DeFi’s Speculative Frenzy Subduing Ethereum; Users Approaching 500k
During the bloody red Monday, Ether lost about 10.6% of its value; currently, it is trading around $340.
These levels were last seen earlier this month, but another small lower and Ether will get back to July level.
“Weekly time frame still looking like a bearish retest of the previous range ($390s). Bitcoin looking better on the weekly, but also pulling back from daily resistance,” noted trader Cred.
With a lull in price came the opportunity to make cheaper transactions on the second-largest network. Not that the sky-high fees prevented users from doing that, as evident from the drastic congestion seen last week.
Currently, the average transaction fees on Ethereum is around $3.56, down from $11.6 on Sept. 17, the day popular DEX Uniswap airdropped its governance token UNI.
It is also the largest decentralized exchange by trading volume that generates nearly $1.5 million in fees per day, less than Ethereum’s $5.2 million but more than Bitcoin’s just over $500k, as per TradeBlock.
The trading volume on DEXs overall has also been hitting a new all-time high. More than $17 billion in notional volume has already been transacted so far in September, double the August’s volume and an increase of 400% since July.
DEXs have seen explosive growth in recent months on the back of increased capital flows in DeFi tokens, which don’t need a formal listing process. All this speculative frenzy of activity results in driving up ETH gas fees.
With traders desperate to get ahead of their peers and willing to pay outrageous prices for a confirmation, the Ethereum fees proved to be inelastic, which has some projects even abandoning the network as it makes their project economically unviable.
Unilogin is out of gas: we’re unfortunately shutting down the project. Many factors contributed to it, but mainly: gas prices, DeFi gentrification and being collateral damage in a war of between the tech giants.
— Alex Van de Sande (avsa.eth) (@avsa) September 19, 2020
Can even ETH 2.0 handle it?
The overwhelming demand for Ether has been going on for the past three months, which saw the daily transactions on the network hitting a new peak at 1.4 million, up from 1.34 million set at the height of last bull run, in early Jan. 2018, as per Etherscan.
This is why ETH continues to flow out of centralized exchanges and into smart contracts. Since August 15th, the balance of ETH has decreased by 11.6%, with 2.2 million ETH withdrawn from exchanges while the amount of Ether in smart contracts increased by 3.4 million.
DeFi currently has nearly 8 million ETH locked compared to 16.6 million on centralized exchanges, as per Glassnode.
The innovation in DeFi space is also drawing users in like crazy, currently just under 500k, up from 98k at the beginning of 2020 and a mere 8,325 on January 1st, 2019.
This raises the question of whether ETH 2.0 will really be able to handle this growth.
Assuming DeFi users have four addreses on average (could be more), there are now 114K users. Small number with massive room for growth. For comparison, Coinbase has 32M users.
But Ethereum can't handle 114K users. Will Ethereum 2.0 be able to handle millions of users? How many? pic.twitter.com/ayVMLtjowT
— Alex Krüger (@krugermacro) September 18, 2020
“(ETH 2.0) starts with 64 shards at first, so it should be able to handle at least 64x more usage (potentially even more if we get some L2 adoption as well),” said David Lach.
Although the first step towards ETH 2.0 has been taken, the path to launch is long and arduous, as such layer-2 applications present another solution with Ethereum co-founder Vitalik Buterin himself endorsing the likes of OMG, Loopring, and Zk-sync.
With high gas fees also burning the profits of exchanges, with Coinbase now passing this directly onto users, an increasing push towards these solutions has been seen. Tether is already implementing Zk-roll ups; many apps are also turning to side chains such as xDai.