Ethereum, the second-largest cryptocurrency in the world, has been slowly consolidating its position over the past year. The prices have been growing steadily, and while the bull run was not as extensive as most investors expected it, ETH grew quite a lot over the past months. However, some are worried about its ability to maintain that growth in 2024, and have invested in other crypto as well, such as adausdt, in order to diversity. While the initial predictions showed that Ethereum growth is inevitable and that it is only a matter of time before a massive bullish run arrives, 2024 started off differently.
Right now, some investors and analysts are wondering whether the optimism might have been rushed.
Black swan
Also known as the black swan theory, this event is a rare occurrence with far-reaching consequences. It has been coined by Nassim Nicholas Taleb, a statistician and investor. And while its origins are in the traditional finance markets, the crypto environment has since co-opted it, too. The black swan event is unanticipated but has a significant impact and can change the marketplace quite a lot.
At the moment, investors believe such an occurrence is very probable in the near future. The Geth Ethereum network, a command-line interface that lets developers process Ethereum nodes, mine and carry out smart contracts, is at the center of the controversy. The concentrated use poses risks as most validators could lose their staked coins in case of a bug.
On January 23rd, the market share of the network execution clients dropped by 5.2%, getting to 78.8%. Only twenty-four hours before, it had climbed to 84%. Geth is an essential part of the process involving the handling and execution of the transactions. Ethereum validators have shown a clear preference for it, leading to concerns regarding imbalances and the risk of centralization. Now, there’s the risk that it could cause the massive wipeout of roughly 80% of staked Ethereum.
The predictions
The crypto space is well-accustomed to frequent predictions owing to the ever-changing nature of its environment. Since it’s impossible to make very clear estimations given the considerable volatility levels, investors must carefully weigh their options before making any choice. Many investors believe that the only way to avert a black swan event is to use less robust execution clients.
The number of staked coins has been steadily climbing over 2023 after the last upgrade made it easier to withdraw the staked funds. Although many believed this move would destabilize the market by causing most investors to extract their money, this tendency was short-lived. The reverse happened, and investors began staking more than ever before.
The worries come from the fact that staked ETH coins aren’t risk-free. According to some analysts, over 80% of investors are currently investing considerable sums, often as high as $75,000, into projects that have the potential to cause losses of 100% of the capital. When Geth’s share exceeds 66%, or two-thirds, the emergence of a critical bug can block the chain’s finalization.
The outcomes
So, what would actually happen if this pessimistic hypothetical scenario became a reality? For starters, almost all the staked coins would be entirely destroyed in a little over a month. To put things into perspective, a validator that goes online because of a minor bug only loses 0.4% of the stake during the same period. There would be a small window for validators to exit to limit their losses.
However, a rate-limited queue determines how many can exit per epoch. This is the timeframe of roughly thirty-two slots where the validators attest the blocks. On January 23rd, the second-largest execution client increased shares from 8% to 14%. The change occurred even though they identified critical bugs in several versions of the client. These mishaps led to users being unable to fully process blocks on Ethereum.
Exchanges
On the same day, a large exchange platform also discussed the situation. This platform is one of the largest to run on Geth, and their main concern was client diversity when accounting for Geth’s dominance. As such, they’ve announced the beginning of an upgraded technical assessment on alternative execution clients that can balance things out.
Exchanges have begun evaluating prospective clients since 2020, but none have met the requirements until now. That’s because it can be reasonably challenging to fulfill the demands of growing exchanges and a crypto marketplace that continues to evolve and see increasing engagement. A formal update on the process will be released toward the end of February 2024, but it’s unclear if the platform will have a definitive answer by then, or just confirm that they’re still assessing the options.
According to Ethereum.org, the exchanges are not wrong to suspect a diversity issue. Approximately 85% of nodes operate on Geth. Bugged transactions and a failure to handle executions or payloads are just some of the concerns this situation could provoke. And since this can indeed happen, the exchanges must do what they can to protect their customers and businesses.
Dencun upgrade
The Ethereum space is well-known for its numerous upgrades, and the blockchain was more than just a place for trading from the very beginning. At the moment, investors are looking forward to the introduction of the Dencun upgrade. It was officially activated in the Goerli testnet on January 17th. It introduced several Ethereum Improvement Proposals, with EIP-4844 being particularly interesting for enabling proto-danksharding.
This improvement has been highly anticipated, as it is set to reduce transaction fees associated with Layer 2. This has been an ongoing issue for the blockchain for quite some time, causing many investors to lose interest in Ethereum because they couldn’t support the costs. However, the upgrade’s roadmap includes nine other EIPs. Blob transactions are another essential feature. They will improve storage efficiency, making transactions readily available in a compressed format. The potential cost reduction can also be as high as 90%.
The Ethereum blockchain continues to develop, but investors must remain mindful of possible price changes. There’s still a lot of room for volatility, so staying aware of the shifts will make the difference between having a solid portfolio and losing a lot of capital.
