Ethereum: Why we haven’t seen the ETH rally yet
By Raghu Yarlagadda
On May 10th, Ethereum (ETH) hit an all-time high, underscoring a price surge that almost matched the blistering rally seen by Bitcoin in 2020. Through discussions with some of the largest institutions, I see more room for growth as Ethereum supports the infrastructure of a fast-growing crypto ecosystem: DeFi.
While consumers initially initiated Decentralize Finance (DeFi) through a desire for higher yields and easily accessible financial products, we are now seeing DeFi applications taking the entire blockchain marketplace to new heights on both Wall Street and Main Street. Today, major financial institutions are not only building the infrastructure to invest in Bitcoin, they are also expanding into Ethereum in the belief that demand for this digital asset will continue to grow as the applications built on it grow.
how did we get here
Working with institutional investors, we have been at the forefront of diversifying away from traditional asset classes into crypto. A year ago, the only companies doing this were crypto-native. In recent months, the narrative has changed dramatically as large amounts, mostly in Bitcoin, come from traditional financial institutions and Fortune 500 corporate balance sheets. The reasons for this trend are numerous, but typically focus on inflation hedging, geopolitical risk hedging, and muted expected returns from traditional asset classes.
Returning 15%, 2020 was a stellar year for the S&P 500. While that return is impressive on an absolute basis, it pales in comparison to the staggering 300% return Bitcoin had in the same year. These high, less correlated returns are enticing to institutional investors, prompting them to consider where this level of growth might lead next. For some, that answer remains Bitcoin, but many believe the next stage of growth lies in DeFi.
On March 12, 2020, the entire DeFi sector had a combined value of just under $1 billion (TVL). Today that number stands at $61 billion. This 61-fold increase in TVL was partly due to price increases, but was catalyzed even more strongly by a belief in a system that enables basic financial services, such as borrowing, lending and wealth management, on permissionless protocols not subject to the whims of a central party, such as a bench.
Currently, DeFi is led by so-called DeFi blue chips. Examples include Compound (COMP) and Uniswap (UNI). Compound allows users to lend tokens to token pools, from which borrowers can raise secured loans, in exchange for interest income. On Uniswap, users contribute their tokens to liquidity pools that traders use to exchange tokens. These liquidity providers earn a portion of the trading revenue. Compound and Uniswap have $7.52 billion and $6.61 billion in TVL, respectively. These are just two examples of a fast-growing DeFi universe brimming with innovation.
The role of stablecoins
The rate of expansion of DeFi would not be possible without the proliferation of stablecoins. Originally launched to offer users some of the benefits of crypto such as:
Stablecoins have served as a link between users and various DeFi protocols. Users are very easily able to move tokens from wallet to protocol and from protocol to protocol quickly and with confidence in the value. In addition, they allow users to use DeFi more effectively. For example, when a user takes out a loan from Compound, they are required to post collateral. If collateral falls below certain thresholds, the collateral will be liquidated. There is more security in collateral when using a stablecoin compared to using a volatile asset like ETH. The benefits of stablecoins are not limited to lending and lending protocols, but are being felt throughout the DeFi ecosystem.
As stablecoins continue to enable positive DeFi interactions, there will be a virtuous cycle of user retention and user attraction. This is clearly proven by the massive increase in stablecoin supply this year. As of January 2021, the stablecoin supply, consisting of tokens such as USDT, USDC, BUSD and Dai, totaled around $30 billion. Today, that number is closer to $100 billion and the rate of change continues to point upwards. While some of these tokens are used for basic transactions, many are used in DeFi.
So what’s next for DeFi? And what awaits us?
DeFi is clearly the most powerful and tangible use case of crypto we’ve seen outside of Bitcoin to date, and it’s still in its infancy. The promise of decentralized, permissionless, and censorship-resistant protocols has evolved from a theoretical exercise to a real-world exercise. As we evolve, we expect more: more protocols, more TVL, more use cases, and more innovation. Traditional finance, which has gripped financial services for millennia, is on the verge of major upheaval. Importantly, consumers – retailers and institutions alike – will benefit from a more open system built for and by the community.
In this next step forward, we expect ETH to capitalize on this appreciation, reinforcing our belief that ETH is well-positioned for more growth.
*Disclosure: I personally own less than $1000 worth of ETH, mostly for product testing.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.