What was once just the market for one is now flooded with other options for crypto-currency investors. The advent of meme currencies that seem to create millionaires overnight makes it easy to believe that crypto-currency investments are only for the short term. However, despite a crowded field, there is one crypto-currency that investors should never sell: Ethereum.
Like Bitcoin, Ethereum is a crypto-currency that has changed the way we think about finance in the digital age, but for different reasons. Ethereum is unique from Bitcoin in many ways. But one in particular is behind what is perhaps the biggest innovation to come out of blockchain and crypto-currency technologies: decentralized finance, better known as DeFi.
The new era of finance
The traditional financial world relies on centralized authorities such as banks, notaries, brokers, exchanges, and other intermediaries to manage and process financial services. Traditional financial processes, such as applying for a loan or buying a stock, require some sort of intermediary to complete the transaction.
But thanks to Ethereum and its innovative smart contract technology, these traditional financial processes are becoming increasingly obsolete. Smart contracts are the backbone of DeFi and are what make Ethereum so unique. Prior to its creation in 2014, no other crypto-currency had smart contract capabilities. The creation of smart contracts allows blockchain developers to customize the conditions and criteria for performing particular actions.
For example, smart contracts could oversee loan contracts and release collateral upon full repayment. Because smart contracts can integrate with other data, they could also regulate agricultural drought insurance policies by automatically disbursing funds in the event of agreed-upon amounts of rainfall.
In addition to their seemingly endless customization and potential, smart contracts and DeFi could completely disrupt what we think of as the role of traditional institutions in the financial world.
One of the most attractive aspects of DeFi is its inclusiveness. If you want to use a DeFi financial product, all you need is an Internet connection. There are no credit bureaus, no brokers, and no loan officers. As long as a crypto-currency wallet is set up, users can trade and move assets anytime and anywhere.
In addition, all transactions occur in real time and are completely transparent. There is no need for banks or brokers to process transactions, as they occur almost instantaneously on the blockchain. The other advantage of the blockchain is that once a transaction is added, anyone with an internet connection can view the activity on the network. Not to mention that any possibility of tampering or embezzlement is eliminated due to the high level of security of the blockchain.
Arguably, the biggest advantage of DeFi is that it is constantly evolving. The applications and projects built on Ethereum are all open-source. This means that developers can integrate multiple DeFi applications to create financial products that meet new user demands as they arise.
First mover advantage
Since Ethereum was the first blockchain to have the smart contract functionality, it holds the majority of the market share in the DeFi sector. Despite new competitors like Tron, Binance Coin, and Avalanche coming in to grab a piece of the market, they face an uphill battle as Ethereum’s hold on the DeFi economy is incredibly disproportionate.
We can look at a statistic called Total Value Locked (TVL) to compare the collective value of a blockchain’s DeFi ecosystem. Think of it like the market capitalization of a company.
Of the $62.5 billion invested in DeFi at the moment, nearly $36 billion is on the Ethereum blockchain. The closest competitor is Tron, and that blockchain only supports about $9 billion in value. That’s not even close.
The potential long-term value that DeFi presents should be weighed heavily by investors, especially considering that it is still in its infancy. Those who are optimistic about DeFi’s ability to overtake traditional finance should count on Ethereum to continue to dominate for the foreseeable future.