The year 2021 is undoubtedly one of the major breakthroughs for the Ethereum network, not only in terms of development activities, but also in terms of adoption as the industry-leading smart contract platform. This growth is particularly due to the emergence of both the DeFi and NFT sectors on a large scale. Total transaction value of up 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 Jan. 17 with a surge above $3.5 billion. Similarly, according to DeFiLlama, the total value (TVL) in Ethereum smart contracts also increased from $27 billion to over $144 billion last year.

Source: DeFiLlama

Accordingly, the network benefits from this increasing acceptance. Notably, it brought in $4.34 billion in revenue in Q4 2021, up 1,777% from Q4 2020 report of the State of Ethereum. However, such an increase in network revenue is not necessarily a positive indicator. This means users pay higher gas fees for using the platform.

The average gas fee itself is up 577% from about $4.09 to $26.89 during that time.

The Ethereum community in particular has managed to overcome the difficulty by using Layer 2 protocols like Polygon, which provide the network scalability needed to host the growing traffic. This resulted in over 11,000% of Etheruem’s value being shifted to Layer 2 scaling solutions, at over $6.8 billion at press time.

Merge to fix?

In 2022, the London hard fork goes live and starts burning fees on the network. Bankless found that up to 87% of the $4.34 billion in gas fees collected in Q4 2021 was burned by EIP-1559. This policy is said to be positive for ETH value as the inflation rate has dropped by 64% from 1.13% to 0.46%.

The report further notes that while 2021 is important for the network, 2021 is even more important in terms of ecosystem-driven developments. The Merge is scheduled to take place this year. It will merge Ethereum’s beacon chain (which already has staking capabilities) with the current chain to make Ethereum a full proof-of-stake network. By the end of the fourth quarter of 2021, 8,818,933 coins had been staked, a 471% increase compared to the same period last year.

However, this may not have the desired effect on Ethereum’s scalability. An advisor to the Ethereum Beacon Chain Community has tweets:

“Ethereum consolidation will happen around June 2022, but it won’t impact the transaction fees you pay. Post consolidation, the focus will likely shift to fees, but you should now be proactive and use tools like Polygon, xdai, Arbiturm, Optimism, and zksync.”

Ethereum developer Anthony Sassano made a similar argument in a previous blog post, noting that apart from the one-minute block time adjustment, no noticeable change in Layer 1 gas fees should be expected.

“Actually, what I’m worried about is how bad the post-merger side effects will be and how gas fees won’t go down the way a lot of people are expecting. I could have imagined FUD ramping up and showing ETH2 as a failure even though The Merge was the biggest upgrade in Ethereum history.”

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