There seems to be a new energy sweeping through the cryptocurrency market now that 2023 has arrived. Nearly every cryptocurrency is up since the beginning of the year, but it is the second-most-valuable cryptocurrency that has my attention today.
Although Ethereum‘s (ETH 1.33%) price was down 68% in 2022, it is the only cryptocurrency that can boast of accomplishing one of the most significant events in the history of digital assets. In September, Ethereum developers successfully implemented The Merge, a change to the blockchain’s code that shifted its consensus mechanism from the clunky and energy-intensive proof-of-work system to the streamlined and energy-efficient proof-of-stake method.
As important as The Merge was, it did little for Ethereum’s price. There was a brief rally in the days leading up to its official unveiling, but the token tumbled once it went live. While The Merge represented a crucial milestone in Ethereum’s development and laid the foundation for it to support more use cases and new features in the future, the move didn’t have an immediate impact or advantage to users.
A new beginning
But now that we are in the post-Merge era, Ethereum can start reaping some of the benefits that come with moving to proof-of-stake. In Ethereum’s previous life, it used mining as the method in which transactions were verified and new data blocks were created. But now, instead of miners, Ethereum’s blockchain is secured through the use of validators who “stake” or lock their funds on the network to serve as collateral.
As a part of The Merge, Ethereum developers made it so that those who staked their funds could not withdraw them. It was a necessary step to launch Ethereum’s next chapter, but without any end date on the withdrawal moratorium, it likely discouraged some from staking. That might change this year.
Ethereum’s next upgrade, Shanghai, will be released this spring and allow users to withdraw their staked funds. While there is speculation as to what this will do to Ethereum’s price in the short term, in the long run, it should only benefit the blockchain. Now that people know they will be able to withdraw their staked Ethereum funds at any time, more people are likely to stake on the network. Subsequently, this should make the network more secure and decentralized — both great developments for the blockchain network and its investors.
A busy blockchain once again
While the introduction of withdrawals should help Ethereum in the future, in the short term, there are signs that Ethereum’s network is experiencing a revitalization in activity, which is oftentimes a precursor to an increase in prices.
Because blockchains are public, we can take a look at trends that shed light on how it is being used and the amount of value it supports. One of the primary ways to get a glimpse into Ethereum’s activity levels is through the number of smart contracts being created on a blockchain. Smart contracts are pieces of code used by developers to build applications and typically serve as a metric to indicate network demand. The more smart contracts being created, the more demand.
For much of 2022, the number of smart contracts created on Ethereum was stagnant. But since October 2022 and through the turn of the new year, there has been a dramatic spike in the number of smart contracts created daily. After barely registering a day with more than 25,000 contracts in most of 2022, Ethereum has notched more than 100,000 on multiple occasions and averaged about 50,000 a day over the past few months.
This increase in activity is also reflected in its total value locked (TVL), a statistic used to measure the dollar amount a blockchain supports in the decentralized finance (DeFi) sector, which Ethereum has come to dominate. To close out 2022, Ethereum’s market share of DeFi increased by nearly 4% — a significant move after losing market share for most of the year. Out of all other blockchains that possess DeFi capabilities, Ethereum now makes up more than 60% of the sector’s value. The next closest is BNB (BNB -0.17%) at just 10%.
I anticipate that the lead Ethereum has over its competitors will only increase over the coming months and years. And as it does, Ethereum’s price should rise. With the uptick in activity to close out last year and events like the Shanghai upgrade on the horizon, it looks as though Ethereum might have finally bottomed out, making it a great time for investors to capitalize on a cryptocurrency with explosive long-term potential.
RJ Fulton has positions in Ethereum. The Motley Fool has positions in and recommends Ethereum. The Motley Fool has a disclosure policy.