Analysis of the Ether (ETH) Chain – How is the Ethereum network doing after The Merge?

The Merger ends with a great technical success

More than a month after The Merge and the transition of the Ethereum network from the PoW (Proof of Work) consensus mechanism to the PoS (Proof of Stake), Ether (ETH) price dropped to a low of $1200 before recently rising towards $1500.

After our analysis of speculative position in ETH derivative markets Just before The Merge, today we will look at the state of health of the Ethereum network after the transition to PoS, through various metrics to paint a large-scale picture of the state of the chain of the second cryptocurrency in the sector.

Figure 1 – ETH daily price

Today we will study:

• On-chain activity and collector participation ;
• Financial health of ETH 2.0 guardians.

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Post-Merger activity on a relatively sparse chain

On September 15, 2022, at block 5,537,393, the last PoW block of the Ethereum network was mined and the Beacon Chain took control of the chain consensus.

The Merge update with Ethereum was successful and resulted in the collapse of the chain’s basic PoW features.

The following graph illustrates this point by highlighting the sudden descent into the hell of hashrate measurements and mining difficulty of the Ethereum network after 15 September.

Figure 2 – Ethereum hashrate and mining difficulty

One era ends and another begins, welcome to Ethereum 2.0 and its Proof of Stake consensus algorithm, which we will continue to observe and analyze on Cryptoast.

In response to these events, the solicitation of the Ethereum chain is a little contractachieving an hourly transaction rate of nearly 43k transactions.

Figure 3 – Number of transactions

This drop, which is also visible through the active addresses metric, represents a certain point warning from Ethereum userswhich limits their interaction with the protocol for several reasons:

• Investor mistrust after the a very significant downward trend in the derivatives markets ETH;
• A break in some economic activity while we wait to see the potential adverse effects of The Merge;
• Mark market environment, pushing investors to conservative behavior by limiting risk.

In support of this decision, the amount of transfers circulating on the Ethereum chain has decreased significantly, which shows low participation from network users.

Note, however, that current values ​​are still anchored in traditional averages of bear market activity. Although this drop is circumstantial, it should not be over-interpreted.

Figure 4 – Transfer Volume

Chain usage and on-chain engagement metrics pushing up could be a positive signin conjunction with a recovery in the price of ETH.

This would indicate that the relief in market prices would add a new pulling force that would draw back users and investors, eventually pushing adoption to new highs.

Finally, the participation rate, a metric exclusive to ETH 2.0, which is the ratio between the number of blocks successfully produced (ie not lost) and the total number of available slots, indicates that drop in collector participation.

Figure 5 – Collector participation rate

As a result of an increase in the number of lost blocks, this measure indicates the decreased activity of some validators after the transition from Ethereum to PoS.

This sign of fundamental deterioration is not welcome but it is not a definitive conclusion.

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Diminishing Returns & Underwater Guardians ETH 2.0

During this time, the number of active collectors is constantly growing, almost 450k now. Although this observation is helpful at first glance, it is also a sign of increased competition for awards.

Collectors may be pushed towards performance-optimized solutions, for example MEV-boost from Flashbots maximize their performance.

Figure 6 – Active collectors

Note thata large influx of validations was recorded around The Merge eventshowing operators’ interest in participating in the ETH 2.0 consensus.

Reflecting the dynamics of the competition for yield validators on the Ethereum network since the Beacon Chain went live, the following graph shows the estimated annual yield of these entities.

It is interesting to note that this measure has been divided into almost 7 since the end of 2020falling from an annual return of 21% to just over 4% currently.

Picture 7 – Estimated annual yield from collectors

This dynamic is an additional catalyst that can push Ethereum node operators to favor solutions to optimize and select blocks with the highest transaction costs.

As well as that, ETH 2.0 contract custodians are currently sustaining an unrealized loss continuous. By measuring the price at which ETH is locked in the ETH 2.0 contract, the aggregate realized price of ETH 2.0 holders can be calculated.

Currently located near $2200 and therefore above the spot price, it shows that the value of ETH at the time of deposit is lower than the current price of Ether, which represents an unrealized loss of about 30% for the average depositor.

Figure 8 – Profit/Loss of ETH guardians 2.0

Finally, note that after the recent rise in the ETH spot price, the latter is approaching the realized price, which represents the overall underlying cost of ETH circulated on the network.

If the spot price breaks above the level on this chain on the upside, this would indicate a return to full market profitabilitywhich would be a very positive sign of recovery in the medium term.

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Summary of this onchain analysis

Finally, the on-chain data presented this week, after The Merge, shows that the Ethereum network has successfully implemented the consensus algorithm at Proof of Stake (PoS) and that the Beacon Chain has welcomed the traffic with flying colors. second cryptocurrency on the market.

Measurements of chain activity and collector responsiveness show a decline in chain participation and usage, an encouraging sign but influenced by the adverse bear market context and degraded macroeconomic components.

Moreover, it seems that The declining annual return of collectors and the negative profitability of deposits locked in the ETH 2.0 contract put significant financial pressure on participantswhich could be partially spread if the spot price of Ether crosses above the realized market price of ETH.

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Sources – Figure 2 to 8: Glassnode

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My goal is to inform everyone about the state of Bitcoin (as an asset and a distributed network) through the prism of chain analysis.