Progress Update

The fourth quarter of 2018 eventually brought the Ethereum devcon number IV. It was hosted in Prague between October 30 and November 2 and more than 3,000 people participated.

Ethereum is currently at its third stage which is called Metropolis. Metropolis consists of two major updates which are Byzantium and Constantinople. While Byzantium already occurred in 2017 Constantinople is still pending.

The Constantinople update was initially planned to occur during Q4 2018. However, due to some bugs in the test net the release of the Constantinople update was postponed towards the first quarter of 2019.

The Constantinople update requires a hard fork of the Ethereum chain and brings along 5 individual Ethereum improvement proposals. Among them is the implementation of scaling based upon state channels and off-chain transactions.

Additionally a reduction of block rewards will enter into effect with the Constantinople hard fork. The amount of ETH issued per block produced will be reduced to 2 from currently 3. This will effectively reduce the inflation of Ethereum and is hence good news for investors but bad news for miners.

A new killer app is needed

ICOs used to be Ethereum’s first killer app that was enabled by the ERC-20 token standard. But with regulation from the SEC coming in and a bear market that is now lasting for almost a full year the ICO hype has substantially cooled off. In the past a lot of the demand for Ethereum came from participants in ICOs. As ICOs have decreased sharply Ethereum needs a new use case that drives adoption of the Ethereum blockchain.

Currently a lot of hope of Ethereum enthusiasts is based on Dai. Dai is a stable coin empowered by the Ethereum blockchain and build by the Maker project. The latest investment round for Maker happened in September 2018 through Andreessen Horowitz. Since then a lot of positive news came out of the Maker ecosystem. Ethereum enthusiasts already start asking whether Maker is on the way to become Ethereum’s new killer app?

As of today more than 1 million Ether are already locked as collateral for CDPs created on Maker. This represents more than 1% of the total circulating supply of Ethereum. Despite the ongoing bear market the amount of Ethereum locked up as a collateral has doubled since the summer of 2018. While CDPs represent a great resource they also represent a significant risk for Ethereum, which acts as the underlying collateral. If Ethereum were to fall below 60 USD then a lot of contracts will be liquidated which would lead to a major sell off of Ethereum.

Nevertheless, as Dai will get more popular the Ethereum based stable coin could empower a new wave of decentralized finance. It could also generate a positive impact on other Ethereum based applications such as Augur. With Dai people could hedge risks on Augur without the need to hold Ethereum which is subject to volatility. Dai is also a sound alternative for people searching for a cryptocurrency for payment purposes. Since the value is stable there is no negative trade off from using Dai for purchasing things online.

Market Sentiment

During the 2018 cryptocurrency meltdown Ethereum was hit significantly harder than Bitcoin. Bitcoin which is by far the largest cryptocurrency by market capitalization was driving the market down. The ratio between Ethereum and Bitcoin nevertheless fell from more than 0.1 ETH/BTC in February 2018 to below 0.03 ETH/BTC in Q4 2018.

Ethereum, compared to all the other smart contract platforms, counts on its network effects. It has the highest number of developers of any smart contract platform combined with the highest market capitalization of all smart contract platforms. Different from Bitcoin, Ethereum has a much broader objective than just being a store of value in the shape of digital gold. It wants to address the web 3.0 which represents the internet of value opposed to the previous internet of information. Blockchain technology enables this exchange of value and Ethereum as a layer 1 protocol wants to serve the web 3.0 by enabling all sorts of dApps that can run on top of it.

Community Metrics & Network Usage

Despite negative price development the subreddit r/ethtrader has grown to over more than 200,000 subscribers. Ethereum has gained more than 430,000 followers on Twitter, but the number of new followers has declined sharply since January, during the peak of market interest. So far no decentralized application on Ethereum has achieved consistently more than 1,000 daily active users. However, the ETH staked in various dApps has grown in the course of the last months. The gas price for ETH transactions has stabilized around 2.2 Gwei which represents less than 1 Cent of a USD. Too high transaction fees or network congestion do not represent an issue at the current stage.

Outlook

The next big milestone that is expected for Ethereum is referred to as Serenity or Ethereum 2.0 and was presented by Vitalik Buterin during devcon IV. Serenity essentially refers to the deployment of a combination of different features that are critical for the evolution of the Ethereum blockchain. Serenity is the fourth stage of Ethereum after Frontier, Homestead and Metropolis.

One of the key features of Serenity is the deployment of an entirely new Proof of Stake based blockchain that includes references to the current Proof-of-Work based Ethereum blockchain. This Proof of Stake update is referred to as Casper in the Ethereum community. Furthermore the scalability of Ethereum shall be improved through sharding technology. Other updates from Serenity include improvements of the Ethereum Virtual Machine, improvements to the cross-contract logic and improvements to the protocol economics.

Serenity should eventually deliver on Ethereum’s promise to build a decentralized world computer. It will run a pure Proof of Stake consensus mechanism and will count with faster confirmation times. It should be able to improve scalability of up to 1,000 times compared to the current level. Serenity itself is divided into four different phases which will be gradually implemented.

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