Ethereum’s Shanghai upgrade, which was implemented in April, has not generated the expected increase in network activity on the world’s largest smart contract blockchain, according to a research report from JPMorgan. The upgrade involved shifting from proof-of-work (PoW) to proof-of-stake (PoS), resulting in a significant reduction in energy consumption and an increase in staking. However, daily transactions count has fallen by 12%, daily active addresses have dropped nearly 20%, and the total value locked (TVL) in decentralized finance (DeFi) has slumped by almost 8% since the upgrade.
JPMorgan suggests that the decline in network activity may be due to various bearish factors that have occurred over the past year. These include the collapse of Terra and FTX, the U.S. regulatory crackdown on cryptocurrencies, and a shrinking stablecoin universe. These negative events may have outweighed the positive impact of the Shanghai upgrade.
Although staking has increased by 50% since the upgrade, the dominance of liquid staking protocols raises concerns about centralization. The bank notes that protocols such as Lido have a high share of staking, which poses questions about the level of decentralization in the Ethereum network.
The Shanghai upgrade allowed for the withdrawal of staked ether (stETH), while the Merge, which took place in September 2022, transitioned Ethereum from a more energy-intensive PoW consensus mechanism to PoS. These upgrades were expected to boost network activity and improve efficiency.
JPMorgan also mentions the upcoming EIP-4844 upgrade, or Protodanksharding, which is planned for the fourth quarter of this year. The bank sees this upgrade as a potential catalyst for a material increase in Ethereum’s network activity. However, it cautions that continued bearish forces in the crypto market could act as a headwind.
Overall, JPMorgan’s report highlights the disappointment in Ethereum’s network activity following the Shanghai upgrade. Despite the reduction in energy consumption and the increase in staking, the blockchain has experienced a decline in daily transactions, active addresses, and TVL in DeFi. The upcoming Protodanksharding upgrade holds promise for a potential turnaround, but the impact of ongoing bearish factors remains to be seen.
