A fair comparison? Ethereum growth outpaces Bitcoin in 2021

2021 was a fortunate year for Ether (ETH), the second-largest cryptocurrency in the world. It has seen a fourfold increase over the past twelve months.

Ether has outperformed Bitcoin’s appreciation and gained a larger share of the total cryptocurrency market capitalization. Although the overall cryptocurrency markets have experienced relative gains over the past year, ETH’s value increase has been accompanied by upgrades to Ethereum’s core protocol. This protocol will be the foundation for the transition to a proof of stake consensus protocol in 2022.

Certain Ethereum Improvement Proposals have been the focus of the wider Ethereum community. They have proven to be crucial for “The Merge”, which will take place in 2022 with the proof-of stake Beacon Chain.

The London hard fork was the most awaited upgrade, which introduced a few EIPs. EIP-1559 was a contentious upgrade due to changes in fee structures paid by miners and earned by users. There were both positive aspects and negatives to the upgrade.

The ETH burn mechanism, which destroys a part of Ether that was used to pay a transaction fees, is a crucial element. Although some miners weren’t happy about the reduction in transaction fees, the positive effect of the London hardfork was the deflationary action by the ETH burner mechanism. This EIP and its deflationary mechanism are expected to increase the value of ETH over the coming months and years.

Altair was the next upgrade to London towards the end of 2019, and served as the first update for the Beacon Chain’s December 2020 launch. This allowed different teams working on the Ethereum ecosystem to run a dry-run of “The Merge.”

The burgeoning Decentralized Finance (DeFi), which has attracted significant capital, is another factor in Ether’s strong performance for 2021. The blockchain of Ethereum hosts many of the most important DeFi platforms. This has had a direct impact on the value and increased activity on the blockchain.

You reap what you sow

The smart contract functionality that underpins Ethereum’s blockchain platform popularity is the reason for its success. Smart contracts enable a wide range of applications to be created on the blockchain. This allows users to create tokens, apps, and platforms.

While ETH is the lifeblood of Ethereum’s ecosystem, it is not the only thing that generates value. It is the applications and projects that run on the blockchain that are responsible. The old saying that you reap what your sow is true. The ecosystem is reaping the rewards of a blockchain system that allows seeds to grow into popular and valuable DApps and platforms.

Ben Caselin is head of research and strategy at cryptocurrency exchange, AAX. He shared some insights about the key factors that contributed to Ethereum’s success in 2018. Caselin began by highlighting the many use cases that have contributed to ETH’s success throughout the year. “We’re referring stablecoins and DeFi, GameFi nonfungible tokens (NFTs), me coins, digital bonds central bank digital currency initiatives yield farming, liquidity pool, and the metaverse,” he said.

“Ethereum has each of these segments and associated capital with a large market share. The activities Ethereum powers determine its value. Bitcoin, however, is steadily growing as it sees it as a base-layer saving technology for a new global economic system. Although they move in unison, they are driven fundamentally by different forces and circumstances.”

Cointelegraph spoke with Mattias Nystrom as community manager for Ethereum layer-two payment platform Golem Network. Nystrom pointed out the success of the Ethereum network’s activity as the reason for its success in 2018. “While Bitcoin was primarily designed for payments, Ethereum is unique due to its underlying technology. This is beginning to catch on as Web 3.0 starts its journey towards mainstream adoption.”

Cointelegraph was told by Mati Greenspan (crypto analyst, founder of Quantum Economics) that it is difficult to compare the performance of Bitcoin and Ether due to their vastly different use cases and ecosystems. He did admit that Ether has experienced a clear increase in value over the past twelve months.

“Bitcoin is and Ethereum are as different as any assets, except that they are both digital currencies. Each has its own buy and sell pressures and serves a different purpose within their respective networks.

Influential EIPs

Cointelegraph reported in November that Ethereum is moving from the energy-demanding Proof-of-Work (PoW), consensys algorithm, to the Proof-of-Stake (PoS), Ethereum 2.0 chain.

In December 2020, the Beacon Chain was launched. This led to the creation of PoS Eth2 chains, with over 8600,000 ETH staked, and just under 270,000 validators. These validators will basically take over the work done by current-day miners in Eth2, processing transaction and maintaining operation of the blockchain. To become a full validator, a user must stake 32 Ethereum. Users can also stake smaller amounts in pools.

Midway through 2021, one of the most anticipated Ethereum Improvement Proposals was launched. EIP-155 was a topic of debate due to the changes it made to the fees earned by miners and those paid by users.

The built-in ETH burning mechanism, which destroys a part of Ether that was used to pay a transaction fees, was a major problem. Given that the fees are a part their incentive to maintain it, miners weren’t impressed.

Related: Ether’s growth is an independent asset that fuels the ETH-BTC flippening narrative

The ETH burn mechanism was the deflationary effect that the London hard fork brought. This was the upside to the London hardfork. Every transaction is affected by ETH destruction, which leads to more ETH being removed from the ecosystem. This process is intended to increase the value and scarcity of ETH.

Caselin believes the London upgrade has contributed to investor optimism. However, it also highlights key differences between Ethereum and Bitcoin.

“The London Upgrade confirmed that Ethereum is alive and well. It is still under construction. This is attractive for investors and speculators. It is better than other projects that rank high on the charts but have little in terms of activity or providing actual services. The burn mechanism is a narrative about inflation that borrows from the logic Bitcoin uses.

Greenspan was, however, more objective in his analysis. He suggested that an average Ethereum user would not have known the impact of recent EIPs which have formed part the looming merger between the Ethereum blockchain and Beacon Chain. “Even though the upgrade may have had some effects on the inner tokenomics but I don’t believe it has affected sentiment very greatly.”

Nystrom believes that the technological improvements to the Ethereum ecosystem along its journey to the Merge, and the variety of applications running onto its blockchain, have proved its versatility. This was reflected in the value rise of ETH throughout the year.

“ETH is built differently from BTC, and has made much more technical progress since 2021.” The crypto community is well aware that Ethereum has a wider range of uses and has a larger ecosystem. This gives it more scope to scale up and create valuable, ambitious projects over a longer time.

Markets still fragile

December was a difficult month for global markets. They reacted strongly to the South African researchers’ discovery of the COVID-19 variant. The traditional markets were shaken and this rippled into the cryptocurrency markets.

BTC, ETH, and a wide range of other major cryptocurrencies lost as sentiment spilled into crypto markets. This was further bad news because inflation in the United States has been increasing. Caselin provided a balanced outlook and highlighted the market’s typical reactions to major economic news events. He also suggested how BTC might be more beneficial than ETH over the medium term.

Markets move to the beat of news stories, economic events and other important news. But longer trends are largely driven by fundamentals. […] Although we may not yet be in a bearish market, there are many reasons to believe that the two-year growth has been only the beginning. The long-term holders of the stock are still buying.

Greenspan cited the events in the United States to be a sign that times are changing and the reason for recent market declines. However, he acknowledged that the future for cryptocurrency markets is uncertain at this stage.

“While the Fed was printing money social media was abuzz with ‘brrrrrrrrrrrrrrrrrrrrrrrrrrrrrr memes. Now that liquidity is drying up there is a lot less noise coming from the peanut gallery. We may see the depth of this pullback by the end the year. Or not.”

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