Ethereum's (ETH ) In-Depth Analysis

Quick Overview

Ethereum is one of the largest and most popular blockchain platforms, which utilizes a Turing-complete scripting language, Solidity, to enable developers to write smart contracts and decentralized applications (Dapps).

Source: coinmarketcap.com

Ether (ETH) is the native asset used within the Ethereum network and is used as a source of payment to miners and developers for the computational costs (gas) needed to verify blocks, execute smart contracts, and develop Dapps.

Technology Evaluation

The EVM (Ethereum Virtual Machine) is a quirky but solid technological development. Additionally, Ethereum developers are solving real, business use cases with the technology, e.g. Golem and Augur. Furthermore, Vitalik and team appear to be solid leaders and highly focused.

However, there are a few issues to note:

1. Solidity — The Solidity programming language is not great for smart contracts, which is a big use case for Ethereum. This comment is a bit old, but still relevant. Essentially, Solidity was a good first attempt but the community has realized problems with it. However, the same thing happened with JavaScript and look how popular that is! That being said, there are attempts to make better languages that integrate with the EVM, such as Vyper, but it is still in beta.
2. Spam Attacks — Ethereum is vulnerable to spam attacks to push up the price of gas (EOS rumors) or even just getting clogged by popular apps or ICOs (remember CryptoKitties?). There are several projects trying to solve this problem via sharding and off-chain transactions, e.g. Raiden Network and Plasma. Unfortunately, these solutions are hard to get right and time consuming (these projects have been trying for awhile), thus no guarantee of success.

Code Evaluation

Source: Quality Analysis of Cryptocurrency Codebases (QUACC)

How to read the stats:

1. Cyclomatic complexity — is one measure of how complex the individual methods/functions that make up a program are. A program with a high average cyclomatic complexity or a program with high maximum cyclomatic complexity will be difficult to test its quality. Note: you can’t really say that a “low cyclomatic complexity” is good, but rather a really high number is bad. For example, it is similar to asking “what’s a good weight for a human?” Well, maybe 100 pounds is good for a child, but it would be dangerously skinny for a 6'2 tall man, but everybody would agree that if a person weighed 650 pounds, it would be suboptimal. Generally, a value lower than 10 is considered to be low-risk. The uncompiled version is a measure of the complexity of the code itself, whereas the compiled version is a measure of the code after it been converted into an executable (machine code); both metrics are beneath 10, thus low-risk.
2. Number of errors in code — These are problems with the code that automatic static analysis has determined to be relatively severe, such as a possible null pointer dereference or opening a resource and never closing it. Note: the number of errors in code and the number of warnings are both sometimes prone to false positives, thus the metric could be overstated. At time of testing, Ethereum had 69 errors in its code.
3. Number of warnings in code — These are problems with the code that our that our static analysis has determined to be less severe. Looking through the Ethereum warnings, these are mostly from forcibly casting an unsigned (i.e., non-negative only) integer into a signed integer, superfluous code, or not initializing a variable in a constructor. At time of testing, Ethereum had 219 warnings in its code.

Network Analysis

Currently, Ethereum is one of the biggest and most reputable platforms for Dapp developers. Despite the aforementioned shortcomings, coupled with a multitude of well-funded competitors, Ethereum still enjoys strong network effects from its first mover status.

Given the switching cost between platforms for developers is notable but not insurmountable, the first-mover advantage is increasingly important to continued growth; especially in terms of Ethereum’s “killer app,” i.e. capital raising. Ethereum’s continued domination of the capital raising or ICO market indicates that developers and companies currently have faith in the ecosystem despite some of these ICOs being used by competitors, e.g. EOS and NEO, to raise large sums of money to compete with Ethereum.

Regulatory Analysis

Recently, the SEC announced that Bitcoin and Ether are not securities which means instead of being subject to Securities and Exchange rules like stocks or futures, they are commodities. This is positive because it removes itself from the potential ire of the SEC (for the time being) and paves the way for Ethereum derivatives creation (additional source of demand).

However, the announcement did not drive up the price of ETH. Possible interpretations of this lack of price action could be that the government attitudes toward the overall cryptocurrency space is still sufficiently murky.

Community Review

Github Repositories

There are 161 repositories on Github with over 40 contributors, and supports multiple languages and APIs for developers. Furthermore, Ethereum is doing a great job in lowering the barrier for adoption to attract new users. For example, in addition to Solidity, they also provide Python and Javascript plug-ins, so that different language developers can integrate and build upon the technology with few obstacles.

Contributors

The community has grown a lot since inception with a multitude of decentralized actors, contributing to several different repositories. For example, the frequency of updating popular repositories can be less 10 minutes per update. Another example is Go-Ethereum, which has 104 pull requests and 5,986 forks, but Solidity is by far the most popular repository with more than 3000 commits, constant pull requests and active users.

Miners & Computing Nodes

The number of miners and Ethereum nodes indicates the continued popularity of the platform. There are approximately 150 active miners via ethereumpool.co. Plus, the computing nodes in the picture below show the global nature of Ethereum’s network. Furthermore, miners are profit driven actors, thus the continued and growing pool of miners suggests sustained optimism regarding ETH’s future price appreciation in relation to their mining expenses.

Source: Peter Szilagyi, Google Earth, ethernodes.org

Technical Analysis

EMA with Long Term Trends

On the 1D chart, the bullish EMA cross (not shown), or Golden Cross, has not occurred which confirms ETH’s negative, 2018 linear price trend (Pearson’s R Correlation between time and price of 0.75). At time of writing, price is near the mean with a downward trend lag. If the existing linear trend holds, then a continued decline to a key support and 0.236 fibonacci retracement level (black and dashed line) of ~$350 is likely in the near term. This level is critical to hold. If price fails to hold ~$350, then continued decreases to $200 or below become probable.

Source: tradingview.com

Additionally, the volume flow indicator (VFI) has consistently remained beneath 0, which may indicate stalling buying volume, which supports the “meandering” downward price theory. The VFI interpretation is a value above 0 is bullish and below 0 is bearish, with divergences between price and oscillator being high probability signals.

Ichimoku Clouds

The Ichimoku Cloud uses four metrics to determine if a trend exists; the current price in relation to the Cloud, the color of the Cloud (red for bearish, green for bullish), the Tenkan (T) and Kijun (K) cross, Lagging Span (Chikou), and Senkou Span (A & B).

The status of the current Cloud metrics on the 1D charts for both singled settings (10/30/60/30) and doubled settings (20/60/120/30) are bearish; price is below the Cloud, Cloud is bearish, the TK cross is bearish, and the Lagging Span is below the Cloud and price.

A traditional long entry would occur with a price break above the Cloud, known as a Kumo breakout, with price holding above the Cloud. From there, the trader would use either the Tenkan, Kijun, or Senkou A as their trailing stop.

Using (10/30/60/30), price will need to break above flat Senkou B level of ~$564 for a Kumo breakout and new bull trend. Using (20/60/120/30), price will need to break above flat Senkou B level of ~$603 for a Kumo breakout. If successful, price targets would be $617 and $700. The support levels to watch on the downside are $430, $380, and $350 (critical to hold).

Source: tradingview.com

Competitive Analysis

ADA (Cardano)

Cardano is the one competitor that should make Vitalik and team concerned, especially from a technology perspective. Cardano is much more focused on correctness, can do formally verified smart contracts, and has some smart minds working on it. However, despite the relatively high market cap, there still does not appear to be much activity happening from developer perspective. Ethereum is still the king of the hill regarding developer usage, which means that this could become a case of a technically superior product not getting market support. One potential reason is that Cardano uses a ML-derived programming language called Plutus, which looks an awful lot like Haskell, and to get people to even look at a language like that is difficult!

However, Cardano’s management seems to have noticed the developer shortfall and has taken proactive steps to address it. For example, the CEO of Cardano has recently went on a global marketing campaign to promote the network and technology, and attract developers and users. In short, Cardano has the long term potential to be quite disruptive to Ethereum, but will need to make demonstrable strides in language friendliness and attracting developers to build “real” applications on the network.

Price has consistently declined since early May with a Pearson’s R Correlation between time and price of 0.85. Using the slow, Ichimoku Cloud settings (20/60/120/30), price will need to breach $0.25 to re-ignite a new positive uptrend. M_ore fundamental and technical analysis of ADA_ here.

Source: tradingview.com

TRX (Tron)

Tron is a blockchain technology originally built on Ethereum, but currently transitioning to its own mainnet. Tron is a highly controversial digital asset for reasons ranging from its gregarious CEO to allegedly copying large portions of their code from other projects without attribution. In theory, TRX will support higher transaction speeds and better scalability. The goal of Tron includes free and uncontrolled data storage on the distributed network, ICOs, and digital assets supported by their decentralized infrastructure. If TRX can execute upon a fraction of their promises, they could become a legitimate threat to Ethereum, but that is not in the near term.

Price has consistently declined since early May with a Pearson’s R Correlation between time and price of 0.95. Using the slow, Ichimoku Cloud settings (20/60/120/30), price will need to breach $0.06 to re-ignite a new positive uptrend. M_ore fundamental and technical analysis of TRX_ here.

Source: tradingview.com

EOS

EOS is one of the most hyped blockchain projects in recent time and similar to Tronix insofar as EOS is currently transitioning to its own mainnet and looking to attack Ethereum’s shortcomings. EOS will theoretically offer better scalability, faster transaction speeds, and will be free. However, instead of being decentralized like Ethereum, EOS will be more centralized with only 21 validator nodes, which is typically a trade-off for better speed and performance.

Additionally, unlike Ethereum which requires users to pay “gas” for the transactions, EOS is free with the fees being paid by an inflationary issuance schedule. This “free” service coupled with notable investors in the project make EOS a phenom that has skyrocketed to the top 5 in market cap and top 4 in trading volume with little more than a white paper. It would appear that the EOS community has faith in the lead developer, Dan Larimer, who has a proven and solid track record with his programming capability widely recognized.

Price has consistently declined since early May with a Pearson’s R Correlation between time and price of 0.91. Using the slow, Ichimoku Cloud settings (20/60/120/30), price will need to breach $13.60 — $14.40 to re-ignite a positive uptrend.

Source: tradingview.com

NEO

NEO is known as the Chinese Ethereum and proposes a “Smart Economy” which includes digital assets, digital identity, and smart contracts. NEO’s Byzantine Consensus or Delegated Byzantine Fault Tolerance is the protocol NEO uses to verify the block creation by selecting delegates (bookkeepers) to reach consensus and approve a new block. In theory, Byzantine Consensus provides faster transaction speeds by cutting down the number of involved nodes, which also reduces costs. Additionally, NEO’s smart contracts support popular programming languages which may attract developers.

Price has consistently declined since early May with a Pearson’s R Correlation between time and price of 0.91. Using the slow, Ichimoku Cloud settings (20/60/120/30), price will need to breach $60 to re-ignite a positive uptrend. M_ore fundamental and technical analysis of NEO_ here.

Source: tradingview.com

ZIL (Zilliqa)

Zilliqa is a young blockchain project that is gaining attention and users as of late. The token is based on Ethereum’s ERC-20 technology, but it is independent of the Ethereum network given it was founded precisely to address some of Ethereum’s shortcomings such as scalability and increasing gas prices. Furthermore, Zilliqa smart contracts are written using their proprietary programming language, Scilla, and uses sharding. Given the aforementioned improvements, Zilliqa has apparently been quietly attracting Ethereum developers over to its platform.

ZIL’s price has slowly been moving upward since the end of June 2018, despite the current bear market (black arrow). However, the negative, linear price trend using Pearson’s R Correlation between time and price is 0.88. Furthermore, price has bounced off the upper 2 standard deviation level (black circle), and has begun decreasing again. Using the slow, Ichimoku Cloud settings (20/60/120/30), price will need to breach $0.135 to re-ignite a positive uptrend.

Source: tradingview.com

BTC (Bitcoin)

Despite both digital assets and networks solving different problems, they still compete in subtle ways given Bitcoin has the first-mover advantage, highest trading volume, price, and market cap. This market dominance coupled with some work happening in attracting better developer support for Bitcoin smart contracts could pose serious future risks to Ethereum, i.e. bitcoin maximalism. Similar to how bimetallism eventually fell in favor of the gold standard, blockchains seem to have a natural monopoly, thus we may see all non-Bitcoin cryptocurrencies fade away or at least be reduced dramatically. Kyle Samani offers an in-depth look at the nuances of network effects within blockchain systems, which offers support and rebukes to the bitcoin maximalism theory here.

Price has consistently declined since early May with a Pearson’s R Correlation between time and price of 0.82. Using the slow, Ichimoku Cloud settings (20/60/120/30), price will need to breach $7900 — $8700 to re-ignite a positive uptrend.

Source: tradingview.com

Conclusion

Currently, the bearish trend of 2018 still exists for ETH, thus it would behove investors to wait for a strong buy signal before entering a long position. However, in the longer term, we still believe ETH has a strong probability of being very successful given the community is healthy and active, has “killer app” leadership, and its scalability problems are being addressed.

Despite the ever-growing threat by competing networks, we do believe Ethereum has several moats of protections including first mover advantage, strong community, and growing network effects. However, in the world of open-source competition, Ethereum will need to continually out-innovate their competition while retaining quality developers in order to maintain market leadership.

One interesting point of note is that Ether should technically be used to buy gas on the network, which means that it may eventually be treated as a commodity instead of a currency, thus fluctuate based on developer demand. If this logic unfolds, then ETH’s price may plateau or even decline in the future since ETH’s store of value premise will be diminished, which will increase velocity.

Special thanks to William Laboon and Szuyu Chu for their contributions!

Disclaimer: This analysis has been designed for informational and educational purposes only. Readers are advised to conduct their own independent research into individual assets before making a purchase decision.