Bitcoin

Changing the way DeFi projects work

The end of 2020 was enormous for the crypto community. There was not only a spectacular rise in the price of digital assets, possibly signaling the start of another bull market, but also the start of the Ethereum 2.0 beacon chain, which has been in development for some time.

Ethereum’s long-awaited blockchain upgrade is transforming the network from a proof-of-work to a proof-of-stake consensus model and is designed to improve speed, security, lower transaction fees, and address scalability issues. who lag behind Ethereum in the course of 2020.

Ethereum 2.0 is still in the early stages of development, in phase 0, and there is still a long way to go before a full migration from the old to the new chain occurs. Despite this, The effects on the market could already be felt due to the rapid development. This is especially true for the DeFi area, as Dr. Octavius, co-founder of the DeFi OctoFi protocol, told Cointelegraph:

“Most people misunderstand Eth2 and what it means for the entire industry, DeFi in particular. While other chains are competing to solve some scaling issues in Ethereum, in my opinion the impact of the network is pretty profound and Ethereum is leaps and bounds ahead. If anything, the 2.0 launch is giving people confidence in the staying power of Ethereum. “

The DeFi boom

Changing the way DeFi projects work
Changing the way DeFi projects work

The introduction of Ethereum 2.0 caused significant price volatility. The price hit a high of around $ 670 shortly after it launched on December 1, only to suffer a slight correction in the days that followed in line with the rest of the altcoins.. The hype was felt most in DeFi, however, as ETH 2.0 has been a critical element in growing the overall value of projects and that trend is likely to continue, Octavius ​​said: “The impact should accelerate participation in DeFi markets like DeFi Builders can improve their products by an order of magnitude. “

The total locked-in value (TVL) was just under $ 10 billion in early November and is now at $ 13.4 billion after a slight correction from its all-time high of $ 14.1 billionaccording to data from DeFiPulse. So it grew significantly after November 27th, a few days before the beacon network launched. Growth is being driven by a new confidence in Ethereum’s development efforts and DeFi’s longevity.

Of course, the current uptrend in cryptocurrencies, along with other factors, including the merger of Yearn.Finance with the decentralized exchange SushiSwap, which was only last on Yearn’s list of secured partnerships, contributed to this significant growth. Finances. In addition, there was a liquidation of Uniswap’s profitable agriculture, which resulted in a sharp increase in TVL (Total Blocked Value) in other protocols such as SushiSwap and Bancor. Ilya Abugov, advisor to dApp statistics aggregator DappRadar, told Cointelegraph that Eth2 could be crucial in avoiding competing blockchains in the DeFi space:

“It can become important when competing blockchains really get going. As Polkadot and NEAR become more active, the good news regarding Ethereum 2.0 can help keep projects anchored in the Ethereum ecosystem. “

Despite the significant growth of TVL, the total transaction volume fell. Over $ 41 billion in November, The transaction volume recorded a decrease of 12% compared to the previous month. This may be because users are not moving their money and are using Eth2 instead.

This was one of the necessary steps for the start of ETH 2.0, as 16,384 validators each had to use 32 ETH to start the new chain. A total of 524,288 ETH in the deposit agreement can easily explain the decline in the transaction volume in November.

Another piece of data showing the dominance of DeFi alongside the billions in TVL is the fact that 99% of Ethereum’s transaction volume comes from DeFi protocols.. This means that users will still be drawn to DeFi’s enormous returns, which are unlikely to be matched by ETH 2.0’s stake rewards. It is also likely that users will stay on Ethereum during this change if promising projects running on the blockchain continue to perform well. In addition, the improvements made through the update may also attract a more cautious institutional audience.

Disadvantages of the ETH 2.0 in DeFi

Once Ethereum 2.0 is fully functional, the DeFi market will likely benefit from the faster and more scalable network. However, some industry participants argue that there might be some downsides.

The transition to a PoS consensus will have an impact on the DeFi ecosystem. Stakers with ETH in their wallets deserve an interest in their problems. Basically By sharing very similar reward systems, it is possible for the compensation offered through the stake to compete with the rewards of high-yield farming and other DeFi products. While this can take some time, the potentially high rewards in Eth2 can lead to conflict and decreased incentive to use DeFi. However, innovative solutions to this conflict are already being developed, including tokenized ETH 2.0 bonds.

Validators can receive money in originally unlocked Ether by transferring a token created by a fully secured smart contract to a creditor. In return, It is promised that upon the blockchain merge and the lockout end, the creditor will automatically receive the original 32 ETH plus the accrued rewards. Dr. Octavius ​​is optimistic about such developments:

“This concept is not only interesting for the futures markets, but also for the forecast markets and how they can be used to improve project management. […] But I’m also very interested in how something like EIP 1559 affects the flow of shares in ETH and gives it a better S2F than Bitcoin. I think there will be a whole new dynamic in valuing investments, especially as DAO and DeFi projects continue to generate attractive income. “

Another big risk is the old and new Ethereum blockchains running at the same time. With successful development milestones, the full transition to the new chain is planned for 2022, but not without significant risks. DeFi logs can go smoothly, but there is also the possibility of minor outages or even catastrophic losses.. Dr. Octavius ​​told Cointelegraph, “Of course we have encountered unexpected bugs, or maybe Eth2’s results are disappointing, but if developers continue to build on Ethereum, that really counts.”

What the future holds for Ethereum

There seems to be a consensus on the positive effects of Ethereum 2.0. However, as mentioned above, there may be some inconvenience. From technical risks to a change in the dynamics around DeFi and liquidity. The latter, according to Abugov, will not be felt in the near future:

“It doesn’t seem like Ethereum 2.0 will have a significant impact on liquidity in the next 9 to 12 months. It will remove some ETH, but it is doubtful that it will be enough to disrupt the current Ethereum 1.X economy. “

With a successful move to Ethereum 2.0, which poses a potential risk to DeFi’s growth, some see an extremely positive outlook for the NFT market, which has grown significantly over the course of 2020 and is not a sector directly related to the model will compete. put behind Eth2.

Regardless of the advances in Ethereum 2.0, DeFi is likely to take DeFi to the next level in 2021 if it breaks into legacy funding. Dr. Octavius ​​said, “Consumers will suddenly find they have access to new savings accounts secured at 2% APR, all made by DeFi without knowing it.”

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