This may be the first year in Ethereum’s history in which the network’s economy has been severely damaged. As per the on-chain data, Ethereum’s economy has reduced by at least 30% or more in 2022 alone.
This is primarily because of the crypto economy crunch caused by the expanded ‘crypto winter season’, further fueled by Terra Luna’s and FTX’s fall.
Resultantly, a large number of Ethereum investors departed their ways with the network and pulled out their investments.
Ethereum Exchange Decline Dilemma
An analyst at CryptoQuant suggests that Ethereum investors may have been departing temporarily and may opt to hold Ether later for the long term.
However, analysts’ views do not change the fact that the Ethereum exchange is in deep waters and the dilemma is beyond the network’s expectations.
What Is ‘Exchange Reserve’?
Ethereum exchange represents funds in Ether held by owners in their digital wallets and the wallets are in the custody of centralized exchanges.
So whenever stats suggest that the exchange reserve has increased then this means owners have been storing their Ether funds with exchanges.
The main purpose of owners engaging with exchanges is generally for trading, either for selling, converting, or acquiring another digital currency.
It would hence be asserted that the exchange reserve represents the sale and disposal supply of Ether coins. In return, this sale and disposal supply of Ethers has the potential of bringing a bearish impact on the value of the asset.
Similarly, if the exchange reserve indicates a decline then that means investors are parting ways with Ether which brings down the sale and disposal supply. Eventually, leading to a potential bullish impact on the value of the asset.
Exchange Reserve Shrinkage Started In 2021
It was at the end of 2021 when the Ethereum exchange reserve started to indicate a reduction. However, the reduction accelerated from the beginning of 2022 and, by the time of this writing, remains accelerated.
Massive reduction started soon after the Ethereum network conceded the news pertaining to FTX’s disastrous collapse.
The reduction thereafter was predictable because FTX was not only the world’s biggest exchange but also a ‘centralized’ exchange.
Upon FTX’s fall, investors became seriously concerned and developed a sense of fear which forced them into re-considering their engagement with ‘centralized exchanges’.
Subsequently, a large number of centralized exchange users left such exchanges and pulled out their crypto funds, including Ether.
They were convinced it would be better to keep funds in their own wallets instead of giving them to somebody else.
CryptoQuant’s Argument Finds Support
This brings us back to the views shared by the analyst of CryptoQuant.
Considering why the exchange reserve has declined by 30% and that Ether funds are actually lying in owners’ wallets, CryptoQuant’s argument finds support.
There could be a possibility that Ethereum holders may be keeping the funds and using them in the distant future. Or they may proceed back to centralized exchanges in the future after the uncertainties are removed or become clearer.
The positive aspect of exchange reduction is that the majority of parted Ether holders have not disposed of their Ether funds.
Where Ethereum Stands Today
Ethereum is currently trading at a reduced price of $1,216.00 and has been struggling in bypassing a crucial ceiling of $1,230.
In the past week alone, the coin saw its value surge by 1% against the US Dollar.
However, such gains can neither make any difference nor bring back the people who were once part of the Ethereum ecosystem.
Network’s Capability a Game Changer
For bringing them back, and stopping exchange reduction, Ethereum would need to reinstate investors’ confidence back into centralized exchanges.
If anybody can do this impossible, it is Ethereum because even with a reduced exchange, Ether continued to dominate the crypto market.
It has raised the bar in Non-Fungible Tokens (NFTs) markets, in the decentralized finance (defi) sector, crypto trading, and Metaverse.
Ethereum is creating a difference in software design, infotech, blockchain, Web3, etc., and can certainly put things in order in the industry. All it requires is a little support.