As cryptocurrencies begin to cement themselves into the wider financial system thanks to growing interest from previously wary institutional investors and blockchain technology’s increasing integration into our everyday lives, the way is being gradually paved for a world where all money and financial products are digital. The driving force behind the ultimate shift will undoubtedly be decentralised finance (DeFi), which is slowly but surely making the transition from conceptual technology to commercial use. Stablecoins will certainly play a pivotal role in this space as their inherent stability make them far more suited for such applications. Indeed, apart from private projects like Tether and Paxos, global central banks are all working overtime to roll out their own CBDCs (Central Bank Digital Currencies) in order to meet popular demand for low-volatility cryptocurrencies. With 2021 touted as the year of DeFi, we can expect to see even more integration of this technology. That can only be good news for the cryptocurrency whose architecture makes it all possible: Ethereum.
So, what is DeFi anyway?
DeFi just stands for decentralised finance. It basically does what it says on the tin. It takes away the need for intermediaries in a range of financial transactions and agreements. Using the same blockchain technology central to cryptocurrencies, two parties can enter an agreement with a virtually unlimited number of variables and stipulations. There’s no need for a third-party enforcer or middleman as the technology itself creates a smart contract that’s essentially self-fulfilling. For example, imagine you want to agree to pay someone 5 ETH if they perform a certain task for you. Your 5 ETH will be earmarked, and as soon as the other party delivers on their end of the bargain, the money will be immediately paid to them over the blockchain. This means both parties have total peace of mind that the other will make good on their promise and, best of all, there are no hefty fees to pay for this security. The potential applications go way beyond simple sale/purchase contracts, though, ranging all the way from personal loans to lease-hire agreements, crowdfunding and even prediction markets.
The role of Ethereum
The Ethereum blockchain and DeFi go hand in hand. Indeed, it’s hard to imagine how DeFi could have developed without it. This is because the Ethereum network is inherently easier to use and lends itself to creating other types of decentralised applications beyond standard transactions. In fact, the number two digital currency’s creator Vitalik Buterin alluded to such uses as early as 2013 in his original Ethereum white paper. As we’ve already touched upon, the smart contract architecture makes this all possible. It’s hoped that the advent of Ethereum 2.0 will improve the scalability of such applications, with a view to popularising them even further. With a sharp uptick predicted in DeFi this year, we can also expect newer applications to be more user-friendly than earlier versions that primarily focused on the tech side and neglected the UI/UX aspect. Despite the crucial role the Ethereum network plays for DeFi, it’s also worth noting that other platforms like Polkadot are similarly well-suited to host DeFi solutions, a trend that may just start to emerge before 2021 is out.
What does this mean for prices?
If we compare ETH with BTC, we see that the original cryptocurrency has lost over 40% from recent highs, while Ethereum has only declined a shade over 35%. And though the current correction may likely only be short-lived, this difference in the extent of losses is statistically significant. Many analysts attribute this to Ethereum’s integral role in DeFi applications. Looking at the three-month ETH chart below (taken from the StormGain crypto trading platform), we can see a period of consolidation signaling that a break back to the upside is likely:
As we can see, since the initial correction in late May, Ethereum is seeing both higher troughs as well as peaks, which would suggest that a new uptrend is establishing itself. This is likely attributable to ETH’s utility beyond its use as a cryptocurrency. With the launch of the Ethereum 2.0 network, DeFi applications will be even more easily scalable, driving demand for the native » Read more
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If we look at the same time frame for major DeFi » Read more