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 only mined on July 30, 2015. Since then, Ether (ETH) has become l dominant altcoin in market capitalization, popularity, and network value settlement, having even surpassed Bitcoin in the latter.
Ethereum was created with a myriad of possibilities in sight, enabling smart contracts, powerful tokenization, complex decentralized applications, and decentralized fundraising campaigns. The latter of these became extremely popular in 2017, as initial coin offerings took over the crypto space and amassed incredible payouts for participants.
Could DeFi be the new ICO?
Ether has become the primary funding mechanism for ICO projects. As the said projects and their underlying ERC-20 tokens exited the ICO phase, speculation for their tokens increased, as did the price of Ether, whose price hit a record high of $ 1,412 on January 10, 2018. While currently nowhere near that number, the price of ETH hit a 2020 high of nearly $ 357 on August 1.
While ICOs have helped bring the cryptosphere to new heights, the hype was short lived and the entire crypto market collapsed in early 2018. Shortly before that, the Securities and Exchange Commission of United States had announced that ICOs were considered security offers and began a crackdown to protect investors.
Now, there are concerns that Ethereum is taking a similar path to 2018 with the growth of DeFi. While regulatory oversight has pushed for improvements in the crypto ecosystem, in the short term it can have devastating consequences such as loss of funds for investors and lawsuits for project operators.
DeFi really drives the price of Ether?
While price speculation appears to be rampant, it is widely known that the actual financial impact and liquidity of decentralized finance is rather insignificant. Ethereum recently becoming the largest blockchain in terms of regulated value, how much of this activity in Ether can actually be attributed to DeFi?
ConsenSys estimates DeFi protocols collectively hit an all-time high of 3.3 million Ether stuck in protocols in the second quarter of 2020. Messari suggested that the Ethereum blockchain settles around $ 2.5 billion every day. Comparing DeFi to the real crypto market, it’s also easy to see that DeFi is still just a drop in the ocean, smaller than the market cap of XRP and Bitcoin Cash (BCH), and only represents 1.5% of the total cryptocurrency market.
DeFi sector vs BCH and XRP – Market capitalization. Source: Messari
Ether weathering a DeFi boom and bust cycle?
As funding rates for DeFi protocols are eclipsed by the ICO-based fundraisers of the 2017 era, it could be worrying that a handful of DeFi tokens have rallied thousands of percent in a short period of time. . For example, Aave (LEND) rose 7,300% from $ 0.0046 to $ 0.344, and the price of Compound (COMP) quadrupled in its first week of trading in June. In fact, over 10 other DeFi-related tokens grew by over 100% in 2020. While impressive, this still pales in comparison to the ROI provided by ICOs in 2017.
While DeFi has reached milestones, such as $ 4 billion in locked-in funds, the size of the investment secured by DeFi protocols is far less than what ICOs have amassed. Still, Ethereum co-founder Vitalik Buterin seems concerned that people are underestimating the risks associated with these protocols, which have been exploited by hackers in the past.
While another bubble is not ideal, it can be an inevitable part of the current cycle of crypto innovation. Projects and concepts tend to be disproportionate before more organic adoption and investments occur. This is exactly what has happened with ICOs, security token offerings, Bitcoin, and altcoins. As the DeFi industry continues to grow rapidly, its biggest challenge may come in the form of future regulation, just as it has done with ICOs.
The Future of Ethereum: Stablecoins, Institutionalization and Scalability
While only time will tell if DeFi is experiencing a bubble phase, there are certainly other reasons Ether is outperforming Bitcoin, such as becoming the base for stablecoin transfers. According to ETH Gas Station, Tether (USDT) is the largest consumer of gas on the grid and continues to grow. Although Ethereum overtook Bitcoin in network activity, this was mainly due to stablecoin transfers, which were themselves largely fueled by inter-exchange settlements.
This year, positive milestones such as the issuance of real securities on the blockchain and $ 1 billion in futures volume on Ether have also been achieved. These factors have contributed to the growing adoption of Ethereum over the past five years, but they also point to a looming stalemate in scalability and congestion. However, Ethereum 2.0 staking has finally started testing, raising hopes for a new and improved network.
Related: Ethereum 2.0 Is Likely To Affect DeFi And DApps With The Introduction Of PoS
Over time, it’s likely that DeFi will continue to grow even if it suffers short-term setbacks. This means that the Ethereum network will likely continue to ride on the back of this success.