When Will Ethereum Benefit from the DeFi Boom?

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2020-06-26 11:34 (UTC+8)

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To find the answer to the question, it is necessary to understand the two camps of Ethereum - the bears and the bulls.

DeFi is undoubtedly the most popular sector in the current currency circle, while the development of Ethereum, which is the biggest source of power for DeFi, is a bit flat. Many Ethereum investors are starting to worry: When will ETH benefit from the violent momentum of DeFi?

The DeFi market is nearing all-time highs with just over $1.5 billion in total value locked. Since the beginning of 2020, the total value locked in the DeFi market has increased by 124%.

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1. Ethereum's slow road to da moon

It stands to reason that the biggest beneficiary of the take-off of the DeFi sector should be Ethereum, but there is no price momentum in the world's second-ranked cryptocurrency.

Since the beginning of this year, Ethereum has entered a period of slow development. The price on New Year's Day was $130. Although it has risen by 85% to around $240, the price of ETH is still down by 32% compared to the middle of 2019, when DeFi really started to take off.

Looking forward, ETH is still down 83% from its historical high, and two years has little impact on the price of Ethereum. In this way, the price outlook of Ethereum is indeed worrying.

The price continues to oscillate between lows around $120 and highs around $300, which is where ETH’s sticking point lies. ETH has not been able to break out of this price range since it completely “fallen out of favor” in 2018.

The last time ETH broke through $400 was in June 2017. The six months since then have been a highlight for Ethereum, with ETH soaring to $1,400 with the ICO boom. Despite the relatively slow growth of DeFi today, Ethereum has not yet benefited in terms of price.

Industry watcher Ryan Sean Adams has delved into the phenomenon in his latest blog, noting that some of the major DeFi tokens, namely COMP, AAVE and SNX, have all rallied significantly over the past week, while ETH has rallied during the same period. It only edged up 3%.

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2. Ethereum short VS Ethereum long

The reason for the bearish bearishness is that in 2017, Ethereum was used by ICO as a tool to raise funds, and now Ethereum is losing its "currency attributes", which are being replaced by other stablecoins and ERC-20 tokens.

Adams added that bearish people will say that DeFi is not necessarily related to the rise in ETH prices because it is only used for transactions. "People only use the minimum amount of ETH required to buy DeFi transactions. At this time, ETH is like your Gasoline in the car - you don't need to store it, you just need to make sure you have it in the tank."

Ethereum bears believe that ETH will be overtaken by more cost-effective, technologically advanced blockchain networks. Although the "Ethereum Killer" has not yet appeared, the shortcomings of Ethereum's unsustainable gas costs and hindered expansion performance are obvious.

In contrast, the bullish view on Ethereum is more pragmatic and patient. Adams asserted that the market is "delayed". He still believes that ETH is a utility token, which is the reserve asset of DeFi. With the use of DeFi, ETH will become a scarce asset, and the market will soon catch up. At the same time he pointed out:

"As the reserve asset of DeFi, ETH will not be threatened by Bitcoin. The success of DeFi is good for ETH. The more economic activities, the more ETH is locked and used for transactions, and the gains brought by DeFi projects will flow Back to ETH, just wait and see."

Adams believes the bullish view is more accurate for three reasons.

First, the amount of ETH locked in DeFi has increased significantly. Since the launch of COMP, 400,000 ETHs have been locked in DeFi smart contracts.

Secondly, according to reports, more than half of the newly mined ETH this year has been acquired by Grayscale Investment, which allows us to see the momentum of institutional transformation.

The last argument comes from the Protocol Sink theory, that is, the DeFi protocol with the highest settlement guarantee will become the base layer of encrypted banks and even commercial banks.

3. Conclusion

Many people worry that the upsurge brought by COMP will trigger the DeFi bubble, but these concerns mainly come from Bitcoin extremists and critics who are used to depreciating the financial infancy.

The stellar performance of DeFi in the past week was not enough to label this market a bubble. DeFi is just getting started, and its growth over the past few years has shown its sustainability. In the long run, this will ultimately benefit Ethereum.