Analysis & Opinions

Ethereum & Bitcoin Eye Protocol Upgrades

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Every week, IntoTheBlock brings you on-chain analysis of top news stories in the crypto space. Leveraging blockchain’s public nature, IntoTheBlock’s machine learning algorithms extract key data that provide a deeper dive into the major developments in the industry. 

This week, we cover Ethereum’s recent milestone as it gears up for the beginning of an anticipated upgrade, as well as the implications it has been having on blockchain indicators. Similarly, we dive into recent news for Bitcoin and a potential upgrade that may be arriving sooner than most expected. 

Bitcoin’s Market Cap Sets New All-Time High

Ethereum will begin the initial phase of its anticipated Serenity upgrade on Dec. 1 as scheduled. Dubbed ETH 2.0, the upgrade consists of multiple phases aimed at improving Ethereum’s scalability. 

Phase 0, the Beacon Chain, will be the first step towards migrating Ethereum into a proof of stake consensus mechanism. While many doubted its capacity to launch in 2020 after several delays, the Ethereum community will finally embark on this journey after approximately 6 years of research. The last prerequisite to initialize Phase 0 was for the amount of Ether deposited into the first staking contract to reach 524,288, or roughly 0.5% of the circulating supply. 

Having reached the target just in time for the Nov. 24 deadline, the Ethereum community celebrated this milestone. By analyzing on-chain indicators, we can analyze these events from a data-centric perspective to have a better understanding of the implications in the underlying Ethereum blockchain. 

IntoTheBlock’s Large Transactions Volume indicator aggregates the total volume transferred in transactions of over $100,000. This acts as a proxy to institutional investors and whales’ activity. Large transactions volume for Ethereum has been on an uptrend for Ethereum and hit a two-year-high few days after the staking contract started to accept deposits. 

As of November 17, 2020 using IntoTheBlock’s Bitcoin network indicators

The growing large transaction volume is indicative of higher institutional participation in Ether. While the two-year-high of $4.56 billion seen on Nov. 17 did not coincide with increased deposits in the staking contract, on Nov. 23 there were also over $4 billion in large transactions as deposits doubled within less than 48 hours, and have continued to increase even past the deadline.

As of November 24 via Dune Analytics

Though certainly not all large transactions went into the deposit contract, there is evidence that whales and institutional players have led the way towards the deposit target. With only 2,025 unique addresses depositing into the staking contract, that brings the average deposit to $208,000, well above the minimum to be labelled as a large transaction. Needless to say, average Ethereum users do not have such funds, pointing to large players confidently blasting past the deposit target right on time. 

While the introduction of the Beacon Chain marks the beginning of the end for Ethereum miners, the network’s hash rate has sustained near its all-time highs. 

As of November 24 using IntoTheBlock’s ETH network indicators

The hash rate represents the total power miners contribute to solving cryptographic puzzles in the proof of work consensus. Though the Ethereum hash rate did drop 5% the day after the deposit target was reached, it bounced back to be within 1% of its all-time high. This suggests miners are still as interested in mining Ethereum while they can. 

It is important to note that even though the Beacon Chain genesis will be on Dec. 1, the proof-of-work chain will also continue to work in parallel, which is probably why miners have not rushed to shut down their operations. Overall, though, miners appear as eager as ever to earn Ether as the initial phase of ETH 2.0 approaches and the price of Ether surpasses $600. 

Institutional adoption has been a key theme for both Ethereum and Bitcoin in 2020. The large transactions deposited into the staking contract is the most recent vote of confidence from institutional players in Ethereum. Similarly, miners continue to support the Ethereum blockchain as hash rate nears its all-time highs.

Could Bitcoin See Its First Major Upgrade in 3 Years?

Bitcoin holders have enjoyed the remarkable last few months. The first cryptocurrency has been progressing both in price action and fundamentals. In terms of price, Bitcoin has increased by approximately 90% since its September lows. 

At the same time, Bitcoin has experienced a wave of interest from institutional investors. Most recently the CIO of Blackrock — the investment management corporation with over $7 trillion in assets under management — stated that Bitcoin could replace gold, as reported on CNN. This is just the most recent of many signs of support of large traditional finance players in Bitcoin. The growth in institutional activity is reflected in the increasing large transaction volume happening on its blockchain.

As of November 24 using IntoTheBlock’s BTC financial indicators

To add to Bitcoin’s momentum, it may be about to have its first upgrade in over three years. The last upgrade was SegWit2x, which resulted in the hard fork of Bitcoin Cash. The upgrade, dubbed Taproot, is intended to be a soft fork, meaning that it should not result in two different blockchains and cryptocurrencies coming out of it. Taproot may be close to happening as over 54% of miners signal support for the upgrade, according to CoinDesk

So, how does Taproot affect Bitcoin? 

In short, Taproot aims to enhance privacy, scalability and smart contract capabilities on the Bitcoin blockchain. In terms of privacy, the upgrade implements Schnorr signatures, which allow smart contract transactions to be recorded as regular on-chain transactions. This protects users, making it harder for outsiders to discern the use-case and addresses taking part in these. 

Moreover, Taproot is designed to keep blocks of transactions smaller and lighter, thus freeing up space for additional transactions. This should result in slightly higher transaction throughput for Bitcoin, while also enhancing its privacy. Taproot achieves all of this while still guaranteeing ownership of users’ Bitcoin without double spending as it does now, albeit through a different structure combining Schnorr signatures with Merklized Abstract Syntax Trees (MAST). 

Having just surpassed 54% approval from miners, it appears that the decision is not whether Taproot will be implemented or not, but rather when and how. Miners expect this to be an uncontroversial upgrade, with support from more mining pools to come. 

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ITB is a tribe of data scientists, cryptocurrency experts and AI geeks that set out on a journey to unlock the mysteries of crypto assets and provide investors with relevant intelligence about the market.

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