Ethereum’s network remains remarkably strong and stable, despite crypto market volatility and macroeconomic headwinds.
It continues to stand in top position as the world’s leading smart contract platform. Meanwhile, the Beacon Chain is the world’s most successful Proof of Stake network.
Only Bitcoin has proven to be as robust as a blockchain. However, Bitcoin doesn’t offer token holders the opportunity to earn yield at a protocol level. In December 2020, the Beacon Chain introduced staking to the Ethereum community, allowing ETH holders to earn yield on their investment. The network has grown from ~27k validators upon Beacon Chain launch in 2020, to almost 400k validators as of May 2022.
(Source: Beaconscan.com, 2022)
Today, we’ll be exploring the reasons why the world’s second-largest crypto by market cap remains stalwart to both its users and the wider crypto community, despite market turbulence.
Deep Network Effects
The power of the Ethereum ecosystem stems from its deep network effect.
This network effect is a competitive ‘moat’ that has been built over many years, by a vibrant, international community.
This community is threefold:
- A large cohort of active developers
- A robust, professional validator base
- A loyal network of daily users
Ethereum has the largest developer base of any crypto ecosystem by far.
A report showed that in 2021, over 700 new devs joined the ETH developer community over several months.
(Source: Electric Capital)
This represents 20% – 25% of all new web3 devs.
Also relevant are the various Ethereum Virtual Machine (EVM) based chains, currently available on the market.
These chains (e.g. Gnosis (Beacon) Chain (former xDAI), EnergyWeb Chain, Evmos etc.) offer Ethereum devs an alternative EVM based developer environment, with real economic value on the line. Devs can port this knowledge and skill set over to Ethereum at any time.
All of this tooling and support benefits Ethereum’s developer ecosystem.
Ethereum has the largest validator set in the history of Proof of Stake. Furthermore, the merge is set to be the largest Proof of Stake mass adoption event in the history of crypto.
Ethereum’s Proof of Stake delivers greater security guarantees than Proof of Work. Proof of Stake uses an internal resource (‘stake’), rather than an external resource (‘energy’) for the network’s consensus, as is the case with Proof of Work.
Proof of Work runs on a logic of massive power, incentivized by massive rewards. However, Proof of Stake relies heavily on penalties, rather than rewards. This both punishes bad behavior, through slashing, while rewarding good actors.
According to founder Vitalik Buterin,
“The “one-sentence philosophy” of proof of stake is thus not “security comes from burning energy”, but rather “security comes from putting up economic value-at-loss”
Validators form the powerful backbone of this Proof of Stake paradigm.
ETH’s User Base
Ethereum’s user base participates in DeFi, NFTs, DAOs and much more. This is enabled by the strong flywheel of new, innovative projects regularly launched on-chain. ERC20 tokens also allow participants to stake and transact tokens which rely on Ethereum as the settlement layer. Some popular ERC20 based crypto projects, such as Audius and Livepeer, have attracted massive fan bases.
Furthermore, there is a robust scaling roadmap in place, thanks to a flourishing Layer2 ecosystem. Already, Layer2 solutions such as Optimism, Polygon and Arbitrum allow faster transactions and lower fees for end users.
Each transaction a user makes requires gas, which is essentially an auction for blockspace. This gas incentivizes consensus participants in the network. By having such a mature fee market, Ethereum returns the highest revenue for miners in terms of gas usage. As ETH token issuance decreases over time, these gas fees will become even more important to incentivize ecosystem validators in the long run.
ETH Staking is Primed for Further Growth
Combined, these three factors form the bedrock of the blockchain’s successful network effect. The power of network effects relative to the number of participants in a network is reflected in Metcalfe’s Law.
Ethereum staking yields deliver solid ROI in the face of market adversity.
Some have compared ETH staking to an Internet Bond. Government bonds demonstrate faith in a country. An Internet Bond is ‘skin-in-the-game’ in Ethereum’s decentralized, digital economy. This analogy draws on Ethereum (the protocol) as the bond issuer, whereas a validator or delegator is the bond holder. Holding this bond generates yield.
So, why not start staking your ETH today to earn yield in the strongest blockchain ecosystem? Begin your staking journey with Blockdaemon.
Disclaimer: This information, as well as the information and resources available on this website, is intended to be used for educational purposes only. It is not financial advice or a solicitation to buy or sell any assets or to make any financial decisions. Before making any investment decisions, it is important for you to do your own analysis as well as take independent financial advice from a professional taking into consideration your own specific needs and circumstances.