. The biggest change from two years ago is in defi-related activity -- DeFi accounted for about 12% of all Ethereum transactions in the first half of March 2021; By late February 2023, that share had dropped to about 4%.

DeFi activities were hit hard

Defi activity has also been affected against the backdrop of a significant decline in TVL, the Ethereum DeFi ecosystem. The flight of money from Defi smart contracts means fewer Defi transactions are taking place on the Ethereum blockchain. According to Defi Llama, Ethereum TVL is currently around $64.4 billion, down more than 65 percent from its high in late 2021 ($197 billion). When Terra's UST algorithm Stablecoin crashed, there was also a ripple effect in the Defi ecosystem, dealing a heavy blow to confidence in the industry.

As can be seen from the chart of ETH transaction types mentioned above, the number of Defi transactions is positively correlated with ETH prices. The Defi rush in 2020 coincided with the initial phase of the ETH bull market. It was not until the first half of 2022 that DeFi activity, as a proportion of ETH transactions, began a sustained decline that the bull market cycle really ended.

Therefore, in the new cycle, if the Ethereum Defi ecosystem can experience another boom similar to what happened in the summer of 2020, it will help provide strong momentum for the next ETH bull market.

ETH pledge is expected to drive DeFi revival

For bullish ETH investors, a new opportunity to trigger the next DeFi craze is on the horizon - Ethereum developers will soon be doing a "Shanghai upgrade" to the Ethereum main network. This upgrade will enable the ETH pledge to withdraw the pledged ETH and the corresponding rewards obtained.

ETH beacon chain pledge started at the end of 2020, but the pledged ETH is locked and cannot be withdrawn. The lack of flexibility of pledged funds has been a concern for many potential ETH pledge investors. As of the end of February, the number of ETH pledges was 17.3 million, accounting for only 14% of the total circulation. In contrast, the pledge rate of many L1 blockchains that use PoS consensus mechanism but can flexibly withdraw the pledge token is almost above 40%, and the pledge rate of ADA, SOL, BNB Chain and ICP is above 70%.

According to Messari's tweet on March 1, the Ethereum merger had a huge positive impact on Pledgor Economics. Even if ETH's price performance is poor, its pledge rate of return is still about 6% in year 22.

Currently, there are about 530,000 verifiers on the ETH chain. According to Staking Rewards, the next 30 days ETH verifier revenue is growing by 43.44%, and the next 30 days gross mortgagee revenue is $2.08 billion.

At the same time, the number of addresses on the Ethereum network has increased. According to Glassnode, the number of non-zero addresses on Ethereum is 9.83 million. But the total volume of transactions on Ethereum has plummeted. This suggests that many of the new addresses holding Ethereum are not selling their ETH.

According to Santiment data, ETH's current MVRV ratio has only just turned slightly positive. This shows that for most ETH holders, they would not be able to make a large profit by selling their ETH today. This will also help to increase the incentive for more ETH holders to participate in the "flexible pledge" after the "Shanghai Upgrade" to earn more.

Currently, decentralized ETH liquidity pledge protocols such as Lido and Rocket Pool have a high ratio and are likely to continue to be beneficiaries of ETH pledge growth. Ethereum liquidity pledge has become the largest segment of TVL (Lido, Coinbase Wrapped ETH and Rocket Pool TVL up to $12.76 billion, and the amount of pledge is likely to continue to rise in the "Shanghai upgrade". Otherwise, unmanaged Staking schemes (e.g., ebunkers, etc.) are growing rapidly, thanks to the proximity of the Shanghai upgrade.

Further development of ETH Staking may help fuel growth in other DeFi areas, as investors participating in ETH staking seek to gain more from the pledged ETH. And, within the Ethereum ecosystem, the rise of DeFi TVL will help drive the narrative around wider adoption of Ethereum technology and long-term price growth.