The Rise of Ethereum and DeFi

The Rise of Ethereum and DeFi

The price of Ethereum has increased as DeFi has grown, and the future looks bright for both

Ethereum (ETH) has been on a steady increase recently, adding 24% in the last week, and 68% over the past month. Similarly, decentralized finance (DeFi), is growing rapidly, with new protocols joining the ecosystem and increasing functionality across alternative financial applications.

ETH accelerates

While DeFi decentralized applications (dApps) are supported by various blockchains, the majority of dApps are built on Ethereum smart contracts, making Ethereum the backbone of DeFi. As DeFi has exploded in adoption and use, Ethereum’s price has risen. 

In addition to providing a foundation for open finance development, Ethereum also provides DeFi with the greatest source of collateral for protocols whereby users stake their ETH funds for asset exposure and possible returns. 

Ethereum monthly active addresses are on the rise, with 626k active addresses on August 2nd, closing in on the all-time high of 735k on January 16th, 2018, according to Coin Metrics. Transaction fees, as many traders are aware, are also up (see below), mostly a result of demand in block space as funds are moved across the network. The Ethereum network amassed USD $2 million in daily fees during the last week of July.

USD and ETH locked in DeFi reach all-time highs

2020 is undoubtedly DeFi’s breakout year. At the start of the year there was USD $663.64 million worth of funds locked up as collateral in DeFi smart contracts. Today, just seven months later, there is USD $4.45 billion locked up — a 570% increase. The number of ETH used as DeFi collateral has increased 133% since January, to to 4.3 million ETH locked up. Maker DAO (DAI) represents nearly a third of this market cap, with USD $1.38 billion locked in the Maker protocol

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Much of this increase in locked funds can be attributed to ‘staking’ collateral on DeFi protocols. Staking protocols allow users to earn potential returns on deposited funds, much like how interest is earned on traditional bank deposits. Crypto users can ‘stake’ their assets and lock them up for a predetermined period of time in return for a rate of return, or yield. While interest rates offered by banks can be negligible (0.1%), staking protocols can offer much higher rates.

Why DeFi is mainly built on Ethereum

Ethereum was inspired by what Bitcoin brought to the world, but it was conceptualized as an advancement on the Bitcoin protocol as a ‘world computer.’ For the founders of Ethereum, this meant a distributed ledger that would allow applications to be built on top of it. While there are other blockchains that offer similar functionality, Ethereum has the highest rate of adoption and usage. Many token protocols are built on Ethereum, using the common ERC-20 standard. With a top three market cap of USD $44.64 billion, Ethereum’s value serves to support and maintain its robust ecosystem.

As such, Ethereum users leverage their tokens as collateral in many dApps built on the blockchain, a network that is well supported by thousands of nodes around the world. These dApps include lending, borrowing, trading, saving, insurance, and tokenization. The Ethereum community also consists of dedicated open-source developers who are committed to the improvement of Ethereum. 

DeFi in 2021 and beyond

DeFi is relatively new, having grown from an industry segment of predominantly Ethereum-based protocols referred to as ‘open finance’ in 2018 to the DeFi ecosystem in 2020. In that short time, we’ve seen a significant increase in decentralized versions of traditional financial services that support autonomy, removing need for central authorities and creating a peer-to-peer financial network.

Before the end of 2020, it’s expected that phase one of the next Ethereum upgrade, called Serenity, will commence. Broadly, Ethereum 2.0 is focused on improving the scalability of the network with sharding and a move to proof-of-stake (PoS) consensus algorithm from the existing proof-of-work consensus algorithm (PoW). Ethereum 2.0 will also mitigate gas price issues for smart contract usage (EIP 1559). The improved scalability of the Ethereum network is expected to further boost DeFi growth, supporting use of existing and incoming smart contract protocols. 

The upgrade is much-anticipated, with phase one functioning as a transition to PoS. This will eliminate miners from the network over time. Instead of using hardware to mine ETH, users will be rewarded for staking their ETH and validating the Ethereum network. On August 4th, Medalla went live with 20,000 validators, the final testnet before the launch of the upgrade.

We recently explained the Ethereum 2.0 upgrade, what the upgrade will mean for traders, and a timeline of Ethereum updates.

ETH and DeFi on OKCoin

OKCoin makes it easy to participate in DeFi. Users can quickly buy and sell Ethereum (ETH) and stablecoins including USDT, DAI, PAX, TUSD, USDK, and USDC. Stablecoins are designed to provide cryptocurrency markets with a stable crypto asset that reduces exposure to volatility. The stabilization comes from the backing of an underlying reserve asset.

Last month OKCoin launched the OKCoin Oracle, a secure price feed for the DeFi ecosystem. This means OKCoin supports DeFi protocols with a trusted source of signed market data backed by a liquid exchange that is regulated in multiple jurisdictions across the globe. The price feed is signed by OKCoin with the private key secured by our proven infrastructure. By providing DeFi with a reliable source of price information, we help diminish and remove current oracle vulnerabilities.

“It’s exciting to see the buzz in DeFi after two strong years of development on the technology stack. But massive returns on capital are almost never risk-free, so it’s important to do your research and weigh out the risks.” said Jason Lau, COO at OKCoin. “Our mission is to enable anyone one in the world to trade, and provide a frictionless path between crypto and fiat currencies, so the DeFi space is one we look forward to supporting further.”

It’s likely that the upcoming launch of Ethereum 2.0 is contributing to the increase in price, as well as the growth in ETH usage across DeFi. As the value of Ethereum rises, the value of total locked DeFi funds will also continue to rise.

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