It's been a big year for the world's second-largest blockchain — but heading into 2023, Ethereum's going to face some big challenges.
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This year was the beginning of Ethereum's second act, sometimes known as Ethereum 2.0.
Moving the No. 2 blockchain — with a market capitalization of $162 billion — from a Proof-of-Work consensus mechanism to more environmentally friendly, and eventually more scalable, Proof-of Stake, was a process already underway back in 2015 — the year Ethereum launched.
When The Merge finally happened on Sept. 15, it was many years overdue and remains a work in progress — sharding comes next year.
This achievement also happened during the first crypto winter since digital assets went mainstream, the year that both the U.S. and EU — and many other countries — began writing and passing comprehensive crypto regulatory regimes.
This was also a year in which a trio of scandals saw millions of investors stripped of their tokens as poor project design, poor financial management and what is looking more and more like outright malfeasance sent a $48 billion stablecoin down in flames, a swath of crypto lenders into bankruptcy, and the founder of the world's second-largest cryptocurrency exchange into handcuffs.
With that in mind, here's a look back at the top 10 biggest Ethereum stories of 2022.
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1. The Merge
Most of the year was spent in a build-up to The Merge, which took place on Sept. 15. That's when the old Ethereum blockchain — now called the "execution layer" — transitioned over to the new one, which is now called the "consensus layer." (The name Ethereum 2.0 had too much baggage, according to the Ethereum Foundation, such as scammers telling people to switch their ETH for the non-existent ETH2 tokens.)
There's a lot more detail to it, but the core comes down to this: Ethereum has left Bitcoin-style Proof-of-Work mining behind and is now a far more environmentally friendly Proof-of-Stake blockchain.
There's a lot more to be done, and eventually the new Ethereum will also be a far more scalable blockchain, getting rid of the current blockchain's congestion and high transaction fees. This will be done via sharding, which lets the blockchain act like many blockchains. Think of it as turning a two-lane road into a 12-lane superhighway. And there's opportunity for just about anyone to earn by staking ETH.
Ethereum co-founder Vitalik Buterin said: "There's still lots of steps to go. We still have to scale, we still have to fix privacy, we have to make the thing actually secure for regular users. We have to work hard and do our part to make all of these other things happen as well."
Buterin went on to say that The Merge "symbolizes the difference between early-stage Ethereum and the Ethereum we've always wanted."
2. Ethereum Goes Green
Before The Merge, Ethereum's Proof-of-Work blockchain was using as much power annually as Austria. Afterward, both its electricity use and carbon footprint have dropped more than 99.9% according to Digiconimist, which tracks the power cost of Bitcoin and Ethereum.
The environmental change wasn't just a PR win. The growing environmental, social and governance (ESG) investor movement has had a real impact on crypto. Both Firefox's Mozilla Foundation and Wikipedia stopped accepting crypto in 2022 due in large part to the environmental concerns. Meanwhile, Morgan Stanley suggested ESG investors should consider the social benefits of crypto, such as financial inclusion, before turning away from digital assets altogether.
Besides, there has been a growing movement by governments ranging from China to New York State to ban crypto mining due to its environmental costs.
3. The Fall, Rise and Fall of ETH's Price
By the time Jan. 1 rolled around, Ether had already joined Bitcoin and the rest of the crypto market in the initial collapse of the bull market — falling 33% from an all-time high of $4,891.70 set in November 2021.
ETH wasn't done, dipping as low as $2,172 on Jan. 24 — a level it wouldn't reach again until the second major crash of the year, caused by the collapse of the Terra/LUNA stablecoin ecosystem. It later reached $3,500 as excitement about The Merge grew — as reports made it more and more likely the long-delayed switch to PoS was going to happen in the fall.
But it was at $2,750 on May 5, when the UST algorithmic stablecoin began depegging, launching a week-long run that would see it and partner token LUNA drop $48 billion, becoming essentially worthless and sending the entire crypto industry into a tailspin. By May 12, it slid below $1,750 — down 36% in a week and 64% off its all-time high.
Then came the week of June 9, when the industry was spooked again by the spate of insolvencies and bankruptcies that were the fallout of Terra/LUNA. Ether broke below $900 — down 50% in nine days and 72% from its all-time high.
In December so far, ETH has stayed in the $1,200 to $1,300 range — down nearly 75% from its all-time high and a third on the year.
What was supposed to be the year of Ethereum has not been kind to the price of ETH.
4. The Importance of Sharding
Ethereum's high transaction fees aren't just bad for business, they come with a social price, Buterin noted in August.
Noting that Ethereum transaction fees regularly go to $20 (and often spike higher,) Buterin pointed out in a speech that in Mongolia, take-home pay averages at $16 and in Zambia just $4. As a result, he said:
"If we're talking about blockchains being this global thing that's supposed to empower people who are not empowered today in underprivileged countries, you can see how it starts looking less viable. We're talking about single transactions potentially taking up people's entire daily income... If you want to actually have a world where we can have blockchain activity happening without needing to trust centralized exchanges for everything, then we just have to learn how to make blockchains cheaper."
Ethereum can manage about 12 to 15 transactions per second, and will grow to as much as 100,000 TPS with the addition of sharding, which breaks the blockchain into smaller pieces — shards — that each only process a small part of the data.
That is needed for "bringing back crypto payments," which he called critical.
To handle day-to-day retail payments, a good comparison is Mastercard, which generally handles around 6,000 TPS and has a network capable of 65,000 TPS. Visa is roughly the same. As is Solana, although with a theoretical limit of more than 700,000 TPS.
Buterin said in his speech that transaction fees could fall to $0.002 to $0.05 through the use of another technology called rollups.
5. Staking Comes to Ethereum
In the last two years, stakers locked 15.6 million ETH — worth $20 billion at present — in a deposit contract that was critical to Ethereum's successful switch from Proof-of-Work to Proof-of-Stake. But the lockup was open-ended, discouraging some participants who couldn't or wouldn't tie up funds indefinitely.
However there are some big concerns about the staking pools effectively centralizing PoS Ethereum. Shortly before The Merge, just four staking pools accounted for 60% of all staked ETH, with centralized exchanges Coinbase, Kraken and Binance accounting for 30% and DeFi's Lido pool another 30%.
6. Is ETH a Security or Commodity?
One of the biggest unintended consequences of the Ethereum 2.0 project is that it may have transformed Ether into a security.
Being a security brings a lot of legal and regulatory baggage to a cryptocurrency — for example, any payment with a security token, even for a cup of coffee, must be reported to the IRS as a capital gain or loss.
Ether was the biggest question mark, with Commodity Futures Trading Commission Chairman Rostin Behnam (and his predecessor) having repeatedly said that in his opinion, ETH was sufficiently decentralized not to qualify. Behnam reportedly pulled back from that comment recently, suggesting only BTC qualified — a big setback — although on Dec. 13, the agency referred to ether as a commodity in a court filing.
"It's starting to look more like Bitcoin is the only thing that would qualify as a commodity… because of the way [it] moved from Proof-of-Work to Proof-of-Stake," Lummis said on CoinDesk TV.
7. Cross-Chain Bridge Hacks Pose a Challenge
Well over $3 billion was lost to DeFi hacks in 2022, the overwhelming majority of it from cross-chain bridges that let users lock one crypto into the project and retrieve a wrapped version of the other, which can be used and then returned to unlock their initial deposits.
Ether is by far the most locked cryptocurrency in bridge platforms.
This is great, and necessary for a multi-blockchain world that is rapidly developing and is seen by many as vital to the technology's long-term success. Unfortunately, it means locking hundreds of millions of dollars worth of crypto in what amounts to a hot wallet in a DeFi protocol often developed in great haste and too often without audits or proper testing.
Play-to-earn game Axie Infinity saw $625 million drained away from the Ronin Bridge, Wormhole Bridge lost $325 million, Nomad was hit for $190 million, Beanstalk Farms for more than $180 million, Wintermute for $160 million and the Harmony Bridge for $100 million. Hundreds of smaller thefts happened as well. Some projects were able to reimburse the tens of thousands of users who lost locked funds. Others were not. All were ETH bridges.
It is a problem that can only be solved, to an extent, by centralizing — which would make cold wallets viable — although introducing far better security would go a long way. And that's essentially basic common sense in many cases, like auditing, or requiring hackers to steal more than two validator passwords needed to loot the Harmony Bridge. Ronin Bridge's thief stole five.
8. Losing NFTs
This year was not good for Ethereum's dominance of the NFT market. Not that it has been broken, mind you, it remains far and away the biggest blockchain for everything from PFPs to artwork.
Top PFP developer Yuga Labs, creator of Bored Ape Yacht Club (BAYC) and owner of CryptoPunks, is on Ethereum, but also demonstrated its shortcomings. When it launched a sales of land plots for its fledgling metaverse project, the sale clogged Ethereum so badly that gas fees for transactions spiked to $3,500 and beyond, not only effectively shutting the blockchain for other transactions but causing would-be buyers to lose their fees.
And even at the best of times, transaction fees for minting NFTs have been prohibitively steep.
Which is why a growing number of projects launched on or switched to Ethereum killers or their own blockchains. Solana was a leader in this regard, but the implosion of FTX has hurt the blockchain, which was heavily supported by Sam Bankman-Fried.
Polygon and BNB have also been moving aggressively and more than a few other blockchains are seeing marketplaces open or expand.
9. Will PoW Ethereum Survive?
The first time Ethereum underwent a major hard fork, the Ethereum Classic blockchain was created by a group of users that didn't like the new direction (which was to cancel out The DAO hack).
Nonetheless, it has been so badly delayed that two of Ethereum's original co-founders, Charles Hoskinson and Gavin Wood, created competing blockchains Cardano and Polkadot, respectively, in part out of frustration at the sidelining and slow progress of Ethereum 2.0.
10. SBF "F***s" Everyone
Like more or less everything else in crypto, one of the biggest stories for Ethereum was the destruction of the FTX and FTX US exchanges and their sister trading firm Alameda Research. All were owned by Sam Bankman-Fried, who was arrested on Dec. 13. The allegations are that he looted FTX customers' accounts for funds used by Alameda traders — who lost as much as $8 billion.
FTX's new CEO, John Ray III, cleaned up after Enron. And despite that, he said "never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred" at this doomed exchange.