What if Ethereum falls?

There is nothing unusual about the impact of news on financial markets. The saying “Sell the news, buy the rumor” is a perfect example. News can be divided into two types: Good and bad news (bad news is also known as FUD); both kinds of news correspond to two states of the market. When coin charts are flying, a lot of good news is released, playing a role in pumping up hope and enthusiasm for the crowd. Conversely, when charts are heading down, the bad news is like pouring oil on the fire to make the crowd panicky.

2022 has been a crazily terrible year. The forces that we once trusted and thought would exist have shaped or created the future of crypto and have all gone away. There is Luna, a giant in the decentralized finance world, one of the top 10 ecosystems. Or the latest is Sam with FTX, the top 3 global digital currency trading platform, valued at $3.8 billion at the beginning of the year. Not to mention the series of bankruptcies that followed.

So, what could be worse? The answer is yes. Recently, there has been a sudden rise in rumors that Ethereum will have a significant change. The creator of this blockchain, Vitalik, has spoken out about a rumor of an important event that is about to happen. Let’s hope that Ethereum will stand firm; but in the future, how crypto will look if Sam drags down ETH?

Where does Ethereum stand in the world of cryptocurrency?

If Bitcoin is considered the king of cryptocurrency, then Ethereum is considered the queen of the decentralized world. While Bitcoin is seen as a pioneer, Ethereum is known for its development and advancements in blockchain technology.

Let’s review the development history of this queen:

In 2011, a young programmer named Vitalik Buterin first became aware of and interested in Bitcoin. Then in 2013, he and his friends founded Bitcoin Magazine, a major media outlet for cryptocurrency and Bitcoin.

But Vitalik also soon realized the limitations of the Bitcoin blockchain, specifically its lack of interactivity. Bitcoin is a standalone blockchain and has no capability for expansion. (Vitalik’s exact words: “I thought [those in the Bitcoin community] weren’t approaching the problem in the right way. I thought they were going after individual applications; they were trying to kind of explicitly support each [use case] in a sort of Swiss Army knife protocol.”)

Therefore, Vitalik cooked up a new blockchain with more features, interactivity, and the ability to expand beyond the singular purpose of buying and selling like Bitcoin. That is Ethereum.

At the 2014 Bitcoin Miami event, Vitalik first introduced Ethereum to the community. (You can watch his introduction video here). Then, Vitalik and his team raised 18 million USD from the community. According to Vitalik, the number of people accepting Bitcoin or cryptocurrency worldwide in 2015 was only around 100,000, so the amount of funding raised was quite impressive.

Eighteen months after the funding, the Ethereum network officially went live. Although not the inventor of smart contracts, Vitalik saw its potential for application. Ethereum became the first smart contract blockchain, opening up opportunities for developers to build applications on top of the chain.

Seven years later, ETH has become an important part of the cryptocurrency market, with over 2,700 applications and 450,000 daily users. From Ethereum, new trends such as Defi, NFT, and blockchain games have emerged and spread to other platforms. Currently, Ether is not just a single-layer blockchain; it is also a platform layer for other blockchains to develop upon (layer-2) to expand the network.

Although Ethereum has risen to the second spot in the ranking of coin market capitalization, only behind Bitcoin, Vitalik’s humility is demonstrated by his statement, “$1b is still much more than I have,” during the FTX drama when people were discussing Sam’s 18 billion assets.

Vitalik has been named on Forbes’ list of 30 under 30 in Finance (2018) and Forbes’ under 30 Hall of Fame (2022). Time magazine also included Vitalik on its list of the 100 most influential people in 2021. His achievements in the media may not seem impressive, but Vitalik is a rising star in the crypto world. He is a frequent attendee of events and gives deep, interesting insights on his vision and what Ethereum is doing.

Since he joined the crypto business, Vitalik has not had any stains. The only time we saw Vitalik being seriously attacked was in 2018 when he said: “Crypto will have rare opportunities for 1000x more” but was misrepresented by the media as “Crypto no longer has development opportunities.” Both CZ and Justin Sun also jumped into the verbal sparring with Vitalik before realizing it was a meaningless drama.

Vitalik has also twice personally supported a large amount of money for humanitarian purposes rather than political purposes, as his friend S did. The amount of $1 billion (500 $ETH and 50,000 $SHIB tokens) was sent by him to the Indian COVID-crypto relief fund (tweet). At the beginning of the year, when the conflict between Russia and Ukraine occurred, Vitalik spoke out in support of a peaceful solution. When the gunfire erupted, he sent $5 million USD to the Ukrainian relief fund to support the people there.

Without being too glamorous, this Russian guy, who loves pink and likes to wear kilts, has gained the trust of almost all crypto people.

Looking at Ethereum, we also feel the presence of Vitalik in it. That is humility, not boastful, slow but steady development. More importantly, Vitalik is still determined with the goals he has set. “A blockchain with good interaction” sounds like a drawing in 2015, but Ethereum has done it in just over five years of development. But looking ahead, Ethereum, Vitalik, and the team still have a long way to go, a path that is certainly not flat.

Can Ethereum crash or not?

The current position of ETH is no less than Bitcoin; it can be seen as the center of the crypto and blockchain market. But in a year as chaotic as 2022, something as seemingly illogical can happen. Therefore, we cannot consider a future where we lose Ether for any reason.

On November 21st, Vitalik suddenly posted a tweet that caused a stir among the cryptocurrency community. He said, “I’m hearing through the grapevine that something important is about to happen. Please recognize the fact that my elite social connections to people who are early to know things make me cool, and please help me validate my self-image of coolness.” After the incident with Sam and FTX, the community is very sensitive to news. Therefore, rumors about Ethereum’s instability began to spread.

Currently, there is no additional information about the above tweet, and everything suddenly stopped, and no one talks about it anymore. There is something related to Ether; the FTX exchange, after filing for bankruptcy, was hacked and lost more than $30 million of $ETH. Perhaps Vitalik was afraid that this person would sell the $30 million $ETH on the market, causing a crash in the price of Ether.

What would happen if the $ETH price dropped?

Oh, it would be very devastating. And the consequences will be more than a few times the turmoil created by Sam and FTX. $ETH is currently ranked second in terms of market capitalization with a market cap of 158 billion dollars, accounting for 17.95% of the total value of the cryptocurrency market (only behind Bitcoin with 38.34%). The total value locked on Ethereum is at the top with 24.32 billion dollars, accounting for 57.77% of the total value locked in the market (42.28 billion USD).

If the price of $ETH falls sharply, there will be a massive liquidation on Defi lending platforms. These are smart contract-based lending platforms; if the price of the collateral (in this case, ETH) falls to the liquidation level, immediately, the collateralized ETH will be sold directly to the market to recover funds for the protocol.

The strongest liquidation level is at around $700, then at $500 and $400. If there is no intervention at the $700 level, the price of ETH will certainly fall very deep and very quickly, below the $400 level. You may be wondering: “why these milestones?”.

Let me answer that. According to the chart below from DefiLlama, there are 225K $ETH liquidated if the price falls to $720, 156K other $ETH is waiting at the price of $530, and 192.2K will be liquidated when ETH falls to the price of $442. These are just the three major liquidation levels. If, in the worst-case scenario, the price of $ETH truly reaches $400, this margin call will bring the total assets to 1.35 billion Biden, equivalent to about 2 million coins sold directly to the market.

In the past, there was a case similar to the scenario we imagined. In June 2022, a whale on the Solana network locked a large amount of $SOL coins (5.7 million $SOL ~ 170 million USD) on the Solend lending platform (accounting for 95% of the total value locked of the protocol), and then borrowed $108 million, equivalent to 88% of the total lending assets of the platform.

At this time, the $SOL price was again falling, and if $SOL fell to $22.3, about 20 million USD worth of $SOL would be liquidated to protect Solend’s capital. If this amount of coins were sold, a domino effect would occur, and a large number of other users’ contracts would also be liquidated (due to a sharp decrease in the @SOL price), similar to the scenario of ETH $400.

Of course, no one wanted this to happen, so a proposal was made by Solend itself. Specifically, Solend wanted to “ask permission” for the community to be able to liquidate this loan through OTC, avoiding any impact on market prices. This proposal was passed by the community, but fortunately, the price of SOL went up soon after, and there was no margin call at all.

Validators are also a worrying issue.

Validators are an important part of the network; they are responsible for monitoring transactions, checking, verifying, and putting them in a block. Imagine blockchain as a highway, and each validator is a checkpoint. What happens if the number of vehicles (transactions) exceeds the processing capacity of the number of validators?

To be “checked,” users will have to pay a higher fee (gas fee). Before stepping into version 2.0, even with more than 400,000 validators, the transaction fee (gas fee) of ETH had moments of reaching 2–300$ for a command. After the event The Merge, Ether moved to version 2.0, the gas fee has decreased to a comfortable level of ~2$, but in the recent market change, the transaction fee has surpassed the threshold of 5$ again. Without imagining a scenario where all Ether validators “turn off”, if just half of them leave, the gas fee will again be a barrier for users to access ETH or even leave ETH.

Why?

To become a validator of Ethereum, you need to stake (lock) 32 ETH into the network (around $41,000 with the current price of $1,200), and the reward you will receive is an annual percentage rate (APR, not including compound interest) ranging from 5.3–7.3% (currently at 6.1% and this rate will change every six months). If the price of ETH falls dramatically, it will reduce the number of assets locked by users and also the rewards. Money is lost, so is there any reason for you to continue this validator position? In a bad-case scenario, there may be a situation where validators collectively leave the network. If this happens, ETH will die.

But above all is the issue of trust; Ethereum and Vitalik have been symbols for the crypto market. If Ether is lost, the community will take a very long time to regain trust in this market.

If you remember, the cryptocurrency market is controlled by many narratives. In other words, hope or trust is a necessary material to make the technology wheel develop. If a leader like Ether falls, it is unclear whether crypto has the opportunity to stand up or not.

The future of Ethereum, where will it go?

Although this article has a slightly FUD-ish tone, I still believe in a bright future for Vitalik and Ethereum. What Ether has done and is doing has proven that Vitalik is not joking around with the roadmap he has presented.

In fact, many people have said that one day, ETH will replace BTC to lead this crypto market. In reality, Ethereum had this power before the Merge event; many people placed their trust in ETH 2.0, the market’s only hope. At that time, ETH skyrocketed to $2k, helping the market to recover slightly.

The overall market context has an impact on the financial situation of this largest layer-1 network. But finance will not be a major issue for the ETH team to develop. Another positive indicator is the number of daily active users, which is also growing positively, even better than other chains such as Near, PolkaDot, and Avalanche.

The Merge is an important event for ETH not only in 2022 but also in its development plan. This event marks the change of ETH’s consensus mechanism from Proof-of-work to Proof-of-stake. In simpler terms, before The Merge, validators had to use hardware (such as specialized mining farms) to earn rewards (that is, to mine the coins). After The Merge, the mining process is done by locking tokens. To become a validator, users need to lock 32 ETH and receive a reward of 5.3%-7.3%/year.

This has reduced the pressure to release ETH into the market as only around 2000 ETH is rewarded per month (80% less than the old proof-of-work version). At the same time, the new mechanism called EIP-1559 is doing a very good job of making ETH one of the least inflationary tokens.

At the same time, solutions to expand the Ethereum network, such as Optimistic roll-up or Zero-knowledge roll-up, are also being studied extensively. A few layer-2 networks, such as Optimism, Arbitrum, or Zksync, are gradually establishing themselves with a large amount of Total Locked Value, good projects, and stable users.

All of the above is enough for me to have faith in Ethereum. Vitalik and his team are doing their best for ETH. The updates may not be flashy, but they are important and have an impact on the entire blockchain.

For us, the day Ethereum collapses will be the day of the downfall of crypto.

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