Ethereum's Role in the DeFi Revolution: Future Potential

There is no doubt that the hottest thing in the crypto industry at the moment is decentralized finance. However, Ethereum as its foundation still hasn’t caught up.

Another day has heralded another all-time high for the total dollar value of collateral locked up in DeFi markets. That milestone has just hit $2.15 billion as more investors lock up their crypto, according to Defipulse.com.

The Year of Decentralized Finance (DeFi)

In less than a month, the amount of collateral locked into smart contracts across the budding industry has doubled. Compound Finance is still the most dominant platform with a market share of 31% though others are racing to grab a slice of this digital pie with their own yield farming and staking incentives.

There is no doubt that 2020 is the year for DeFi as 2017 was the year for ICOs, and 2018 the year for stablecoins. Business Director at Kraken, Dan Held, made the observation.

ADVERTISEMENT

The comment was largely construed as Bitcoin maximalism by Shapeshift CEO and industry stalwart Eric Voorhees who replied:

When ETH Moon?

If DeFi is just another crypto fad, then it is likely to be replaced with the next big thing in 2021. However, with current developments in the industry, and the evolution of its backbone, Ethereum, that is looking unlikely.

DeFi tokens have been on fire recently with a number of them, including KNC, SNX, Ren, BNT, COMP, and BAL surging by triple digits over the past month. Many are beginning to wonder why Ethereum has remained so lethargic during this DeFi boom.

ETH prices has moved a little over the past couple of days, lifting from their slumber by around 10% to just under $250 where heavy resistance lies. However, the long term picture has been flat with the asset wallowing around the same level as it was this time three years ago. DeFi has not benefitted Ethereum in terms of prices.

The reason for this is scalability. Ethereum suffers under heavy load: as transactions skyrocket, so does the network fees. Costs to use the Ethereum network have been higher than those for Bitcoin over the past month. This makes the small operations in DeFi unsustainable at current gas rates.

Only when layer 2 scaling is fully deployed, and the network can handle thousands of transactions per second instead of a paltry 15 will Ethereum start to move in terms of price. Phase 0 of ETH 2.0 needs to be deployed before the end of this year for that to happen. Until then, the asset is likely to remain in digital hibernation.