Deep and important explanation ‼️
1. Ethereum’s centrality in the altcoin ecosystem
• The Ethereum network is the infrastructure for many altcoins:
• A large number of alternative currencies (Altcoins) are built on the Ethereum network using the ERC-20 standard.
• Coins like Uniswap (UNI), Aave (AAVE), and Chainlink (LINK) are directly based on the Ethereum network.
• When the price of Ethereum rises, it boosts investor confidence in the entire ecosystem, leading to higher prices for its associated coins.
• Smart Contracts and Decentralized Finance (DeFi):
• Most DeFi projects (such as MakerDAO and Compound) are based on Ethereum.
• The rise in the price of Ethereum stimulates growth in these projects, which increases demand for the currencies associated with them.
2. Impact of Gas Fees
• High fees reflect demand for Ethereum:
• When the price of Ethereum rises, there is often an increase in network activity (such as trading and DeFi), which leads to higher Gas Fees.
• Coins that offer solutions to reduce fees, such as Polygon (MATIC), may see a rise as a result of the rise in Ethereum.
3. Ethereum’s dominance in the smart contracts sector
• Ethereum is the leader in the smart contracts sector:
• Ethereum's rise boosts investor confidence in other smart contract projects, such as Avalanche (AVAX) and Solana (SOL), causing them to rise as well.
• Ethereum alternatives follow its rise:
• Coins like Cardano (ADA) and Binance Smart Chain (BNB) often rise with Ethereum due to competition in the same sector.
4. Capital flows
• Ethereum's rise attracts liquidity to altcoins:
• When Ethereum starts to rise, capital first flows to its associated coins, then moves to smaller or competing coins.
• In bull markets, Ethereum's rise leads to what is known as “Altcoin Season.”
5. Exceptional cases
• Currencies independent of Ethereum:
• There are some currencies that operate on independent networks (such as Polkadot (DOT) and Solana (SOL)), and may move independently based on special updates or partnerships.
• The adverse effect of high fees:
• If Ethereum fees rise too high, users and investors may move to cheaper alternative networks, supporting the prices of these altcoins.
Conclusion
• The relationship is largely positive: The rise of Ethereum often translates into the rise of altcoins linked to its network or that use smart contracts.
• The biggest impact on ERC-20 coins: such as UNI, LINK, and MATIC.
• Market Liquidity: The rise of Ethereum attracts liquidity and stimulates the rise of altcoins, but with some exceptions based on the circumstances of each coin.
If you are a cryptocurrency investor, monitoring Ethereum's performance can give you important signals about the direction of altcoins.