The previous year was undoubtedly one of major breakthroughs for the Ethereum network. Well, not just in terms of development activity but also its adoption as the industry’s top smart contracts platform. This growth can especially be attributed to the large-scale emergence of both DeFi and NFT sectors. This together amounted to billions of dollars in transacted value along with thousands of new users.
A case in point is the NFT marketplace OpenSea, which reached a new all-time high in monthly Ethereum trading volume on 17 January by soaring past the $3.5 billion mark. Similarly, the total value locked (TVL) in Ethereum smart contracts has also jumped from $27 billion to over $144 billion in the previous year, according to DeFiLlama.
Quite expectedly, the network has reaped the benefits of this increased adoption. Notably, it collected $4.34 billion in revenue in Q4 2021, a spike of 1,777% from Q4 2020, according to the State of Ethereum report. This huge spike in network revenue is not necessarily a positive indicator. However, as it means users are paying exorbitantly increasing gas fees to use the platform.
The average gas fee itself rose by 577% during the time, up from around $4.09 to $26.89.
Notably, the Ethereum community has tried to bypass these issues by using Layer 2 protocols such as Polygon, which gives the network scaling capabilities required to host the increasing traffic. This resulted in an over 11,000% rise in the amount of value bridged from Etheruem into L2 scaling solutions, which stood at over $6.8 billion at the time of writing.
The Merge to fix the surge?
The previous year also witnessed the much anticipated London hard fork, which implemented a fee-burning mechanism within the network. Bankless noted that as much as 87% of the total $4.34 billion collected in gas fees in Q4 2021 was burned through EIP-1559. This burning has had a positive effect on Ether’s valuation; the Inflation Rate fell 64% from 1.13% to 0.46%.
The report further noted that while 2021 was significant for the network, the current one would be even more important in terms of ecosystem-centric developments. ‘The Merge’ is set to take place this year, where Ethereum’s Beacon chain, which already has staking capabilities, will merge with the current chain to turn the network fully Proof-of-Stake. In anticipation of this, 8,818,933 was staked as of the end of Q4 2021, an increase of 471% year on year.
However, this might not have the much-desired effect of Ethereum’s scaling capabilities, as had been expected earlier.
The Ethereum merge will take place some time around June '22, but it won't have an impact on the transaction fees you're paying. After the merge the focus will likely shift to fees, but you can be proactive now by using tools like Polygon, xdai, Arbiturm, Optimism, and zksync.
— superphiz.eth 🦇🔊🐼 (@superphiz) January 10, 2022
Ethereum developer Anthony Sassano argued the same in a blog post earlier, noting that apart from a minute correction in block time, any noticeable change in the Layer 1 gas fee should not be expected. He further noted,
“I’m actually quite worried about just how bad the fallout is going to be once The Merge happens and gas fees aren’t lowered as many people are expecting them to be. I can already imagine the amount of FUD that will be spread as a way to paint ‘eth2’ as a failure even though The Merge will be the biggest upgrade in Ethereum’s history.”