The Ethereum network has just been established for 5 years. Although the project was first announced at the North American Bitcoin Conference in January 2014, its origin block was not mined until July 30, 2015. Since then, Ether (ETH) has become the main token for market value, popularity and network value settlement, even surpassing Bitcoin in the latter.
The creation of Ethereum has endless possibilities, allowing smart contracts, powerful tokenization, complex decentralized applications and decentralized fundraising activities. As the initial token issuance replaced the cryptocurrency field and accumulated amazing benefits for participants, the latter became very popular in 201
Can DeFi be the new ICO?
Ether has become the main funding mechanism for ICO projects. As mentioned earlier, the project and its underlying ERC-20 tokens withdrew from the ICO stage, speculative activities on their tokens increased, and the price of Ether also rose. The price of Ether reached on January 10, 2018 Up to a record high of $1,412. With this figure, the price of ETH reached a record of nearly $357 in 2020 on August 1.
Although ICOs helped push the crypto space to new heights, the hype was short-lived, and the entire crypto market collapsed in early 2018. Not long ago, the US Securities and Exchange Commission announced that ICOs were considered safe products and began cracking down to protect investors.
Now, with the growth of DeFi, some people worry that Ethereum is following a similar path, just like 2018. Although regulatory supervision has promoted the improvement of the crypto ecosystem, in the short term, it may have devastating consequences, such as the loss of investors’ funds and the litigation of project operators.
Is DeFi really pushing the price of Ether?
Although price speculation seems rampant, it is well known that the actual financial impact and liquidity of decentralized finance are negligible. With Ethereum recently becoming the largest blockchain for value settlement, can this activity in Ethereum actually be attributed to DeFi?
ConsenSys estimates that the DeFi protocol collectively set a record high of 3.3 million Ethereum in the second quarter of 2020. Messari suggests that the Ethereum blockchain settles approximately $2.5 billion per day. When comparing DeFi with the actual cryptocurrency market, it is easy to see that DeFi is still only a drop in the ocean, smaller than the market value of XRP and Bitcoin Cash (BCH), and only accounts for 1.5% of the entire cryptocurrency market.
Comparison of DeFi sector with BCH and XRP-market capitalization. Source: Mesari
Has the ether weathered the DeFi boom and bust cycles?
Although the fundraising rate of the DeFi protocol based on 2017 ICO-based fundraising activities dwarfs the funding rate of the DeFi protocol, it is worrying that a small number of DeFi tokens have risen by thousands of% in a short period of time. For example, Aave (LEND) rose 7300% from $0.0046 to $0.344, and the price of Compound (COMP) tripled during the first week of trading in June. In fact, by 2020, there are more than 10 other DeFi-related tokens that have risen by more than 100%. Although impressive, it still pales in comparison to the return on investment provided by ICOs in 2017.
Although DeFi has reached milestone goals, such as $4 billion in locked funds, the absolute investment scale obtained by the DeFi agreement is far smaller than the funds raised by ICOs. However, Vitalik Buterin, the co-founder of Ethereum, seems to worry that people may underestimate the risks associated with these protocols, which have been used by hackers in the past.
Although another bubble is not ideal, it may be an inevitable part of the current encryption technology innovation cycle. Before more natural adoption and investment, projects and concepts can easily be hyped. This is exactly what happened with ICOs, security token products, Bitcoin and altcoins. With the continuous and rapid development of the DeFi field, its biggest challenge may be the form of supervision in the future, just like ICO.
The future of Ethereum: stablecoins, institutionalization and scalability
Although only time will tell whether DeFi is experiencing a bubble, there are definitely other reasons why Ether outperforms Bitcoin, such as becoming the basis for stablecoin transfers. According to the ETH gas station, Tether (USDT) is the largest gas station on the network and continues to grow. Although Ethereum does surpass Bitcoin in network activities, this is mainly due to the transfer of stablecoins, and settlement between exchanges has greatly promoted the transfer of stablecoins.
This year, positive measures have also been taken, such as the issuance of real-life securities on the blockchain and the trading volume of Ethereum futures reaching US$1 billion. These factors have contributed to the increasing popularity of Ethereum in the past five years, but at the same time they pointed to imminent dead ends in scalability and congestion. However, the Ethereum 2.0 bet has finally begun to test, which brings hope for a new and improved network.
Related: Ethereum 2.0 may affect DeFi and DApp through PoS
Over time, even if DeFi suffers some setbacks in the short term, it may continue to grow. This means that the Ethereum network may continue to develop on the basis of success.