A fair comparison? Ethereum’s growth outpaces that of Bitcoin in 2021

2021 has turned out to be a favorable year for the second most important cryptocurrency in the world, Ether (ETH), which has quadrupled in value in the last 12 months.

In this way, Ether has outpaced the appreciation of the predominant currency, Bitcoin, and gained a higher percentage of the global cryptocurrency market by capitalization. While the broader crypto markets have enjoyed a year of relative gains, ETH’s rise in value has paralleled Ethereum’s core protocol enhancements, which have laid the final pillars for its transition to a proof-of-stake consensus protocol in 2022.

Certain Ethereum Enhancement Proposals (EIPs) have been the focus of the wider Ethereum community and have proven critical to “The Merge” (the merger) with the Beacon Chain proof of stake that will take place in 2022.

The London hard fork was the most anticipated update that introduced a handful of EIPs. The EIP-1559 It turned out to be controversial due to the change in fee structures that miners earn and users pay, and there were positives and negatives brought on by the upgrade.

A crucial factor was the ETH burning mechanism introduced, which destroys a portion of the Ether used to pay a transaction fee. Although some miners weren’t happy with the reduction in commissions, the positive aspect of the London hard fork was the deflationary action of the ETH burning mechanism. This EIP and its deflationary mechanism are believed to help increase the value of ETH in the months and years to come.

The Altair update followed London towards the end of the year, serving as the first Beacon Chain update since its launch in December 2020. This allowed various teams involved in the ongoing development of the Ethereum ecosystem to conduct a mock “The Merge.”

Another driving force behind Ether’s strong performance in 2021 has been the burgeoning decentralized finance (DeFi) sector, which has attracted a significant amount of capital. The Ethereum blockchain runs several of the largest DeFi platforms and this has had a direct effect on the value of ETH and increased activity on the blockchain.

Reap what you sow

Ethereum’s popularity as a blockchain platform is a direct result of the functionality of the smart contracts that sustain the ecosystem. Smart contracts allow the creation and execution of a variety of applications on the blockchain, allowing users to create their tokens, applications, and platforms.

Although ETH is the proverbial lifeblood of the Ethereum ecosystem, the projects and applications that run on the blockchain are largely responsible for the value that is achieved. As the saying goes, you harvest what you sow, and the ecosystem is reaping the benefits of a blockchain system that has allowed seeds to flourish on valuable and popular DApps and platforms.

Ben Caselin, Director of Research and Strategy at cryptocurrency exchange AAX, offered some insights on the main factors that have amplified Ethereum’s good year. Caselin first highlighted the variety of use cases that have helped the ETH cause throughout the year: “We are referring to stablecoins, DeFi, GameFi, non-fungible tokens (NFTs), meme coins, digital bonds, central bank digital currency initiatives, yield farming, liquidity pools, and the metaverse.” Furthermore, he added:

“Ethereum carries each of these sectors and the associated capital with a huge market share. Ethereum’s value is set differently based on the activities it drives, while Bitcoin is steadily growing as it sees its adoption as a technology of base layer savings for a new global economy. Each one moves somewhat in unison, but they are fundamentally driven by different forces and conditions. “

Mattias Nystrom, Community manager for Ethereum’s layered payments platform Golem Network shared his thoughts with Cointelegraph. Nystrom highlighted the sum of activity on the Ethereum network as the catalyst for its success this year: “While Bitcoin is primarily built for payments only, Ethereum is unique in its underlying technology and this is starting to catch on as Web 3.0 begins its journey towards mainstream adoption.”

Dead Greenspan, a cryptocurrency analyst and founder of Quantum Economics, told Cointelegraph that the yield of Bitcoin (BTC) and Ether is difficult to compare, given their very different use cases and ecosystems. However, he admitted that the latter has seen a clear upward trend in its value over the past 12 months:

“Bitcoin and Ethereum are as different as two assets can be, aside from the fact that they are both digital currencies. They have very different functions within their respective networks and each have unique buying and selling pressures.”

EIP influences

As Cointelegraph explored in November, Ethereum is on the final path towards its move away from the proof of work (PoW) algorithm, that demands power, towards the Ethereum 2.0 proof-of-stake (PoS) chain.

The Beacon Chain was launched in December 2020, starting the creation of the PoS Eth2 chain, which now has more than 8,600,000 ETH stakes and just under 270,000 online validators. These validators will essentially take over the work of the current miners on Eth2, processing the transactions and keeping the blockchain running. For become in a full node validator, the user must block 32 ETH, while smaller amounts can be wagered on the pools.

One of the most anticipated Ethereum enhancement proposals was launched in mid-2021. EIP-155 was the subject of much debate, due to the changes it introduced in the fee structures that miners earn and users pay.

One sore point was the built-in ETH burning mechanism, which destroys a portion of the Ether used to pay a transaction fee. The miners were not impressed, as the commissions are part of their incentive to maintain the network.

The advantage of the London hard fork was the deflationary effect introduced by the ETH burning mechanism. As a result, each transaction sees a percentage of ETH destroyed, leading to more ETH being phased out of the ecosystem, a process that is predicted to increase the scarcity and value of ETH as an asset.

Caselin believes that the implementation of the London update has played a role in attracting positive investor sentiment, but it also highlights some key distinguishing factors between Ethereum and Bitcoin:

“The London update reiterated that the Ethereum project is fine and alive and is still under construction – this is attractive to investors and speculators. It is better than some projects that have made it to the top of the charts, but have little to show for it. in terms of activity and provision of real services. The burning mechanism speaks of a narrative around inflation and borrows the logic on which Bitcoin is based. “

Greenspan, for his part, was more objective in his analysis, suggesting that the average Ethereum user would have had little or no idea of ​​the effect of the recent EIPs that have been part of the impending merger between the current Ethereum blockchain and the Beacon Chain. to be announced for 2022: “While the update may have had some impact on internal tokenomics, I don’t think it affected sentiment much.” Nystrom believes that the technical improvements made to the Ethereum ecosystem on its way to merger and the variety of applications running on its blockchain have demonstrated its versatility, which was echoed by the rise in value of ETH over the course of the year. anus:

“ETH is built uniquely different than BTC and has shown much greater technical progress in 2021. The crypto community knows for a fact that Ethereum is a more versatile asset, with an entire ecosystem behind it and more room to scale and create ambitious and valuable projects over a longer period of time. “

“ETH is built uniquely different from BTC and has shown much greater technical progress in 2021. The crypto community knows for a fact that Ethereum is a more versatile asset, with an entire ecosystem behind it and more room to scale and create projects. ambitious and valuable over a longer period of time. “

Markets remain fragile

December has been tough for global markets, which reacted sharply to the discovery of the latest variant of COVID-19 identified by South African researchers. The traditional markets shook and this had an impact on the cryptocurrency markets.

BTC, ETH and a swath of the major cryptocurrencies suffered losses as this sentiment spread to the cryptocurrency markets and there was more bad news as the inflation has risen in the United States. Caselin offered a measured outlook, outlining characteristic market reactions to major economic news and events and how this could benefit BTC more than ETH in the medium term:

“Markets have always kept pace with news and events of economic importance, but long-term trends are primarily driven by fundamentals. […] We may not be in a bear market yet, but there is every reason to believe that the growth we have seen in the last two years is just the beginning. Long-term holders keep buying. “

Greenspan highlighted developments in the United States as a sign of the times and the reason for the recent market crash, while admitting that the medium term for crypto markets is unclear at this time:

“While the Federal Reserve was printing money, social media was buzzing ‘brrrrr’ memes, now that liquidity is drying up, there’s a lot less noise from the peanut gallery. Possibly, by the end of the year, we’ll see how far this pullback goes. . Or not”.

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A fair comparison? Ethereum’s growth outpaces that of Bitcoin in 2021

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