Approximately a year ago, Ethereum underwent a significant upgrade known as Shanghai, with the aim of boosting network activity and strengthening the DeFi (Decentralized Finance) ecosystem.
However, a recent report from JP Morgan suggests that the upgrade hasn't met expectations, primarily due to a noticeable decline in network activity since its implementation. The Shanghai upgrade marked a significant milestone for Ethereum, transitioning the blockchain from a proof-of- work (PoW) to a proof-of-stake (PoS) consensus mechanism. This shift was intended to reduce energy consumption and enhance network activity. However, JP Morgan's analysis reveals that Ethereum's network activity has actually decreased following the hard fork.
According to the report, the daily transaction volume on the Ethereum network has fallen by approximately 12% since the upgrade. The number of daily active addresses on the blockchain has also declined by nearly 20%, indicating reduced user engagement. Additionally, the Total Value Locked (TVL) in DeFi has dropped by almost 8%.
JP Morgan analysts speculate that various external factors in the cryptocurrency landscape may have contributed to Ethereum's performance post-Shanghai upgrade. One notable challenge is the prevailing bearish sentiment in the cryptocurrency market, exemplified by setbacks experienced last year by projects like Terra and FTX. These events, combined with regulatory actions in the United States, have generated uncertainty and caution among investors and users.
Another challenge Ethereum faces is a decrease in the supply of stablecoins. Stablecoins are crucial for providing liquidity and facilitating transactions within the Ethereum ecosystem. A reduced supply of stablecoins may have a negative impact on network activity and DeFi protocols, potentially contributing to the observed decline .
Furthermore, concerns about Ethereum's centralization persist despite an increase in staking activity, which has risen by 50% since the Shanghai upgrade. Notably, Liquid staking protocols like Lido have garnered attention, raising concerns about power concentration within the network.
Despite these challenges, J.P. Morgan analysts still hold hope for Ethereum. The blockchain is gearing up for another upgrade known as EIP-4844 or Protodanksharding, scheduled for implementation in the fourth quarter of this year. EIP-4844 aims to address some of the issues observed after the Shanghai upgrade, including improved scalability, increased transaction throughput, and overall network performance enhancements.
However, the analysts caution that ongoing bearish forces in the cryptocurrency market could continue to pose challenges despite these upgrades.
