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The Ethereum network 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 the dominant altcoin in terms of capitalization of market, popularity and network value regulation, 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 the initial coin offerings took over the crypto space and amassed tremendous gains for attendees.
Could DeFi be the new ICO?
Ether has become the main funding mechanism for ICO projects. As the projects and their underlying ERC-20 tokens left the ICO stage, speculation about their tokens has grown, as has the price of Ether, whose price reached an all-time high of $ 1,412 on January 10, 2018. Although currently far from that number, the price of ETH hit a 2020 record high of nearly $ 357 on August 1.
Although ICOs helped take the cryptosphere to new heights, the hype was short lived and the entire cryptocurrency market collapsed in early 2018. Shortly before, the US Securities and Exchange Commission announced that ICOs were considered security offers and cracked down to protect investors.
Some fear Ethereum is following a similar path to 2018 with the growth of DeFi. Although regulatory oversight has pushed to improve the crypto ecosystem, in the short term it can have devastating consequences such as loss of funds for investors and legal action for project operators.
Is DeFi Really Driving Ether’s Price?
Although price speculation appears to be rampant, it is widely known that the actual financial impact and liquidity of decentralized finance are rather insignificant. With Ethereum recently becoming the largest blockchain in terms of established value, how much of this activity in Ether can actually be attributed to DeFi?
ConsenSys estimates that DeFi protocols collectively hit an all-time high of 3.3 million Ether blocked in the protocols in Q2 2020. Messari suggested that the Ethereum blockchain settles around $ 2.5 billion every day. When comparing DeFi to the current cryptocurrency market, it is also easy to see that DeFi is still a drop in the ocean, smaller than the market cap of XRP and Bitcoin Cash (BCH), and only accounts for 1. 5% of the entire cryptocurrency market.
DeFi sector vs BCH and XRP – Market capitalization. Source: Messari
Is Ether Weathering a DeFi Boom and Crisis Cycle?
While funding rates for DeFi protocols are dwarfed by ICO-based funding campaigns of the 2017 era, it could be concerning that a handful of DeFi tokens have seen a thousand percent increase 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. In fact, more than 10 other DeFi-related tokens rose more than 100% in 2020. While impressive, this still pales compared to the return on investment provided by ICOs in 2017.
While DeFi has achieved milestones, such as $ 4 billion in frozen funds, the sheer size of investment achieved by DeFi protocols is far less than that raised by ICOs. However, 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 isn’t ideal, it could be an inevitable part of the current cycle of crypto innovation. Projects and concepts tend to be disproportionate before more organic adoptions and investments arrive. This is exactly what happened with ICOs, security token offerings, Bitcoin and altcoins. As the DeFi industry continues to expand rapidly, its biggest challenge may come in the form of future regulation, just as it did with ICOs.
The future of Ethereum: Stablecoin, institutionalization and scalability
While only time will tell if DeFi is experiencing a bubble phase, there are certainly other reasons why Ether is outperforming Bitcoin, such as becoming the basis for stablecoin transfers. According to ETH Gas Station, Tether (USDT) is the largest gas spender on the network and continues to grow. Although Ethereum overtook Bitcoin in networking, it was mostly due to stablecoin transfers, which were themselves overwhelmingly fueled by inter-exchange deals.
Positive steps were also achieved this year such as issuing real-life securities within the blockchain and $ 1 billion in volume of Ether futures. These factors have contributed to the growing adoption of Ethereum over the past five years, but they also point to a looming dead end when it comes to scalability and congestion. However, Ethereum 2.0 staking has finally begun testing and this gives hope for a new and improved network.
Related: Ethereum 2.0 Might Affect DeFi and DApp with PoS Introduction
As time goes by, DeFi is likely to continue to grow even if it will suffer some short-term setbacks. This means that the Ethereum network will likely continue to ride in the wake of that success.
