The end of 2020 was huge for the crypto community. Not only was there a spectacular price increase for digital assets, potentially signaling the start of a new bull market, but there was also the launch of Ethereum 2.0 beacon chain, which has been under development for some time.
The highly anticipated update to the Ethereum blockchain is transforming the network from a proof-of-work to a proof-of-stake consensus model and aims to improve speed, security, lower transaction costs and solve the scalability issues that have persisted Ethereum. back in 2020.
Ethereum 2.0 is still in the early development phase – in phase 0, and there is still a very long way to go before a complete transition from the old to the new takes place. Despite this, the impact on the market is already felt thanks to the rapid development. This is especially true in the DeFi space, as Dr. Octavius, co-founder of the OctoFi DeFi protocol, told CoinTelegraph:
“Most people don’t understand Eth2 and what it means for the industry as a whole, especially DeFi. While other chains compete to solve some of the scaling issues on Ethereum, I think the network effects are quite profound and Ethereum is leaping ahead of the others. At least the beginning of 2.0 gives people confidence in Ethereum’s endurance. “
The launch of Ethereum 2.0 caused significant price volatility. The price peaked at around $ 670 right after its December 1 launch, only to undergo a slight correction the following days, in line with the rest of the altcoins. But the hype was felt most in DeFi as ETH 2.0 was a critical element driving the growth of the total value locked into the projects and according to Octavius, this trend is likely to continue: “The effects will likely continue the participation in DeFi speed up. markets as the DeFi builders can improve their products by an order of magnitude. “
TVL was just below $ 10 billion in early November and is now at $ 13.4 billion after a minor correction from its all-time high of $ 14.1 billion. according to to data from DeFiPulse. So it has grown significantly after November 27, a few days before the launch of the Beacon chain. The growth is fueled by a renewed confidence in the development efforts being put into Ethereum and the longevity of DeFi.
Of course, the current bull run in crypto has also contributed to this substantial growth, along with other factors including the merger of Yearn.Finance with decentralized exchange SushiSwap, which was just the latest in the list of partnerships secured by Yearn.Finance. Also, the liquidation of Uniswap’s yield farming took place, which caused a big increase of 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 competitor blockchains in the DeFi space:
“It could become important when rival blockchains really start to activate. As Polkadot and NEAR become more active, good news about Ethereum 2.0 could help keep projects anchored in the Ethereum ecosystem. ”
But despite TVL’s significant growth, total transaction volume declined. Transaction volume surpassed $ 41 billion in November and was down 12% from the previous month. This can be explained by users deciding not to move their money and instead betting on Eth2.
This was one of the necessary steps for the launch of ETH 2.0, as 16,384 validators had to deploy 32 ETH each to indicate the launch of the new chain. A total of 524,288 ETH locked into the deposit contract can easily explain the decrease in transaction volume in November.
Another data point showing DeFi’s dominance, in addition to the billions, in TVL is the fact that 99% of the Ethereum transaction volume comes from DeFi protocols. This means that users are still attracted to DeFi’s massive returns probably won’t be beaten by ETH 2.0 staking rewards. It is also likely that users will remain in Ethereum during this change as promising projects running on the blockchain continue to perform well. In addition, it is also possible that the improvements made by the update attract a more cautious institutional audience.
Disadvantages of ETH 2.0 on 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 may be some drawbacks.
The transition to a PoS consensus has implications for the DeFi ecosystem. Strikers who have ETH in their wallets earn interest for their problems. By sharing essentially very similar reward systems, it is possible that the compensation offered by staking can rival the rewards of yield farming and other DeFi products. While this may take time, potentially high rewards in Eth2 can cause conflict and diminished incentive for DeFi usage. However, innovative solutions to this conflict are already being developed, including tokenized ETH 2.0 bonds.
Validators can receive money in unlocked original Ether by transferring a token created by a full collateral smart contract to a creditor. In return, a pledge is made that when the blockchain merger takes place and the blockage ends, the creditor will automatically receive the original 32 ETH plus the accrued staking rewards. Dr. Octavius is optimistic about such developments:
“This concept is interesting not only in terms of futures markets, but also in terms of prediction markets and how they can be used to improve project management. […] But I am also very interested in how something like EIP 1559 will affect the stock of ETH, giving it a better S2F than Bitcoin. I think there will be a whole new dynamic when it comes to assessing investments, especially as DAOs and DeFi projects continue to generate attractive revenue. “
Another big risk lies in both the old and new Ethereum blockchains that are currently running simultaneously. With the following development milestones, the full transition to the new chain is planned for 2022, but not without significant risks. DeFi protocols may undergo a smooth transition, but the potential for minor disruptions or even catastrophic losses are also possible. Dr. Octavius told Cointelegraph, “Sure we can see unexpected bugs, or maybe the results of Eth2 are disappointing, but if developers keep choosing to build on Ethereum, that’s what really counts.”
What the future holds for Ethereum
There seems to be a consensus about the positive impact of Ethereum 2.0. However, as mentioned earlier, some drawbacks can arise. From technical risks to a shift in dynamics around DeFi and liquidity. According to Abugov, the latter will not be felt for the foreseeable future:
“It doesn’t appear that Ethereum 2.0 will have a significant effect on liquidity in the next 9-12 months. It will take away some ETH, but it is doubtful that this will be enough to change the current Ethereum 1.X economy “
With a successful move to Ethereum 2.0 posing a potential risk to DeFi’s growth, some expect an extremely positive outlook for the NFT market which has grown significantly in 2020 and is not a sector that is in direct competition with the deployment model behind Eth2.
Regardless of Ethereum 2.0’s progress, 2021 is likely to come Move to the next level as it trickles into the old finances. Dr. Octavius said, “Consumers will suddenly find themselves accessing new insured savings accounts with 2% interest per year, all derived from DeFi, without even knowing it.”