What’s Behind Ethereum’s Great Growth

According to the Coindesk website, which monitors the prices of the most important cryptocurrencies, on Tuesday the price of an ether hit a new all-time high, exceeding $ 3,500 (about 2,910 euros) after an uninterrupted increase that began on April 25. The reasons are different and, as is often the case with cryptocurrencies, difficult to pinpoint precisely. In part, a common phenomenon has occurred in the industry, which causes a particularly talked-about cryptocurrency to start attracting more and more investors for the simple fact that it is attracting investors. But with Ethereum there is also more: the technology behind cryptocurrency is increasingly exploited in promising applications, and it is also the most frequently used for Non-Fungible Tokens.(NFT), a fast growing market. Recent investments and interest from highly influential international financial institutions also probably contributed to the upside.

Ether is the second cryptocurrency in the world by capitalization after bitcoin: the total of ether in circulation is worth around 400 billion dollars and represents about 15 percent of the value of the entire cryptocurrency market, which currently amounts to 2.3 trillion dollars. For comparison, the total value of bitcoins currently in existence exceeds $ 1.080 billion and represents about 47 percent of the market.

 

Although the gap between the two remains high, it has significantly narrowed since the beginning of the year, when bitcoin was worth around 70 percent of the entire cryptocurrency market and ether made up around 12 percent. Like other cryptocurrencies, ether has seen its value rise sharply since the beginning of 2021, increasing by 350 percent (if you had invested € 100 on January 1st, your investment would now amount to € 450). This growth was relatively much higher than that of the bitcoin price, which rose by 87 percent over the same period and reached around $ 57,200 (about € 47,670) on Tuesday after hitting a high of $ 64,800 in April.

The difference in the price trend of the two currencies has been accentuated especially in recent weeks, during which the value of bitcoin has remained rather stationary while investor interest in ether, and therefore its price, has grown a lot: in early April, an ether was only worth $ 1,920.

Understanding the factors behind a rise in the prices of such new and complex financial instruments as cryptocurrencies is always difficult. Part of the most recent surge is probably due to speculation: a price that rises above certain relative thresholds is interpreted by traders as a bullish signal, which leads more and more investors to buy, causing it to rise further. In this case, however, there also seem to be other reasons.

First of all, the use of the Ethereum platform (the one on which ether is traded) is spreading more and more rapidly.

The Ethereum platform is a blockchain, i.e. a publicly shared ledger (similar to the one that runs the Bitcoin system) on which all transactions in ether are noted, which are verifiable by anyone and therefore difficult to forge.

A differenza della blockchain su cui si scambiano i bitcoin però, la piattaforma Ethereum dà la possibilità a qualsiasi sviluppatore di programmare applicazioni terze (le cosiddette Dapp, o Decentralised Applications) che ne utilizzino la blockchain per qualsiasi funzione essa possa svolgere, funzioni anche diverse dalle transazioni in denaro ma che abbiano comunque bisogno di annotare informazioni su un registro pubblico e condiviso. Inoltre, Ethereum permette di programmare ed eseguire quelli che in gergo si chiamano “smart contract”, contratti intelligenti, cioè contratti che entrano in vigore automaticamente (dando luogo per esempio a una transazione) al verificarsi di determinate condizioni.

These characteristics mean that the Ethereum platform is currently used as the basis for the operation of more than three thousand applications, with the most disparate purposes: from crowdfunding to games, from the sale of NFT (Non-Fungible Token, certificates of authenticity used in the exchange of digital works of art and more) to the decentralization of financial operations traditionally carried out in a centralized manner by banks, such as the granting of loans or the issuance of derivative instruments.

The latter use is called Decentralized Finance (DeFi), and has undergone significant development in the last year, becoming a structured sector in which companies operate which, added up, come to have a value of about 100 billion dollars. Two of the best known examples of Decentralized Finance projects are Uniswap, a decentralized exchange for exchanging cryptocurrencies, and Compound, a platform for lending cryptocurrencies by collecting interest (a practice called “yield farming” in jargon, that is, to grow the crop). These and other applications in the same sector, many of which run on the Ethereum platform and therefore regulate their transactions in ether, have attracted more and more capital. To get an idea, the amount of cryptocurrencies flowing into and kept in DeFi applications has quadrupled since the beginning of 2021,

In short, the use of the Ethereum platform has grown drastically since the beginning of the year: according to Glassnode data cited by CoinDesk , the number of daily transactions has risen by 22 percent, to 1.37 million. According to CoinMetrics, the number of active addresses on the platform has reached an all-time high of 771,000. This has probably contributed to attracting investors’ attention to ether, because theoretically the value of a network like Ethereum’s increases as its users increase (a phenomenon called the network effect ).

However, in the long run, the relationship between the price of ether and the expansion of the use of the Ethereum platform remains to be demonstrated: unlike bitcoins, programmed to be issued in the finite number of 21 million, it has not been imposed. so far no ceiling on the creation of ether. In other words, the fact that the demand for ether increases does not automatically mean that its value goes up over the long term, because at the moment ethers are potentially infinite and therefore the supply could go up as well.

A second reason for the recent price increase of ether could be due to the signs of interest in the platform recently arrived from established institutions. On 27 April, the European Investment Bank (EIB) launched an issue of two-year digital bonds worth € 100 million on the Ethereum blockchain in collaboration with Goldman Sachs, Santander and Société Générale, deciding to use this technology to register and settle digital bonds.

A few weeks earlier, on February 8, the Chicago stock exchange had launched futures contracts (i.e. derivative contracts in which two parties decide today the price at which they will trade an asset on a specific future date) on the price of ether. The Chicago Stock Exchange is the largest derivatives market in the world, which has probably contributed to the seriousness and relative safety of ether in the eyes of investors.

Finally, there may be technical reasons. In March, the developers of the platform approved a code improvement proposal called “Ethereum Improvement Proposal 1559”, or “EIP 1559”, which is expected to go live in July and should make transactions more efficient and faster. Introducing a mechanism that, among other things, would imply that some of the ethers paid as a commission to the platform for each transaction are “burned” , that is, eliminated from the market. This could have a positive effect on the price in the short to medium term, because it would reduce the amount of ether in circulation as transactions increase.The wait for the EIP 1559 could therefore be among the reasons for the rise, even if it is still early to say what consequences the new code will really have in the long term.

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