Ethereum is more sustainable, innovative, and controls the fixed income market of the 21st century. Thanks to the boom in decentralized finance, the number two blockchain is rising to become the new economic system.
Many in the cryptocurrency world hate to make comparisons between Bitcoin (BTC) and Ethereum (ETH). They stress how each of those tokens has very distinct functions. And BTC is still more than double ETH’s market capitalization. But let’s compare the blockchains themselves and their respective potential. I would argue that Ethereum is clearly coming ahead thanks to its usage, smart contracts, decentralization in action, and scalability. Bitcoin is the concept, Ethereum is the use case.
Nothing new here, except that usage is everything in the end. The bitcoin blockchain is supporting a cryptocurrency, bitcoin (BTC) wich is an alternative to classic currencies and a (debated) store of value and inflation hedge. But the Ethereum blockchain is the mother of all protocols when it comes to decentralized finance, or DeFi. And DeFi can be considered the new «fixed income» market of our time. Decentralized finance is certainly the place where we saw the highest growth rates lately.
The term «DeFi» has come to specifically refer to decentralized lending and borrowing, using different platforms that are exclusively based on the Ethereum blockchain. On these platfoms, investors can borrow funds against their crypto tokens, and lenders can lend their cryptos in exchange for income. Smart contracts carry out the terms of specific agreements, which eliminates the need for a central authority or an intermediary such as a bank. This makes these platforms the decentralized fixed income, high yield and repo markets.
Aave for instance, the current number one DeFi protocol, mints tokens at a 1:1 ratio to the assets you supply. You immediately earn interest, which keeps compounding in the form of tokens, which you can exchange or transfer at any time. No need to be a rocket scientist to earn rewards on the DeFi. You just buy and deposit your ETH or other tokens and wait for the reward.
Uniswap, another platfom based on Ethereum, «is a revolution in and of itself, with an automated market maker that allows trading between on-chain assets» (tokens and stablecoins), says Gauthier Vila, a crypto YouTuber and co-founder of Ondefy based in Lausanne. «A key usage of DeFi is that there is no intermediary to manage liquidity pools, to list different types of projects, or to enable anyone to trade assets. Everybody can create a project and get listed. Liquidity providers of these exchanges are being incentivized by redistribution of fees and sometimes by rewards in the form of governance tokens of the specific decentralized exchange», he adds.
The community feature is attractive to young investors, who appreciate to vote on the decisions made about the protocol, interacting in live chats, belonging to a network. In a very real sense, Ethereum is the system chosen by the young generation, who very often enter the crypto space via DeFi.
The DeFi boom is easy to observe on the Defipulse.com website: just a year ago, in August 2020, decentralized finance on lending platforms had reached $ 10 billion in total locked value. We were wondering about this phenomenal growth in this column, because only three months before, in June 2020, the amount was $ 1 billion (which was already impressive). Well, this month, the total DeFi value hit $ 84 billion. An increase of more than 8000% over 15 months. And Ethereum is at the core of this because it enables all of those protocols. DeFi and Ethereum are but one.
«I consider these two blockchains [Bitcoin and Ethereum] as the ones that have critical mass and are too big to fail. But they serve completely different purposes», says Cyril Lapinte, IT developer and founder of C-Layer in Geneva. Nevertheless, he agrees that Ethereum is the blockchain on which most innovations are made. «The Ethereum token is no store of value, since it is and will be produced constantly. The Ethereum token is used instead to support a complete ecosystem of unlimited apps».
«You certainly cannot create the same ecosystem with bitcoin’s «proof-of-work» system which doesn’t allow you to create scalable apps», adds Géraldine Monchau, head of marketing communication at RubiX Network, a sustainable and eco-friendly blockchain. Ethereum, she goes on, is highly scalable and has made NFTs and gaming possible. It is a fact that proof-of-stake is more efficient than Bitcoin’s proof-of work».
But Géraldine Monchau stresses the very high transactions fees on the ETH token. «When you trade ETH on a trading platfom and the volume is high, it gets prohibitive because you can be charged with an insane premium on your transactions». This inefficiency will get better with the Ethereum 2 blockchain, the next version, she says. «The Ethereum 2 blockchain», adds Cyril Lapinte, «will allow you to lock and stake your ETH tokens, to have voting rights and receive dividends. Investing in ETH will become similar to investing in shares of a company». Until then, earning interest on DeFi platforms is the name of the game.
Interestingly, nothing at all was happening in the DeFi space between 2017 and 2020. At that time, nothing at all was happening on the Fed balance sheet either.
But at the exact moment when things took off in the DeFi space was when the Federal Reserve started buying assets, injecting $ 4 trillion in the markets since March of 2020. It is only too obvious that massive liquidity chased high yields, and it found them in DeFi.
Traders, institutionals, and young crypto communities have all rushed to the DeFi gold hunt. The reason is very simple: DeFi is offering the highest of high-yield returns, in an environment that is permissionless, with no third party involved, and where risk is richly rewarded. Yield farming, or lending tokens to the network against fixed or variable interest, is the same as earning yield on a bond in traditional investing, except through protocols that do not require the identification or financial history of either party.
True, the DeFi market is still dwarfed by the $ 119 trillion size of the traditional bond market. But the future belongs to systems in which the function of banks as intermediaries will be automated. The future also belongs to more energy-saving systems. «Ethereum, as a proof-of-stake system, consumes much less energy than Bitcoin», says Géraldine Monchau. She says that Bitcoin will remain the mother of cryptocurrencies. But you can’t create a blockchain economy based on it. «We will witness an economic transition in which multiple protocols will compete with each other to create a superior version: one that will be sustainable, quicker and have lower fees.» And we can be confident this will happen on the Ethereum blockchain.