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Ethereum - Decentralized Finance

Updated: May 21, 2021

We look at the growth and utility of Ethereum network, and focus on how it has fueled the burgeoning Decentralized Finance industry.

Different cryptocurrencies may appeal to investors for different reasons. The first coin will naturally draw lots of well-earned attention. A coin pushed by the world’s largest crypto exchange will have its share of backers. And sometimes a coin may gain momentum simply because it’s based on a meme that Elon Musk thinks is hilarious.

But at its core, a cryptocurrency is a token that aims to represent and reflect a specific blockchain or project -- the more robust that blockchain, the more promising the coin. Going by that standard, Ether (ETH) is the ultimate power coin. It is the native token of the Ethereum network, which is arguably the world’s leading blockchain, with the most potential to drive real utility for enterprise and individuals.

One telltale sign of a network’s strength is the frequency with which developers gravitate toward it. According to a recent report, nearly six times more developers are working on Ethereum every month as are the number of developers working on Bitcoin. As a result, there are now more than 3,000 dApps running on the Ethereum blockchain. While upstart networks such as EOS are slowly gaining traction, the vast majority of the world’s dApps and smart contracts are hosted on Ethereum.

Ethereum’s platform has fueled particularly impressive growth for decentralized finance, with Ethereum being by far the most commonly used blockchain for DeFi uses. DeFi is an experimental form of finance that uses smart contracts on blockchains to offer various financial instruments, instead of needing to rely on intermediaries such as brokers, exchanges, or banks. The Ethereum-based DeFi ecosystem produces new, exciting DeFi apps all the time. The Ethereum DeFi ecosystem consists of the following categories:

Custody: The custody element of DeFi refers to wallets which allow for the self-custody of users’ private keys and digital assets. These Ethereum-powered wallets allow individuals to control their funds at all times. That way, users do not need to trust a centralized entity such as an exchange to hold their assets, reducing the risk of hacks and theft. In other words, these wallets are the gateways through which users can interact with DeFi applications, with the best ones offering high-level security, ease of use, and innovative new features.

Trading: Decentralized exchanges (also known as DEXs) are platforms which enable users to exchange digital assets on-chain, anywhere and anytime, without relying on centralized intermediaries. These DEXs allow users to control their private keys and assets, thus avoiding one of the biggest potential pitfalls of crypto investing: “Not your keys, not your coins.” The best DEXs offer robust governance, innovative technology, capital-efficient derivatives, and other breakthrough features.

Derivatives: As the popularity and upside of cryptocurrencies have grown, investors have become more interested in the types of financial instruments that have long been available to investors in traditional markets. Derivatives platforms generated by Ethereum’s DeFi capabilities offer the issuance and trading of digital assets which are representations of financial instruments, from fiat currencies to indexes and options. Those derivatives platforms are gaining momentum, with Huobi, OKEx, Bybit, and Deribit all hosting crypto futures trades. The Chicago Mercantile Exchange joined the fray on February 8, hosting more than $30 million worth of Ether futures contracts traded on its first day.

Asset Management: These protocols enable users to better manage and visualize their portfolios. The asset management tools involved include automated strategies and routing funds to the highest-yielding lending pools.

Lending: DeFi lending protocols enable users to lend their digital assets in exchange for a return on their deposits. Imagine a high-flying growth stock that also throws off juicy dividends to its investors; that’s what you can get by investing in and staking Ethereum coins. Meanwhile, Ethereum-based lending apps also let you borrow cryptocurrencies against collateral without intermediaries, another valuable and potentially lucrative option.

Insurance: If you’re investing large sums of capital into cryptocurrencies, you will want to have a safety net in place to protect yourself. Ethereum-generated insurance apps offer protection against smart contract vulnerabilities or price volatility, aggregating community funds to use as cover.

As the number and quality of DeFi projects continue to thrive and grow within the Ethereum ecosystem, a growing amount of ETH is being sent to these applications for collateralization purposes. Meanwhile, institutional interest in both DeFi projects as a whole and ETH as a standalone investment continues to skyrocket. The advent of the more robust Ethereum 2.0 ecosystem has accelerated that momentum.

Like any cryptocurrency, ETH will likely see plenty of volatility in the weeks, months, and years to come. But for investors with the vision to see its vital impact on DeFi projects and its dynamic long-term price potential, Ether will continue to be the ultimate power coin.

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