Jack Kubinec

When Ethereum’s “Merge” to proof-of-stake went off without a hitch last September, some felt the layer-1 was primed for a breakout. Speculation arose around a “flippening” and institutional investors waited in the wings.



But ether’s price did not end up meeting these expectations. NFTs tested <a href="https://blockworks.co/news/nft-market-remains-sluggish">new lows</a>, and the bear market <a href="https://www.coindesk.com/business/2023/08/23/defi-shrinks-to-multiyear-low-as-the-crypto-fueled-future-of-finance-falters/">muted</a> DeFi engagement. Bitcoin continued to outpace ether in 2023 — <a href="https://blockworks.co/news/bitcoin-dominance-34k">recently reaching dominance levels</a> not seen since 2021. Meanwhile, institutional inflows are largely <a href="https://blockworks.co/news/ethereum-merge-one-year">yet to materialize</a>.&nbsp;



Blockworks spoke with Justin Drake, a researcher at the Ethereum Foundation, about the network’s current standing and future prospects. Keep reading for more excerpts from Blockworks’ interview with Drake.



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Blockworks: You can see variations of this stat in different <a href="https://tokenterminal.com/terminal/financial-statements">places</a>, but the rewards paid out by Ethereum were larger than the transaction fees that were burned in both September and October. It looks like that&#8217;s turned around a little bit, but how should people think about issuance versus burn and when that flips negative?&nbsp;



Drake: The fee market is exceptionally volatile. What you really want to be doing is zooming out, because when you zoom out, you&#8217;re smoothing your data over a longer period of time.&nbsp;



If you look at <a href="https://ultrasound.money/">ultrasound.money</a>, you’ll notice that when it&#8217;s profitable, it&#8217;s like printing money. It&#8217;s really, really profitable. Ethereum has about a profit margin of 50% which is outstanding for a business. Now okay, on some days, especially weekends, it won&#8217;t be profitable. In some months, if you&#8217;re in the absolute depth of the bear market, then it won&#8217;t be profitable. But over a long period of time, it&#8217;s extremely profitable.



Blockworks: How important is this deflationary aspect of <a href="https://blockworks.co/tag/ethereum">Ethereum</a> and Ethereum&#8217;s ability to generate fees? Because obviously Ethereum is not a company in the traditional sense where your revenues need to outweigh costs. So how should people think about revenue versus issuance? And how important is that metric as a way to gauge the success of the network?



Drake: Broader than just as a company, some people think of ether, the asset, as money for the internet. And in that context, scarcity as a meme is extremely important. There&#8217;s this almost obsession with the 21 million Bitcoin meme precisely because it&#8217;s all about scarcity. And for the first time in history pretty much, we have money which not only has a fixed supply but actually has a decreasing supply.&nbsp;



So now there&#8217;s what I call memetic potential. Memes are ideas that spread. The 21 million meme is one that spreads far and wide because it&#8217;s kind of an attractive thing intellectually. There’s an opportunity potentially for this meme to spread that ether is the scarcest money on Earth. Its supply is going down over time.



Blockworks: And who benefits from this meme?



Drake: Ether the asset is the basis of two very fundamental public goods in any programmable blockchain.&nbsp;



Public good number one is economic security. We&#8217;re trying to build systems here which have a lot of longevity. We want to be in a position where it&#8217;s extremely difficult even for the most powerful nation-states out there to attack Ethereum.



And then there&#8217;s this second really important public good for blockchains which is called economic bandwidth, and that&#8217;s the ability to be used as collateral within DeFi. Ether is especially valuable as collateral money because it&#8217;s the only so-called pristine collateral. Pristine means that there&#8217;s no contract risk. There&#8217;s no governance risk. There&#8217;s no oracle risk. It&#8217;s the one risk free asset.&nbsp;



Blockworks: It sounds like you’re saying the idea of ultrasound money is a means to these larger ends that you described.



Drake: Exactly. It&#8217;s a Trojan Horse, but ultimately the value is utilitarian through economic security and economic bandwidth.&nbsp;



Blockworks: Ethereum’s validator <a href="https://www.validatorqueue.com/">queue</a> has been in the hundreds of people waiting to stake ether (<a href="https://blockworks.co/price/eth">ETH</a>), and that&#8217;s down from tens of thousands over the summer and even into September. What do you make of this?&nbsp;



Drake: The churn, which is basically the amount of validators that can be processed by the queue, is proportional to the amount of staked ETH. As the amount of staked ETH grows, the churn grows and it becomes easier and easier to clear the queue. And so in that sense, looking at the queue is kind of a totally irrelevant game. The fact that the queue is very low just means that ether is very efficient at processing deposits.&nbsp;



The better metric is what&#8217;s called deposits. Every single day on average, there&#8217;s 40,000 ETH coming in, which is a huge amount of money.&nbsp;



Blockworks: How concerned are you about staking yields being down?&nbsp;



Drake: I mean in a way, the lower the better, right? Because it means that we&#8217;re not spending as much to secure Ethereum. Ethereum is already extremely secure.



The security ratio is the value secured by Ethereum, which is all the ETH, all the NFTs, all the ERC-20s divided by the value securing Ethereum, and it&#8217;s 7.5, which is extremely healthy. If we were to have more staked ETH, this ratio would keep on going down. But there&#8217;s no real need for that. And so having more staked ETH in the way is wastefully paying for security.&nbsp;



Blockworks: Post-Merge, there was a lot of excitement about Ethereum. In 2023, ether’s price has gone up, but especially compared to bitcoin, not as much as some had predicted. Why is that?



Read more: <a href="https://blockworks.co/news/the-flippening-will-ether-flip-bitcoin-in-the-next-year">The flippening: Will ether flip bitcoin in the next year?</a>



Drake: What tends to happen, generally speaking, is that during bear markets, dominance of bitcoin goes up, and then during bull markets, it drops down precipitously and then it reaches a new low, so this is all standard behavior.



What I&#8217;ll say is that bitcoin dominance hasn&#8217;t grown as much as what would have been expected in the bear market. So I think expectations were unreasonable thinking that during a bear market, ether will outperform [bitcoin].



This is all speculation, but my guess is that there will be a flippening in the next bull run.&nbsp;



Interview responses were edited for brevity and clarity.



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Ethereum’s Justin Drake is unconcerned despite ether’s middling year pricewise: Q&A

Concerns about increased centralization on the Ethereum network have intensified, following Blocknative&#8217;s decision to discontinue its MEV-boost relay on Tuesday.



Relayers play a pivotal role in settling transactions on Ethereum. They ensure timely and efficient processing, bridging the gap between users and the blockchain by batching and broadcasting transactions. With the exit of Blocknative, the relayer landscape is becoming increasingly concentrated. At time of writing, only four relayers remain active on the network.



Following Ethereum&#8217;s transition to proof-of-stake, the roles of block proposing and block building became distinct processes. MEV-boost software was developed to facilitate an efficient market between these proposers, which submit transaction bundles to validators, and builders, which organize the transactions in a specific order.



Following the Merge, a group of well-resourced Ethereum block builders, formerly including Blocknative, began running their own relays.



Today, nearly all Ethereum transactions use MEV-boost relays. 93% of Ethereum blocks created in the past 14 days made use of MEV-boost, according to data compiled on <a href="https://mevboost.pics/">mevboost.pics</a>. At the time that data was compiled, five entities were responsible for relaying 98% of the MEV-boosted transactions, per <a href="https://www.relayscan.io/overview?t=7d">relayscan.io</a>.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">98% of ETH blocks are proposed by putting *complete* trust in 5 entities -bloXroute -Flashbots -Ultrasound (<a href="https://twitter.com/drakefjustin?ref_src=twsrc%5Etfw">@drakefjustin</a> et al) -Agnostic (<a href="https://twitter.com/koeppelmann?ref_src=twsrc%5Etfw">@koeppelmann</a> et al) &#8211; B̶l̶o̶c̶k̶n̶a̶t̶i̶v̶e̶ now it&#39;s 4. why? because proposals to pay Relays small % remained &quot;in the air&quot;😬💀 1/3 <a href="https://t.co/0ynLS3hunB">https://t.co/0ynLS3hunB</a> <a href="https://t.co/w47XPZTU8e">pic.twitter.com/w47XPZTU8e</a>&mdash; Uri // klarman.eth 🛡 (@uriklarman) <a href="https://twitter.com/uriklarman/status/1706716871024615723?ref_src=twsrc%5Etfw">September 26, 2023</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
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According to Blocknative, it <a href="https://x.com/blocknative/status/1706685103286485364?s=46">dropped</a> its MEV-boost relay because continuing was no longer economically viable. The four remaining relayers collect no fees for their services, making this core piece of Ethereum infrastructure unprofitable for its operators. A recent Flashbots community <a href="https://collective.flashbots.net/t/pbs-guild-proposal-v3-wip/2223">proposal</a> aims to start a “PBS Guild” which would solicit Ethereum community donations in part to reward relayers.



Uri Klarman, CEO of relaying entity Bloxroute, believes that a relayer fee mechanism should be activated, however. He suggests that block validators anticipate this move.



“I heard from multiple validators, like, ‘yeah, we don’t understand how you [haven’t charged] us until this point,’” Klarman told Blockworks.



Klarman said relayer fees would require some level of consensus between the remaining relaying entities and, ideally, the Ethereum community. If the economic incentive problem isn’t fixed, though, Klarman thinks the perceived centralization of MEV-boost relays could grow worse.



“In a year, if everything stays the same […] I think it&#8217;s very reasonable that there will be [fewer] relays than there are today,” Klarman said.



Elias Simos, the CEO of Ethereum data platform Rated, told Blockworks he is ambivalent toward a future where Ethereum continues to rely on its four major relayers.&nbsp;



“They’re demonstrably long-term actors in the space, so they have a lot to lose [if Ethereum is harmed],” Simos said. “But at the same time, is that enough?”



Updated Sept. 28, 2023 at 10:22 am ET: Updated to clarify that Ethereum transactions are now handled by four relayers.



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Ethereum decentralization takes hit as Blocknative discontinues its relayer

Andrew Thurman

As on-chain activity plummets, Ethereum’s blockspace is on track to turn a financial loss for the first time since the Merge, according to Blockworks data. 



Data from Blockworks Research’s newly-launched Analytics product shows that Ethereum blockspace has consistently turned a profit since the network’s switch to proof-of-stake consensus in September 2022. 



The blockspace profitability metric is calculated by subtracting the total protocol fees paid to validators as well as ether (<a href="https://blockworks.co/price/eth">ETH</a>) reward issuance from total transaction fees.&nbsp;


<div class="wp-block-image">
<figure class="aligncenter"><img decoding="async" src="https://lh6.googleusercontent.com/Z0UJLrwrakVt315yfckRyFNh2mgQsJZUNmDTb18YGL7CUMngR5Lp0vYyRKiIsZ7Jq0vyvYmdMceL5xXQ6TnLdqaxLztpHKxNwNCAIO96RK46rOy4bNfvCO-QMduGsyv8OR8ELX8RbI-tDU4rMtB9rBY" alt=""/></figure></div>


Source: <a href="https://app.blockworksresearch.com/data">Blockworks Analytics</a>



From October 2022 to present, only in December 2022 did blockspace narrowly turn a loss, generating $3.5 million in losses — a fraction of the $414 million in gains the protocol has seen so far in 2023.&nbsp;



However, as activity on Ethereum falls, September is shaping up to be the protocol’s first month posting significant losses since proof-of-stake was introduced. Throughout September, Ethereum blockspace has posted only a single profitable day, and as of Monday, has accumulated $15.9 million in losses.



The shift in blockspace profitability coincides with an expansion in ETH’s circulating supply, which is up roughly 8,900 ETH on the month, per data from <a href="https://ultrasound.money/">ultrasound.money</a>.&nbsp;



The declining profitability for blockspace is attributable to declining user activity and falling volumes across multiple on-chain subsectors. Swaps and transfers of popular stablecoins such as USDT and USDC are down as much as 90% from March 2023 highs, and <a href="https://blockworks.co/news/nft-volume-lowest-2-years">NFT trading volumes in particular are continuing to dwindle</a>.&nbsp;


<div class="wp-block-image">
<figure class="aligncenter"><img decoding="async" src="https://lh5.googleusercontent.com/qi-GRcdNRA1QXXY9KnQ-dmJSJJ0Ijy9Npl-izsixpQoxgq38VJ7ZXKLBXhDqFFtJQZe4OYHJLRhYKniheL8uMY8j_uRvNeWyN968jVbFKjhdK62yCC_eGOoSaZ6-krIXVndN7NlzKUA7JOmNxAwPfpY" alt=""/></figure></div>


Source: <a href="https://app.blockworksresearch.com/data">Blockworks Analytics</a>



While activity on the base layer is shrinking with no clear catalyst to alter the trajectory, a number of Ethereum layer-2 networks are maintaining healthy activity.&nbsp;



Arbitrum and Optimism both maintain sequencer profitability, and while each has seen pullbacks in the number of active addresses on the networks, they remain close to yearly highs.&nbsp;


<div class="wp-block-image">
<figure class="aligncenter"><img decoding="async" src="https://lh6.googleusercontent.com/BqvaDux3velvkgU2FejfVvxaYoKZIHpz2rIdFO4BPx4YBeN_QD_oynX65nmZAy3B76LsPMu7w65WsJQ8Do0ytd33rAfzSaJKOZbHKSmRml7mHktBO96L6W2OM117vIY_fc53TGTsF41qKuaOKrZ1saE" alt=""/></figure></div>


Source: <a href="https://app.blockworksresearch.com/data?category=arb">Blockworks Analytics</a>



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Ethereum blockspace on track for first unprofitable month since the Merge

Bessie Liu

NFTs were one of the biggest buzzwords in early 2021.&nbsp;



Digital artwork by up-and-coming creators sold for millions of dollars. Beeple boomed. And “The Merge” attracted over 30,000 collectors, who paid a total of $91.8 million to mint the collection.&nbsp;



The floor price of “The Merge” has since <a href="https://nftpricefloor.com/merge-by-murat-pak">dipped </a>from roughly 25 ether (<a href="https://blockworks.co/price/eth">ETH</a>) to 1.1 ETH today.&nbsp;



Its demise is part of a much larger trend: Trading volume for all NFTs has <a href="https://dune.com/hildobby/NFTs">dropped</a> significantly, from a weekly volume of $1.8 billion in August 2021 to roughly $73 million today.&nbsp;



One could argue that the NFT boom is over and that a comeback would be difficult, but a handful of projects remain faithful to their potential.



In an X, formerly Twitter <a href="https://twitter.com/Noodz2929/status/1696045562452460029?s=20">spaces</a> held by World of Women — an NFT collection that features female artists from around the world — NFT creators on Monday came together to share insights into what they are building.



<h2 class="wp-block-heading">Mints to play football matches on Mars, become a Mayan Jungle guardian</h2>



Gaming remains a big NFT <a href="https://dappradar.com/blog/297m-investment-surge-whats-ahead-for-web3-gaming-metaverse#Chapter-3">narrative</a>, receiving roughly $297 million in funding in July.&nbsp;



One team building in the NFT gaming space is Martian Premier League (MPL). To participate in MPL, users can mint an MPL NFT and enter the gaming world, where they must build their own football team on a virtual Mars.



“Without that sense of ownership model that NFTs have allowed us to take, we wouldn’t have a good enough ‘why’ to come to market,” Eleanor Nugent, the founder of MPL, said in an X space.&nbsp;



The floor price for an MPL NFT is currently sitting at 0.011 ETH  (~$19). 



Read more: <a href="https://blockworks.co/news/nft-marketplace-nansen">NFT collectors focus on generative art and historical significance amid market rout</a>



Gaming is not the only area in which <a href="https://blockworks.co/tag/nfts">NFTs</a> are being used. The team at Maya Spirits is hoping to use their NFT mints to champion gender equality and environmental protection in Mexico through donations.  



Maya Spirits NFTs are inspired by the children in the local community. Roughly 70% of proceeds minted through NFTs are donated, 20% is spent on development initiatives, and 10% covers travel expenses, Liam Scully, co-founder of Maya Spirits, said on the X space.



The team will be partnering with Art Blocks, a platform that connects artists to blockchain technology, to launch its next NFT mint.&nbsp;



“These drops will be very limited in supply, and to get access you must hold a Maya Spirits NFT,” Scully said.&nbsp;



Maya Spirits NFTs are currently trading at a floor price of 0.015ETH (~$26).



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