Will Ethereum Set the Stage for another DeFi Surge?

18 Jan, 2021
Will Ethereum Set the Stage for another DeFi Surge?

It’s never easy being #2, but at some point, the spotlight moves off of the star and onto the next best thing. And in the crypto world, that’s Ether (ETH).

While Bitcoin and Ether don’t have much in common beyond their digital coin existence, the crypto world has turned its attention to ETH as it moves close to its All Time High of $1,448.18. The coin is the powerhouse behind decentralized transactions that are reshaping the way contracts are created in the fiscal world.  And despite challenges such as rising gas prices on the network, the current low reserve, and the launch of Ethereum 2.0 and its proof-of-stake model, Ethereum continues to dominate the DeFi universe.

What’s riding on the success of this one digital network?  Just the future of about every altcoin currently in the market.

“The Ethereum network must be part of any conversation about DeFi,” wrote Sarah Austin on Entrepreneur.” “Ethereum supported the DeFi sector almost single-handedly in 2020, with the cracks showing for much of it.”

While gas prices on Ethereum continued to rise in 2020, much to the ire of traders, it didn’t stop developers from building on the open-source network or from exploring other DeFi opportunities.

“This migration of capital to DeFi protocols has resulted in over $14 billion worth of digital assets ‘locked’ into their projects, with around 150k Bitcoins now locked onto the Ethereum network, a trend that’s accelerated rather quickly in recent months,” wrote Forbes Contributor Lawrence Wintermeyer in “From CeFi To DeFi: How Banking And Investing Are Evolving At Warp Speed.” This development in itself will serve as a further liquidity boost for the decentralized ecosystem, as centralized exchanges are fully aware of the growing interest in all things DeFi and have been more willing to list related tokens.”

And while other DeFi coins including synthetix (SNX), Aavae (AAVE), and Maker (MKR) have been a few bright spots in the new year, they have yet to capture significant attention – or  funds - of the market.

“Ether is the mothership, the main reserve currency layer for DeFi, whereas the DeFi coins are more application-related with a potential additional monetization component and some growth potential if well executed,” said Jean-Marc Bonnefous, managing partner of investment firm Tellurian Capital in a Coindesk interview.

One storm cloud looming over the DeFi sector is the awakening by traditional fiscal institutions to the value of building financial tools and instruments in the digital currency universe.  Central Bank Digital Currencies (CBDCs) are on the horizon and potentially could open the door to DeFi services of their own.

Financial Institutions that are planning to launch a CBDC would be well served to develop tools using “smart contracts,” which are a centerpiece of Ethereum’s power, as  suggested in a 2020 Brookings Institution working paper on Global Economy and Development. Ethereum was explored extensively in this paper, underscoring the innovative value that the network has brought to the financial world.

“Opportunities for novel financial technologies may be best captured with CBDC support for smart contracts, which would offer a flexible means of defining policies,” the authors concluded. “Smart contracts would also offer opportunities for the creation of new types of financial instruments; in cryptocurrency systems, they have led to the creation of instruments so novel (e.g., “flash loans”) that they have no direct analogs in the existing financial system.”

Crypto enthusiasts are betting that the slow-moving, bureaucracy central banks are no match for Ethereum, with its open-sourced platform and community of technically savvy developers.

“When Ethereum launched in 2015, it was easy to write off as an inflationary cryptocurrency with an economic model inferior to Bitcoin’s, but this missed the forest for the trees,” wrote Joey Krug of Pantera Capital. “Ethereum’s launch was a watershed moment in finance and enabled for the first time financial contracts without requiring a trusted third party to engage in a financial transaction. Bitcoin did this for digital gold/wealth storage, but Ethereum is doing it for finance. This new parallel system in the long run will be more globally-accessible, cheaper, and enable rapid experimentation on the level that the internet saw with information consumption, but this time for financial markets.”

Joyce Pavia Hanson