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Four narrative changes in the Ethereum ecosystem's cycles.

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During the peak of each innovative narrative, there is usually a push for an increase in the price of ETH.

Original Title: "Four Narrative Changes in the Ethereum Ecosystem"

Source: Ebunker Chinese

As we all know, the flexibility of the Ethereum application layer is a boost for innovation, narrative generation, and software development. They can both trigger hype and creativity, and may also lead to the emergence of some malicious activities, affecting the end user experience. But overall, most innovations promote long-term adoption and bring new capital and talent to the ecosystem.

Four Main Narratives of the Ethereum Ecosystem

By comparing the gas usage of various major activity types on the Ethereum chain, we can roughly understand the market demand of different periods. According to Glassnode's statistics, there have been four main narratives in the Ethereum ecosystem in recent years. Typically, during the peak of each innovative narrative, it will drive the rise of ETH price.

ICO: The ICO craze witnessed the peak of the cryptocurrency market in 2017 and 2018. During this period, 40% of gas consumption came from ERC-20 token transfers. Although the demand for ERC-20 token transfers has been decreasing, it still contributes a certain share of gas consumption (7%-8%) due to the popularity of Memecoins and the drive of new token distribution methods such as Yield Farming and Airdrops.

Stablecoins: Since mid-2020, the user demand for stablecoins has surged, with gas consumption accounting for up to 16% at its highest, and currently falling to 5%-8%. However, the decrease in stablecoin gas consumption reflects more changes in its utility rather than a real decrease in demand. Currently, stablecoins are more used for hedging and value storage rather than payment methods.

NFT: NFT introduces unique digital representations in the real world. Although NFTs have been around for many years, it wasn't until mid-2021 that they found their way into mainstream society. After reaching a peak in 2022 with gas consumption accounting for 42% of the market demand, the demand for NFTs decreased to 25%-30%.

DeFi: DeFi emerged in 2020 with the aim of creating on-chain financial and tools without traditional intermediaries. From June 2020 to 2021, DeFi's gas usage accounted for as much as 30%, and currently accounts for between 8% and 16%, with a slight recent increase.

DeFi activity gas consumption

Smart contract interactions are becoming more frequent, and the gas consumed by contract interactions is several times that of token transfers. The gas consumption related to DeFi protocols increased by 270% in late April.

If analyzed by protocol, the main increase in gas consumption in DeFi can be quickly determined to be driven by decentralized exchange trading activity. Uniswap remains the main contributor, with gas usage increasing by 388% since April, now accounting for 7.7% to 14.4% of total Ethereum gas demand.

Many people's first reaction when seeing this data may be that the recent hype around Memecoins such as Pepe and Hex is the main reason for the increase in gas usage. In fact, a detailed analysis of Uniswap's trading volume reveals that the highest volume in the past 30 days is still mainly related to assets with higher market values, such as ETH, stablecoins, WBTC, and Coinbase's collateralized derivative cbETH.

Is Arbitrage Robot Taking Over DEX?

After comparing the addresses of the top 10 traders, it was found that only one trader's address was not related to the MEV robot. In the past month, the trading volume of the well-known MEV robot Jaredfromsubway.eth has reached 3 billion US dollars.

Although the number of robots among global traders needs further research to determine, the data of the top 10 trading volumes also indicates that there is a considerable proportion of automatic arbitrage traders on Uniswap.

The method of rationalizing arbitrage traders is to consider the index range of arbitrage opportunities available on the Ethereum DEX.

1) As the price of each token (+slippage) changes, the final gas fee will prove that arbitrage trading is reasonable.

2) Each DEX liquidity pool that provides token trading offers a platform for arbitrage trading.

3) The number of potential arbitrage trading opportunities is directly related to the number of DEX liquidity pools and the number of tokens available for trading.

If considering the participation of many robots in arbitrage trading or "sandwich attacks", the proportion of normal trading volume of UNISWAP may account for about two-thirds of all DEX activities.

With the horizontal fluctuations in the cryptocurrency market, the overall trading volume of the cryptocurrency market has remained low recently. However, the use of DeFi has become increasingly automated, and there is a large amount of arbitrage, MEV, and algorithmic trading in DEX trading behavior.

Although the activities of these trading robots may be harmful to Ethereum end users, they have indeed benefited Ethereum validators. In the past month, validators have not only received higher rewards due to the increase in priority fees, but also benefited from MEV-Boost payments, which come from traders and robots who complete transactions in the most profitable way.

To some extent, this highlights the trend of Staked ETH becoming the main asset in the Ethereum ecosystem, while also establishing a local barrier that requires tokens to compete for capital inflows. According to the Ebunker index, the current APR for ETH Staking is about 6%, with MEV contributing more than 1/6.

Ethereum ecosystem's new products

In the past two years, two new products and services have emerged in the Ethereum ecosystem: GameFi and Staking. Both have attracted varying degrees of interest from investors. GameFi's performance in mid-2022 once surpassed that of DeFi, but its decline was also very rapid. Since early 2023, Staking has been on the rise, with a total market value rising from $505 million in January 2023 to $3.2 billion in April 2023.

If these products and services are viewed as part of the broader Ethereum economy and in the context of the EIP1559 burning mechanism, it can be expected that, similar to DeFi, some of the value generated in these areas will also be reflected in the valuation of ETH. Therefore, their performance can be evaluated based on the ratio of their market capitalization to that of ETH. In 2021, the market capitalization of DeFi reached a peak of 16.6% of the Ethereum market capitalization, but currently it is only 3.04%. The current values of emerging GameFi and LSD tokens account for 1.2% and 1.6% respectively, and their growth potential and subsequent performance are yet to be observed.

Thanks to the burning mechanism of EIP-1559, no matter how the narratives switch on Ethereum, they will burn a large amount of ETH for Ethereum. The collective promotion of these narratives has actually completed the big narrative of Ethereum itself. And when Ethereum becomes a more mainstream platform due to these narratives, these small narratives will also eventually benefit, which is Ethereum's "super positive cycle".