- Ethereum and the decentralized finance revolution
“Whereas most technologies tend to automate workers on the periphery doing menial tasks, blockchains automate away the center. Instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers work with the customer directly…”
Vitalik Buterin (Ethereum Founder)
In late 2013 a young man named Vitalik Buterin, a programmer and co-founder of Bitcoin Magazine, issued a whitepaper of Ethereum, the first decentralized world computer Turing-complete blockchain. Vitalik argued in late 2013 via his magazine that Bitcoin needed a scripting language for application development. After failing to gain support from the Bitcoin community, he proposed developing a new platform with a more general scripting language.
This development means that similarly to how Apple’s IOS programming language enabled developers to produce apps for the iPhone, Ethereum opened up the possibility for decentralized applications. Therefore, it unleashed a cornucopia of various use cases for the technology, most of which could not be possible with Bitcoin.
Additionally, the Ethereum blockchain has better scalability than its Bitcoin counterpart. Users can send Ether, the blockchain’s native cryptocurrency (ETH), anywhere in the world in 15 seconds, proving that Bitcoin’s technology might be revamped exponentially.
After its successful deployment in 2015, Ethereum rose to the top, and this day is the second-largest cryptocurrency by market capitalization. In March 2017, “The Ethereum Enterprise Alliance” was announced, marking a significant milestone in the crypto asset space.
One hundred sixteen corporations founded the alliance, most of them listed on Fortune 500 and web-scale corporations such as Microsoft, Amazon, J.P. Morgan, Banco Santander, to name a few. On the side of the Government, several Countries, NGO’s & Central Banks selected Ethereum as their go-to platform as well. As Bitcoin is called the world’s store of value, Ethereum is becoming its value vault.
The possibility of creating immutable and transparent digital abstractions of value opened up the opportunity for real-world assets to be represented, safeguarded, and traded digitally, driving liquidity and real-time price discovery to traditionally illiquid assets. The world economic forum estimates that approximately 10% of the world’s GDP or wealth will be on the blockchain by 2025. These and other factors contribute to Ethereum’s stellar success.
Decentralized Applications and Smart contracts
“Computer science gives you far more leverage to change the world than any other study in our age.”
As opposed to centralized applications that run on a single computer, decentralized applications or DApp’s run on a Peer to Peer (P2P) network of computers. The interface of the decentralized applications does not look different than their centralized counterparts. They are no different from each other.
DApps differ from traditional apps in the backend, where Smart Contracts represent the entire logic core of development. Smart contracts are integral building blocks of the Ethereum blockchain and one of the main contributions the project has made to computer science.
A smart contract is a computer program that can execute, control, or document legal and other relevant transactions, events, or actions. All these according to the terms of a contract or agreement. Some of the benefits of smart contracts are the reduction of the need for trusted intermediaries, arbitration and enforcement costs, avoiding fraud, and the removal of malicious and accidental exceptions.
The concept was initially introduced in 1994 by Nick Szabo, a computer scientist, and cypherpunk. In 1994 Szabo explained: “The basic idea of smart contracts is that many kinds of contractual clauses (such as liens, bonding, delineation of property rights, etc.) can be embedded in the hardware and software we deal with.
A smart contract refers to a set of promises, specified in digital form, including protocols within, which the parties perform on these promises.” With the Ethereum blockchain, smart contracts became a reality, enabling potential use cases for diverse industries, governments, supply chains, central banks, etc.
Of all the use cases mentioned above for this essay, we will concentrate on a portion of these use cases encompassed by what we now call Decentralized Finance.
“The Blockchain will do to the financial system what the internet did to the media industry…”
The term decentralized finance refers to the ecosystem of financial applications developed in blockchain networks. The great majority of projects in the space are deployed in the Ethereum blockchain. Ethereum can be considered to be the main driver behind DeFi. This movement promotes decentralized networks and open-source software to create a plethora of financial services.
DeFi brings innovation to services and products typically offered by traditional investment and banking services, shifting traditional finance towards decentralization, removing intermediaries, reducing overall costs, and significantly improving security.
The main innovation amplifier in DeFi is the use of smart contracts, which dramatically expands the possibilities for use cases with great scalability and reduced operational costs. The primary use cases of DeFi are stable cryptocurrencies, peer to peer lending and borrowing platforms, decentralized crypto exchanges, asset digitalization platforms, prediction markets, and financial derivatives.
The Decentralized finance ecosystem consists of a diverse number of protocols, many of which focused on providing liquidity to liquidity pools. These characteristics offer incentives to long term crypto asset holders, traders, and institutional investors looking for ways to maximize returns for their crypto-asset portfolios.
The total value of assets locked that provide viability for DeFi projects is around 10 billion USD to this day*. Market participants who speculate on short-term gains invest a significant part of this capital in high yield/high-risk experimental protocols. The empirical section of this space comes from some of the funded projects that are lacking essential items such as code audits, viable, sustainable growth models, etc.*
Industry leaders have suggested that we are in front of a bubble similar to the ICO craze experienced in 2017, where lack of transparency and, in some cases, deliberate “pump and dump” schemes were a common theme.
Nonetheless, we believe that we are witnessing the birth of an industry with the highest growth potential in the crypto space; the DeFi protocols are mainly responsible for the rate of growth that stablecoins have shown during the past few months, at an astonishing 100 million USD per day.
- Date of publication:
- Sat, 11/21/2020 - 08:02
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