Building on the success of the Merge and the Shapella upgrades, Ethereum has witnessed a noticeable increase in investor interest and confidence, with staking deposits recently hitting record highs. Now, Ethereum is preparing for the next major phase, dubbed “The Surge”, which aims to scale the network by orders of magnitude. Will this upgrade fulfil its ambitious goals or potentially trigger a new market rally?
Since its inception in 2015, Ethereum was guided by a clear vision: to become the backbone of a decentralised internet, empowering users to create decentralised applications (Dapps) and leverage the benefits of peer-to-peer blockchain technology. Today, as the leading smart contract platform, Ethereum dominates the DeFi landscape and boasts the highest number of Dapps. Its native currency, Ether (ETH), is the second largest crypto asset by market cap.
Despite the current market climate, the successful Shapella upgrade has stirred considerable institutional interest, evident by the ETH 6.26 million (USD 11.5 billion) in staking deposits following the upgrade.
Fast forward two months, and the results are impressive to say the least. Over ETH 22.6 million is now staked, accounting for nearly 20 percent of Ether’s total liquid supply – a 27 percent increase in less than two months. Even prominent staking providers anticipate a continuation of this trend, with even larger inflows soon to follow. For the time being, staking deposits are outpacing withdrawals at a 2:1 ratio.
The rising institutional interest certainly is a testament to Ether’s growing stature as a blue-chip asset, particularly after Ethereum’s transition to Proof-of-Stake back in September 2022. And, since February this year, Ether has maintained a deflationary state, meaning more Ether burned than created, making it an attractive choice for investors seeking scarce assets. The graph below highlights this deflationary trend.
Ethereum net inflation rate: Ether issuance vs. EIP1559 burn rate. Source: Sygnum, Glassnode (data)
But it’s not just about Ether; investors should note that Ethereum’s vision goes beyond scarcity, staking yields and long-term gains. Its agnostic infrastructure supports are large and fast-growing ecosystem, extending into various crypto-native and traditional markets sectors.
Ethereum’s growth capabilities, bolstered by its own native currency and increasing adoption numbers, make it a compelling case for both technology adopters and investors alike. These factors should be a central part in anyone’s crypto investment strategy – especially when looking at Ether as a viable investment option.
Key challenges for mainstream adoption
Without being overzealous, Ethereum still has significant hurdles to overcome. So, to fully grasp the potential of The Surge, we first need to look at what’s been holding Ethereum back.
- Network congestion: Ethereum often experiences congestion when the number of transactions overwhelms its processing capacity. This leads to slow confirmation times, higher fees and at times a poor user experience.
- High gas fees: Gas fees are essential for processing transactions and executing smart contracts, but they can become exorbitant during periods of congestion. This creates a barrier for smaller transactions and retail investors.
- Slow confirmation times: Congestion results in longer waiting times for transactions to be confirmed, causing frustration and delays for traders and users.
- Data storage issues: Ethereum’s state storage limitations severely hamper its scalability, which is why scaling solutions like rollups are used to bring storage off-chain (more below).
- Low transactions per second (TPS): Ethereum’s current 15 TPS falls far behind traditional companies like VISA or competitors like Solana.
Though popular, the above challenges have hindered Ethereum’s widespread adoption, as seen during instances like the recent PEPE meme coin launch last month, and the DeFi/NFT boom in 2021.
To address these issues directly, the Surge introduces upgrades that can boost Ethereum’s transaction speed, reduce gas prices, and enhance the overall user experience. By tackling these obstacles, Etheruem would likely retain market share, not to be outpaced by emerging blockchain competitors.
What is The Surge, in simple terms?
Initially, Ethereum developers planned to scale Ethereum through a process called “execution sharding”, which meant dividing the network into 64 separate parts called shard chains. However, the growing popularity of Layer 2 rollups and the complexities of implementing the initial plan, Ethereum developers have altered this approach.
Now, the focus is on “data sharding” to make Ethereum work alongside L2 rollups, which will help process and store transaction data off-chain. A few terms to consider.
- Rollups are Layer 2 scaling solutions built on top of the Ethereum network. They work by bundling or “rolling up” multiple transactions into a single one – like collecting cash from a group of friends to buy a round of drinks. This is all done off-chain and then sent back as a compressed summary to the network, thereby reducing Ethereum’s overall computational load.
- The Surge introduces “proto-danksharding”, otherwise known as EIP-4844, which allows rollups on Etheruem to add cheaper data to blocks, reducing gas costs. It introduces data blobs that are attached to blocks (instead of shard chains), allowing rollups to send their data back to Ethereum more affordably.
- Danksharding is the full realisation of this concept and will provide ample space on Ethereum for hundreds of rollups to operate, potentially enabling millions of transactions per second. However, this will be implemented at a far later stage.
- Blobs are a special way to bundle and send data on Ethereum. It’s like putting information in a compact package that can be attached to a block, making it cheaper and more efficient to store and process.
Even as a pre-stage, developers claim that proto-danksharding will provide the “necessary scaffolds” while providing the same user experience as danksharding. Developers also claim that the upgrade has the potential to increase the scalability of rollups by up to 100x, a significant stride towards its ambitious 100,000 TPS goal.
As an investor, what can I expect after the Surge?
If the Surge delivers on its promises, its impact will likely extend beyond the Ethereum network and the DeFi ecosystem. Here’s why:
- Improving Ethereum’s competitive edge: The Surge would make Ethereum more appealing to users who switched to other blockchains for faster and cheaper alternatives. These critical features could solidify Ethereum’s position and retain market share, attracting users from rival chains and reinforce its popularity.
- Boosting Ether’s value: The Surge’s improvements would attract more users, leading to increased network usage and a higher demand for ETH. This heightened demand, coupled with Ethereum’s deflationary monetary system (the burning of Ether), could raise its market value, enticing investors seeking scarce assets.
- Increasing institutional interest: A more scalable and efficient network is likely to sustain and attract institutional investors, who often prioritise reliability, efficiency and growth potential – all of which The Surge aims to enhance.
- Catalysing competition and innovation: Ethereum will likely spur innovation among other blockchain competitors, leading to a more healthy, diverse and innovative ecosystem.
- Potential “flippening”: Ethereum’s technological advances and growing interest could lead to a significant milestone where its market cap surpasses Bitcoin’s, otherwise known as the “flippening”.
- Empowering retail investors: With faster and more affordable gas prices, retail interest would increase in using Ethereum for activities like DEX trading, NFTs, gaming and DeFi applications, making transactions more manageable.
- Increasing enterprise adoption: Many businesses would be attracted to a highly scalable and efficient Ethereum network. This would also encourage merchants and payment providers to consider adopting Ether as a reliable means of payment.
Patience equals long-term success
As Ethereum embarks on the Surge, we must remind investors that transformative changes like these take time and the full-scale benefits won’t materialise overnight. Managing expectations should be kept in check, though the groundwork for these changes could begin as early as Q3 this year.
While uncertainties accompany any intricate technological endeavour, it is not unreasonable to imagine that the Surge could very well redefine Ethereum, the crypto ecosystem, and potentially trigger a new market rally.
Disclaimer: This information was prepared by Sygnum Bank AG. This information may contain forward looking statements and may be subject to change. The opinions expressed herein are those of Sygnum Bank AG, its affilitates, and partners at the time of writing. This is for informational purposes only and contains general material. It does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum Bank AG to purchase or sell assets or securities. It is not intended to be used as a general guide to investing, and it should be used for informational purposes only. When making an investment decision, you should either conduct your own research and analysis or seek advice from an expert to make a calculated decision. The information and analysis contained here have been compiled from sources believed to be reliable. However, Sygnum Bank AG makes no representation as to its reliability or completeness and disclaims all liability for losses arising from the use of this information.
SygnUp for Future Finance
Join our 20,000 strong global community to future proof your investments. SygnUp now to be the first to receive our news, product launches, industry reports and educational series.