Ethereum: 2023 Performance and Outlook

Ethereum has been operating under PoS consensus for over 7 months and recently underwent the Shapella Upgrade to enable ETH staking withdrawals. The ETH supply is now firmly deflationary with Ethereum representing  one of the few L1 chains that is cash flow positive for both holders and stakers after adjusting for block subsidy inflation. The adoption of L2s continues to take hold as Ethereum embarks on its rollup centric roadmap, with proto-danksharding slated to go live later this year.

Activity on Ethereum has picked up throughout 2023, and some metrics point to organic growth when analyzing the sum of activity across Ethereum and its ecosystem of leading L2s. The network continues to become more robust from a security perspective with the ever growing slashable value at stake, a more competitive relay and builder market, and a de-risked staking market with the integration of a fully functional exit queue.

ETH Supply Dynamics

It was a commonly held view that a large amount of ETH supply would hit the market post-Shapella as staking withdrawals were enabled. The beacon chain staking contract was deployed at the end of 2020, which led many investors to believe that early depositors would look to cash in on their gains after the upgrade. However, we haven’t seen the mass exodus that many were anticipating with net withdrawals of just ~425k ETH since Shapella. Ethereum was emitting somewhere between 12k-15k ETH per day under PoW. Even if the harshest critic were to assume the net ETH outflows were all being sold, it's equivalent to a month’s worth of PoW sell pressure.

For additional perspective, 33.5% of total ETH withdrawal requests since Shapella have been full exits with the remaining 66.5% representing partial withdrawal requests i.e. claiming rewards that have accrued since a user began staking. The partial withdrawals amount to a total of 942k ETH and full exits equate to 478k ETH. So in total, we have seen 1.42m ETH of outflows versus ~990k ETH of inflows from validators that have come online over the same time frame. It is worth noting that we are not out of the woods quite yet. Lido announced they would enable full withdrawals in May after testing and auditing, and it represents the largest LSD protocol with over 6m ETH staked. It is difficult to predict how much ETH will be withdrawn through Lido, but the stETH:ETH peg’s strength on DEX pairs signals confidence from market participants. Lido has also withdrawn a significant amount of staking rewards that have accrued since the protocol’s inception, so full exits are the only thing investors need to worry about.