The resurgence of the Ethereum economy

On February 22, a surprisingly bizarre headline appeared in the New York Times business: “Why is a flying cartoon cat with a fat body on sale for $ 600,000?”

If you had access to the internet in 2011, you certainly know that cat. Indeed, Chris Torres, the creator of the internet’s beloved “Nyan cat” GIF (a pixel art kitten glowing in space over a rainbow), has somehow sold the meme for decades. his age for nearly 600,000 dollars.

And it’s not just Torres looking to sell this kind of digital content that was previously deemed worthless – partly because anyone can copy and paste digital files on the fly. Just in the past few weeks:

Christie revealed plans to auction the first “all-digital” work in the form of a series of images created by artist Beeples with a starting price of $ 100.

A very cool looking lo-fi monkey – part of the Cryptopunks series – sold for $ 1.5 million.

A series of 3D models for “impossible furniture”, such as a table made of bubble gum, raked in $ 450,000.

A single tweet from Dallas Mavericks businessman and owner Mark Cuban was priced at $ 952.

All of these stories really say the same thing: people buy assets in the digital, virtual world with large sums of money in the real world.

This growing market is made possible by a cryptocurrency called NFT. Non-fungible tokens (NFT) are essentially certificates of authenticity that indicate that the version of a digital file can be continuously copied-pasted (whether it’s an image, a video, a song, or almost any). something else) is real.

NFTs are primarily issued on the Ethereum blockchain, leveraging the “smart contract” function, and can often be bought or sold on markets dedicated to them. While they’re making a splash right now, NFT isn’t really a brand new. You might recall the craze of Cryptokitties 2017, a digital cat trading game.

NFT projects on Ethereum by total volume sold as of 2/3/2021 | Source: CryptoSlam.io

NFT is a token like Bitcoin and can often be bought or sold through special exchanges that support the service. But unlike Bitcoin, each individual coin is virtually identical in characteristics, each NFT representing a specific digital property. Therefore, “irreplaceable”. They have been used to sell everything from celebrity gadgets, NBA’s “digital collectibles” to virtual real estate and live clips of dance star Deadmau5.

As they turned into surprisingly large businesses, with an estimated revenue of more than $ 100 million, the NFTs sparked a philosophical debate around the meaning of ownership. Is collecting digital artifacts different from collecting rare sneakers, vinyl records, or Picassos in that respect?

Those are intriguing questions, but they don’t even involve a larger story the NFT can help us understand. In that bigger story, smart contract technology that makes it possible for artists, meme makers, and musicians to sell their virtual gadgets is also pushing for a new decentralized alternative to the financial system. present. In that alternative system, designed to economically empower individuals, that will flow through faster, cheaper, more transparent, and open source protocols that are available to all.

That is Finance 2.0. And it’s already starting to show up if you know where to look.

Ethereum’s breakout year

Prior to the NFT craze, Bitcoin has received a large share of the non-crypto media headlines lately. But people already in this space tend to get even more excited when the topic of Ethereum emerges. And not (mainly) because ETH is the second largest cryptocurrency by market cap after Bitcoin.

What casual observers tend not to understand about Ethereum is that it’s not just another form of digital currency. The Ethereum blockchain was created to be a highly flexible decentralized computing platform – a platform that allows developers to build things like a marketplace for digital arts and run financial ‘tools’. Decentralization ”(DeFi) like Compound and Uniswap has raked in hundreds of billions of dollars in the flow of value through them.

Part of the Ethereum story is similar to the one you’ve heard about Bitcoin. Like Bitcoin, ETH (which is the native cryptocurrency of the Ethereum blockchain) increased in price and popularity – climbing from an average of $ 300 to a high above $ 2000 in February.

Ethereum has also seen record global search interest in recent months. Bitcoin is still inferior to its peak search era, which emerged during a wave of widespread popularity in late 2017 and early 2018.

Global search interest in Ethereum | Source: Google Trends

Another indicator of the mainstream increase in engagement is Ethereum-specific Reddit message boards (as well as cryptocurrencies in general), which has seen an increase in new subscribers in recent days:

Total number of crypto subscriptions Reddit | Source: SubredditStats

One important reason is the price of ETH. You may be surprised to learn that the price of ETH has actually risen faster than Bitcoin since the start of 2021 – partly because the large number of retail investors with arbitrary extra time and income due to the COVID epidemic are trying. experience new investment strategies. While Bitcoin’s price has risen around 65% since the start of the year, ETH is up more than 112% in value – with a market cap of $ 177 billion (bigger than Morgan Stanley or Square).

Learn about the broader Ethereum economy

But the bull market cap is only part of the story. What’s really fascinating about Ethereum is that the value of ETH is just the most visible part of the broader economy that the Ethereum blockchain creates.

Think of ETH as the visible part of the iceberg. Because the Ethereum blockchain is so flexible, with vast economic activity happening just below the surface – in the form of crypto portfolios offered by Ethereum include DeFi, stablecoin, wrapped token, and NFT.

Overall, the market cap of the Ethereum economy (as defined by the total market cap of the largest ERC-20 tokens issued on the Ethereum blockchain) has skyrocketed in recent weeks to over $ 250 billion. (NFT is not included, as it is difficult to compare).

Market capitalization of the Ethereum economy | Source: CoinMetrics & CoinGecko

Stablecoins are designed to reduce volatility by attaching their value to reserve assets such as US dollars, which are one of the most promising and rapidly growing sectors of the Ethereum economy. They have been widely accepted as a stabilizer for making payments between exchanges.

As of February 2021, the total dollar value of stablecoins on the Ethereum blockchain has surpassed $ 30 billion:

Stablecoin market cap on Ethereum | Source: CoinMetrics

A smaller but also rapidly growing component of the Ethereum economy is the “wrapped token”, which allows cryptocurrencies other than ETH – especially Bitcoin – to be used on Ethereum and easily interact with. DeFi applications. As a result, the value of Bitcoin tokenized increases dramatically.

Tokenized BTC Market Cap | Source: CoinMetrics

When Reddit met DeFi

So what has driven all this recent activity? Of course, a lot of that has to do with the huge boom in cryptocurrencies. But an interesting component worth a closer look is the internet-proficient investors on Reddit – who were inspired by a nasty experience with traditional financial systems in search of little alternatives. more focused.

These decentralized tools (also known as “DeFi” or “Finance 2.0”) enable profitable investments, trading, savings, new types of “fast” loans, and more. According to Fabian Schär, professor and researcher at the University of Basel, Ethereum-powered DeFi applications have “the potential to create a truly open, transparent, and immutable financial infrastructure”.

The DeFi overview encompasses three categories of applications, with the same goal of becoming faster, more efficient alternatives to inefficient, slow, and often expensive paths that flow through the system. current finance.

Decentralized exchanges like Uniswap and Sushiswap, allowing users to trade tokens without an intermediary.

Saving and lending protocols such as Compound and Aave allow users to borrow and lend tokens without an intermediary.

Oracles like Chainlink aim to deliver real-world data to DeFi applications.

For traders on Reddit whose belief in the Finance 1.0 system has been shaken, DeFi is a natural home – and because these frequent online investors exchange tips and strategies quickly, they have can help each other explore complex new protocol (That doesn’t matter how comfortable the group is with the risk, since the DeFi market can be volatile).

At least one prominent voice began spreading DeFi directly to Reddit’s most active stock traders. During a Q&A hosted by the wallstreetbets subreddit, Mark Cuban shared his belief that DeFi would make “the market more efficient, transparent and available to small investors”.

And not only Cuban thought so. During a live stream with US Representative Alexandra Ocasio-Cortez, Reddit co-founder Alexis Ohanian offered his own stance to DeFi:

“The public cannot see this and so I think there will be more and more energy to find decentralized solutions. There is too much energy driving something to keep the game from being cheated ”.

The total DeFi market has grown to over $ 40 billion in February 2021. In a strong indicator of the popularity of these tools, the largest decentralized exchange Uniswap has reached a volume of $ 100 billion since its launch in May 2020.

DeFi Market Cap on Ethereum | Source: CoinGecko

Monthly volume across all decentralized exchanges broke the $ 50 billion mark in January:

DEX volume by project monthly | Source: Dune Analytics, hagaetc

Institutional circles accept Ethereum
The Ethereum economy has also attracted the attention of major financial institutions. Thanks in large part to the popularity of stablecoins as a method of sending value without fluctuating between exchanges and the DeFi protocol, the Ethereum blockchain has become one of the most popular means of paying with US dollars.

In 2020, Ethereum processed $ 874 billion worth of payments, competing with many major user-oriented systems such as Zelle ($ 307 billion) and Paypal ($ 963 billion), although it remains. Much lower than the volume handled by central bank settlement systems like Fedwire ($ 840 trillion).

In December 2020, Visa announced it was connecting its global payments network of 60 million merchants with stablecoin USDC.

Paypal also recently enabled limited ETH transactions for its vast US user base, and is planning to expand that functionality to all 325 million global users. CEO Daniel Schulman said:

“We all know the current financial system is outdated and can envision a future where transactions are completed in seconds, not days. We are investing significantly in the new crypto, blockchain and crypto business to help shape this more inclusive future.

Meanwhile, institutional investors are starting to move to Ethereum. The Grayscale Ethereum Trust (allowing investors to expose ETH through traditional brokerage firms) has grown significantly. The fund currently holds 3 million ETH with a value greater than $ 4 billion.

Total holdings of Grayscale Ethereum Trust | Source: Skew

CME futures (another means of communicating with institutional Ethereum) recently went live and traded over $ 33 million on its very first day. In December 2020, Connecticut-based hedge fund One River Asset Management revealed commitments to “bring Bitcoin and ETH holdings to around $ 1 billion by the beginning of 2021”.

Ethereum is evolving

When Ethereum was created in 2014, the founding team was well aware that blockchain had a fundamental flaw that would eventually need to be fixed. Because it uses a Proof of Work “consensus mechanism”, transaction times slow down and fees increase as blockchain traffic increases.

The huge number of transactions that DeFi and other smart contract-enabled tools have mentioned in this article cause congestion and scalability alarms. As a result, the network is becoming more and more expensive to use. As of February 2021, each transaction costs about $ 10 in Ethereum “gas” fees.

Average Ethereum network fees | Source: CoinMetrics

But great solutions are about to come. The nonprofit Ethereum Foundation has officially partnered with Reddit to find a new solution and use case for the technology. In August 2020, nearly 20 groups of developers submitted Ethereum scaling proposals to Reddit. Projects like Optimism can help blockchain handle hundreds of thousands of transactions per second (although each solution presents its own challenges).

Meanwhile, the Ethereum community has begun a long-planned transition to a faster, cheaper, and theoretically even more secure Ethereum 2.0 (or ETH2) blockchain.

The ETH2 blockchain uses a Proof of Stake consensus mechanism, which significantly increases capacity. It launched in December 2020 and as of February 2021, more than 3 million ETH were staked in ETH 2.0 contracts. At the end of this multi-year upgrade, the Ethereum economy goes one step further to realize its potential to make financial transactions of all kinds faster, cheaper, and more accessible.

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