2021 has proven to be an unexpected year for the world’s second largest cryptocurrency. ETH has quadrupled over the past 12 months. Accordingly, ETH performs better than Bitcoin and ensures an ever higher market capitalization. While the broader crypto markets have had a relatively good year, the value of ETH has risen in tandem with the upgrade to Ethereum’s core protocol, laying the groundwork for the move to the PoS consensus protocol by 2022.

Several Ethereum Improvement Proposals (EIPs) have been in the spotlight of the Ethereum community and have proven pivotal to “The Merge” with the PoS beacon chain, which will take place in 2022.

The London Hard Fork is the most anticipated upgrade that has introduced multiple EIPs. The EIP-1559 proposal sparked controversy due to changes in the fee structure paid by users to miners, while the upgrade had both positive and negative effects.

An important factor is that the ETH burning mechanism destroys part of the ETH used to pay transaction fees. While some miners are not pleased with the fee reduction, the benefit of the London hard fork here is the deflationary effect of the ETH burn mechanism. Many anticipate that this EIP and its deflation mechanism will help increase the value of ETH in the months and years to come.

The Altair upgrade to London later in the year will be the first update to the Beacon Chain since its launch in December 2020. This allows teams to participate in the ongoing development of the Ethereum ecosystem to sprint to The Merge.

Another driver of ETH’s strong performance in 2021 is the burgeoning DeFi sector, which has attracted significant capital. The Ethereum blockchain powers many of the largest DeFi platforms and this is directly impacting the value of ETH and increased activity on the blockchain.

Sowing seeds that will reap these fruits

Ethereum became a popular blockchain platform thanks to the smart contract functionality that underpins the ecosystem. Smart contracts allow various applications to be created and run on the blockchain, allowing users to create their own tokens, applications and platforms.

While ETH is the lifeblood of the Ethereum ecosystem, projects and applications on the blockchain are largely responsible for the resulting value. With that, the seed pays off and the ecosystem reaps the benefits of a blockchain system that supports valuable and popular decentralized applications and platforms (dapps).

Ben Caselin, Head of Research & Strategy at exchange AAX, provided an insight into the key factors driving Ethereum’s strong year. First, Caselin highlights the variety of use cases supporting ETH throughout the year:

“We talk about stablecoins, DeFi, GameFi, NFT, meme coins, digital bonds, central bank digital currency initiatives, yield farming, liquidity pools and metaverse.

Ethereum has all of these areas and has a dominant market share. Ethereum’s value is set differently depending on the activities it offers, while Bitcoin continues to grow given its adoption as the fundamental savings technology for a new global economy. Each movement is simultaneous, but they are essentially driven by different forces and conditions.”

Mattias Nystrom, Community Manager at Golem Network, Ethereum’s Layer 2 payments platform, also shares his views. Nystrom highlighted overall activity on the Ethereum network as a catalyst for the network’s success this year:

“Whereas Bitcoin was primarily created for payments only, Ethereum is unique due to its underlying technology and is beginning to be pursued as Web 3.0 begins its journey to mainstream adoption.”

Mati Greenspan, analyst and founder of Quantum Economics, said that the performance of Bitcoin and ETH is difficult to compare due to different use cases and ecosystems. However, he did concede that ETH has posted a clear uptrend in value over the past 12 months:

“Bitcoin and Ethereum are different like any other asset, except both are digital currencies. They have very different roles in their respective networks, and each has their own buying and selling pressures.”

The influence of EIP

ETH is on the final trajectory to abandon the massive PoW algorithm and move to PoS Ethereum 2.0.

Beacon Chain went live in December 2020, started generating an ETH2 PoS chain, currently has more than 9,026,611 ETH staked and almost 270,000 validators online. These validators will essentially take over the work of existing miners in ETH2, processing transactions and keeping the blockchain running. To become a validator, users need to stake 32 ETH or, if funds are insufficient, they can deposit into pools.

Source: Beaconcha.in

One of the most anticipated Ethereum enhancement proposals appeared in mid-2021. EIP-1559 was the subject of much debate as it introduced changes to the fee structure that miners earn and users pay.

It is worth noting that the built-in ETH burning mechanism destroys part of the ETH used to pay transaction fees. Miners are not happy because this fee is part of their motivation to keep the network running.

The advantage of the London hard fork is the deflationary effect caused by the ETH burning mechanism. As a result, a percentage of ETH is destroyed with every transaction, resulting in more ETH being gradually removed from the ecosystem. Accordingly, this process is expected to increase the scarcity and value of ETH as an asset.

Caselin believes that London’s upgrade has helped boost investor sentiment, but also highlights several key differentiators between Ethereum and Bitcoin:

“The London upgrade serves as a reminder that the Ethereum project is alive, well and under construction – appealing to investors and speculators. It’s better than some of the highly rated projects, but has very little actual service and activity. The burning mechanism tells the story around inflation and borrows the logic that Bitcoin is based on.”

Meanwhile, Greenspan is more objective in his analysis, showing that the average Ethereum user does not suspect that the recent EIPs have contributed to the consolidation of the current Ethereum blockchain and the Beacon chain, which is set to take place in the coming months of 2022:

“While it’s possible that the upgrade had some impact on the domestic economy, I don’t think it’s having a big impact on sentiment.”

Nystrom believes that the technical improvements made to the Ethereum ecosystem towards The Merge and the variety of applications running on the blockchain have proven its versatility. This has driven ETH’s appreciation in value over the year:

“ETH is structured very differently than BTC and is showing more technical progress in 2021. The crypto community knows that ETH is a more resilient asset with an entire ecosystem behind it and many residuals that scale and create more ambitious, more valuable projects over time.”

The market is not firm yet

In December, there were many difficulties in the world market when South African researchers discovered the latest COVID-19 variant. The traditional markets have been shaken and expanded to the crypto market.

BTC, ETH and a host of major coins have suffered as this sentiment permeates the space, and there is more bad news as inflation picks up in the United States. Caselin provides a calculated outlook and cites market-specific reactions to major business news and events. Accordingly, how this could benefit BTC more than ETH in the medium term:

“The market always moves to the rhythm of news and economically significant events, but longer trends are largely driven by fundamentals… We may not be in a bear market just yet, but there’s every reason to believe that the growth we’ve been seeing have, is over The last 2 years are just the beginning. Long-term holders are still buying.”

Greenspan highlighted events in the United States as a sign of the times and the reason for the recent market downturn, while acknowledging that the mid-term stage for the crypto market is not clear where it is.

“While the Fed printed money, social media swarmed with brrrrr memes. Now that liquidity is drying up, criticism is fading. Maybe by the end of this year we will know how deep the drop is.”

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