Ethereum is lagging behind expectations in terms of network activity after the Shanghai upgrade implemented in April, according to JPMorgan.
“While the shift from proof-of-work to proof-of-stake resulting from the Merge upgrade caused energy consumption for the Ethereum network to drop by more than 99%, Ethereum supply contracted and staking rose sharply (with the amount of ether deployed by 50% since the Shanghai upgrade), the increase in network activity has been quite disappointing,” JPMorgan analysts led by Nikolaos Panigirtzoglou wrote in a note on Thursday.
Ethereum’s daily transactions, daily active addresses and total value locked (TVL) of decentralized finance (DeFi) protocols on the network have all seen declines, the analysts noted.
A look at various Ethereum metrics. Image: JPMorgan.
The drop in Ethereum activity suggests that several “bearish forces” of the past year, including the collapse of the FTX and Terra, the uncertainty and US regulatory crackdown, the waning interest in crypto among institutional investors and the drying up of venture capital financing According to the analysts, the positive impact of the Shanghai upgrade on Ethereum’s network activity was greater than the positive impact of the Shanghai upgrade. The Shanghai upgrade allowed Ethereum validators to withdraw ether locked in the network.
Additionally, Ethereum Layer 2 networks have shown mixed results, they said. While Optimism has witnessed increased activity, Arbitrum’s activity has declined. The TVL for both Arbitrum and Optimism have been declining since late March, just before the Shanghai upgrade was implemented.
The analysts also highlighted concerns about Ethereum’s centralization, especially regarding liquid staking protocols such as Lido, which maintains a dominant share.
Ethereum’s EIP-4844 upgrade
The crypto industry is now looking at the EIP-4844 upgrade or protodankhardening, hoping for a substantial increase in Ethereum network activity. “However, persistent bearish crypto forces remain headwinds,” the analysts said.
Protodanksharding is a preparatory step towards the full implementation ofdanksharding, which is different from the initially planned sharding technique. Instead of splitting the Ethereum blockchain into multiple shard chains, Danksharding introduces data-containing blobs: temporary data packets associated with blocks that can hold more data than the blocks themselves.
This innovation is expected to benefit Layer 2 networks such as Arbitrum and Optimism, which aggregate transactions before sending them back to the main chain. The data blobs will not change the Ethereum block size, but will create additional temporary data space for Layer 2 rollups, potentially increasing network throughput and reducing transaction fees.
Protodankharding is currently scheduled for the fourth quarter of this year, but this could be postponed until early next year.