Changing the way DeFi projects operate

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The end of 2020 was enormous for the crypto community. There was not only a spectacular rise in the price of digital assets, possibly signaling the start of another bull market, but also the start of the Ethereum 2.0 beacon chain, which has been in development for some time.

The long-awaited update to the Ethereum blockchain transforms the network from a proof-of-work to a proof-of-stake consensus model and is designed to improve speed, security, lower transaction fees, and address the scalability issues that Ethereum caused back over the course of the year Year 2020.

Ethereum 2.0 is still in a very early stage of development – phase 0, and there is still a very long way to go before a full transfer from the old to the new chain takes place. Nevertheless, the effects on the market could already be felt due to the rapid development. This is especially true in the DeFi area, as Dr. Octavius, co-founder of the OctoFi-DeFi protocol, told Cointelegraph:

“Most people misunderstand Eth2 and what it means for the entire industry, DeFi in particular. While other chains are competing to solve some scaling issues with Ethereum, the network effects are pretty profound in my opinion and Ethereum is leaps and bounds above the other. If anything, the beginning of 2.0 gives people confidence in the staying power of Ethereum. “

Booming DeFi

The introduction of Ethereum 2.0 caused significant price volatility. The price hit a high of around $ 670 immediately after launching on December 1, only to suffer a slight correction in the days that followed, in line with the rest of the altcoins. However, the hype was felt most in DeFi as the ETH 2.0 was a critical element in the growth of the total value locked in the projects. According to Octavius, this trend is likely to continue: “The impact will likely accelerate participation in DeFi Markets such as DeFi manufacturers can improve their products by an order of magnitude. “

TVL was just under $ 10 billion in early November and is now at $ 13.4 billion after a slight correction from its all-time high of $ 14.1 billion, according to DeFiPulse. So it grew significantly after November 27th, a few days before the Beacon chain started. Growth is being driven by a newfound confidence in Ethereum’s development efforts and DeFi’s longevity.

Of course, the current bull run in Crypto, along with other factors, including the merger of Yearn.Finance with the decentralized exchange SushiSwap, contributed to this significant growth. This was just the youngest in the list of Yearn.Finance secured partnerships. It also saw the liquidation of Uniswap’s profitable agriculture, which resulted in a sharp increase in TVL on other protocols such as SushiSwap and Bancor. Ilya Abugov – advisor at dApp Statistics Aggregator DappRadar – told Cointelegraph that Eth2 could be crucial in fending off blockchains from competitors in the DeFi space:

“It can become important when rival blockchains are really activated. As Polkadot and NEAR become more active, good news about Ethereum 2.0 can help keep projects anchored in the Ethereum ecosystem. ”

Despite the significant growth of TVL, the total transaction volume declined. The transaction volume of more than $ 41 billion in November was down 12% from the previous month. This can be explained by users choosing not to move their funds and putting them on Eth2 instead.

This was one of the necessary steps for the start of ETH 2.0, as 16,384 validators each had to use 32 ETHs to signal the start of the new chain. A total of 524,288 ETH included in the deposit agreement can easily explain the decline in transaction volume in November.

Another data point that shows the dominance of DeFi in TVL in addition to the billions is the fact that 99% of the Ethereum transaction volume is accounted for by DeFi protocols. This means that users will still be drawn to DeFi’s massive revenues, which the rewards for using ETH 2.0 are unlikely to be matched. It is also likely that users will remain in Ethereum during this change if promising projects running on the blockchain continue to perform well. In addition, it is also possible that the improvements made through the update will attract a more cautious institutional audience.

Disadvantages of the ETH 2.0 at DeFi

Once Ethereum 2.0 is fully operational, the DeFi market will likely benefit from the faster and more scalable network. However, some industry participants argue that there might be some downsides.

The transition to a PoS consensus will have an impact on the DeFi ecosystem. Stakers with ETH in their wallets deserve interest in their problems. By sharing very similar reward systems, it is possible that the compensation offered through the stake will compete with the rewards from productive agriculture and other DeFi products. While this can take some time, potentially high rewards in Eth2 can lead to conflict and less incentive to use DeFi. However, innovative solutions to this conflict are already being developed, including tokenized ETH 2.0 bonds.

Validators can receive funds in unlocked original ether by transferring a token created by a fully secured smart contract to a creditor. In return, it is promised that the creditor will automatically receive the original 32 ETH plus the accumulated stake bonuses in the event of the blockchain merger and the end of the blocking. Dr. Octavius ​​is optimistic about such developments:

“This concept is not only interesting in relation to futures markets, but also in relation to forecast markets and how they can be used to improve project management. […] But I’m also very interested in how something like EIP 1559 affects ETH’s share flow and gives it a better S2F than Bitcoin. I think there will be a whole new dynamic in valuing investments, especially as DAOs and DeFi projects continue to generate attractive revenues. “

Another major risk is that both the old and new Ethereum blockchains are currently running at the same time. With successful development milestones, the full transition to the new chain should take place in 2022, but not without considerable risks. DeFi protocols can transition smoothly, but there is also the possibility of minor disruption or even catastrophic loss. Dr. Octavius ​​told Cointelegraph, “Of course we could see unexpected bugs, or maybe the results from Eth2 are overwhelming, but if developers continue to choose to build on Ethereum then that really matters.”

What the future holds for Ethereum

There seems to be a consensus on the positive effects of Ethereum 2.0. However, as mentioned earlier, there may be some drawbacks. From technical risks to a shift in the dynamics of DeFi and liquidity. The latter, according to Abugov, will not be felt in the near future:

“It doesn’t appear that Ethereum 2.0 will have a significant impact on liquidity in the next 9 to 12 months. It will pull some ETH away, but it is doubtful that it will be enough to change the current Ethereum 1.X economy. “

With a successful move to Ethereum 2.0, which poses a potential risk to DeFi’s growth, some see an extremely positive outlook for the NFT market, which has grown significantly over the course of 2020 and is not a sector that is in direct competition with the mission model behind Eth2.

Regardless of advances in Ethereum 2.0, 2021 will likely take DeFi to the next level if it breaks into legacy funding. Dr. Octavius ​​said, “Consumers will suddenly find they have access to new insured savings accounts at 2% pa interest, all from DeFi without their even knowing it.”