The Ethereum network has just turned five. Although the project was first announced at the North American Bitcoin conference in January 2014, its Genesis block was dismantled on July 30, 2015. Ether (ETH) has become the dominant altcoin in terms of market capitalization, popularity and wealthy settlement, and even surpassed bitcoin.
Ethereum was created with countless possibilities in sight, Enable smart contracts, powerful tokenization, complex decentralized apps and decentralized fundraisers. The last of which became extremely popular in 2017 when the first coin offers took over the crypto space and brought incredible profits to participants.
Could DeFi be the new ICO?
Ether became the primary funding mechanism for ICO projects. As these projects and the underlying ERC-20 tokens left the ICO phase, speculation about their tokens increased, as did the price of ether, the price of which hit a record $ 1,412 on January 10, 2018. Although currently far from this number, the ETH price reached a record 2020 of almost $ 357 on August 1.
Although ICOs have helped lift the crypto ball to a new level, the hype was short-lived and the entire crypto market fell apart in early 2018.. Shortly before, the Securities and Exchange Commission announced that ICOs were considered security offers and launched an offensive to protect investors.
Now, Some fear that Ethereum will take a path similar to 2018 with the growth of DeFi. While regulatory oversight has led to improvements in the crypto ecosystem, this can have devastating short-term consequences, such as: B. the loss of funds for investors and lawsuits for project operators.
Is DeFi really increasing the price of ether?
While price speculation appears to be out of control, it is known that the actual financial impact and liquidity of decentralized funding are largely negligible. How much of this activity on Ether can actually be attributed to DeFi since Ethereum has recently become the largest blockchain in terms of established value?
ConsenSys estimates that the DeFi protocols together reached a record 3.3 million ether-blocked protocols in the second quarter of 2020. Messari has suggested that the Ethereum blockchain liquidate around $ 2.5 billion a day. If you compare DeFi’s to the real cryptocurrency market, it’s also easy to see that DeFi’s are still a drop in the bucket, smaller than the market cap of XRP and Bitcoin Cash (BCH), and only make up 1.5% of everything. the cryptocurrency market.
DeFi sector vs. BCH and XRP – market capitalization. Source: Messari
Can Ether Withstand a DeFi Boom Bust Cycle?
While funding rates for DeFi protocols are being reduced through ICO-based funding campaigns of the 2017 era, it could be worrying that a handful of DeFi tokens have thrown back thousands of percent in a short period of time. For example, Aave (LEND) rose 7.300% from $ 0.0046 to $ 0.344, and the Compound (COMP) price quadrupled in its first week of trading in June. Actually, More than 10 other DeFi-related tokens recovered by more than 100% in 2020. While impressive, it still fades compared to the return on investment from the ICOs in 2017.
While DeFi has reached milestones, such as $ 4 billion in insured funds, the total amount of investment made through the DeFi protocols is much less than that raised by ICOs. Still, Ethereum’s co-founder, Vitalik Buterin, appears to be concerned that people may underestimate the risks associated with these protocols that hackers have used in the past.
Another bubble isn’t ideal, but it can be an inevitable part of the current crypto innovation cycle. Projects and concepts tend to be disproportionate before more organic adoptions and investments arrive. This is exactly what happened with ICOs, value token offers, Bitcoin and alternative currencies. As the DeFi sector continues to grow rapidly, its biggest challenge could be future regulation, just like ICOs.
The future of Ethereum: stable currencies, institutionalization and scalability
While only time will tell if DeFi is going through a bubble phase, there are certainly other reasons why Ether outperforms Bitcoin, such as the basis for stable money transfers. According to the ETH gas station, Tether (USDT) is the largest gas donor on the network and continues to grow. While Ethereum outperformed Bitcoin in network activity, this was mainly due to stable money transfers, which were mainly fueled by transactions between exchanges.
This year, positive steps were also taken, such as the issuance of real values within the blockchain and a volume of ether futures of USD 1 billion. These factors have contributed to Ethereum’s growing acceptance in the past five years, but they also point to an upcoming dead end when it comes to scalability and congestion. However, testing Ethereum 2.0 has finally been tested, and this gives hope for a new and improved network.
Over time, DeFis are likely to continue growing, even if they suffer short-term setbacks. This means that the Ethereum network is likely to continue traveling after this success.