James Wang, an experienced crypto analyst who says that Ethereum (ETH) could be the “last investment of your life,” points out that the world’s largest smart contract platform isn’t merely a cryptocurrency. Wang explains that Ethereum is a complete software platform with a rapidly increasing number of users, consistent revenue, and a wide range of decentralized applications (dApps).
Ethereum isn't just a crypto currency. It's a software platform with users, revenue, and applications.
If you cover software like AWS, MSFT, SNOW, or TWLO you should cover Ethereum ($ETH). To get started, check out its Q1 'earnings' results:https://t.co/8ZrEkQRFke
— James Wang (@draecomino) May 17, 2021
Wang adds that if you cover or keep up with software such as AWS, MSFT, SNOW, or TWLO, then you also need to focus on Ethereum (ETH).
Indeed, Ethereum has come a long way since when it was initially proposed in 2013 by Russian-Canadian programmer and writer Vitalik Buterin, who recently became a crypto billionaire.
Ethereum has now matured into a sufficiently decentralized, open-source blockchain or distributed ledger technology (DLT) network with smart contract functionality. Ether (ETH) is the native digital currency of the platform and is trading at just under $3,300 at the time of writing (after recently surpassing the $4,300 mark but then quickly correcting).
Ethereum has consistently been ranked the world’s second-largest virtual currency in terms of market cap, behind only Bitcoin, for many years now. Ethereum has also become the most actively-used blockchain network in the world.
Ethereum Now the World’s Most Widely-Used DLT Network
According to CryptoFees.info data, Ethereum generated over $29.3 million in fees during the past 24 hours. Uniswap V2, a leading ERC-20 non-custodial exchange built on Ethereum, managed to generate $5.17 million in fees – which is good for second place.
Meanwhile, the Bitcoin (BTC) network only netted $3.34 million in fees during the last 24 hours. In fourth place, SushiSwap, a fork (or variation) of Uniswap, recorded around 3.00 million in total fees in the past 24 hours while Aave and Compound, both of which are based on Ethereum, netted $1.41 mmillion (5th place) and $945,000 million (6th place) in fees respectively in the last 24 hours.
While we could argue that a cryptocurrency network’s ability to generate the highest amount in transaction fees is not the only metric to examine, Ethereum now rests on very strong fundamentals. The fast-evolving decentralized finance (DeFi) ecosystem is being developed almost completely on Ethereum.
Over $76 Billion Now Locked in Ethereum-Dominated DeFi Space
DeFi Pulse data shows that there’s over $76.4 billion in Total Value Locked (TVL) in the nascent decentralized finance ecosystem. To put this into perspective, there was just around $1 billion in TVL into DeFi in February 2020. Some might argue that DeFi could be a massive bubble and that these valuations may not be sustainable.
However, a closer examination of the open-source, permissionless, and sufficiently decentralized Ethereum-based protocols makes it abundantly clear that DeFi still has a lot more potential TVL to capture. In fact, Ethereum is still very much in its early stages of adoption and development. Its full potential is still far from being realized when we consider that the smart contract platform has not yet fully transitioned from a proof-of-work (PoW) based consensus model to a proof-of-stake or (PoS) based model (more on this later).
Notably, DeFi Pulse is currently tracking around 100 different decentralized finance protocols and all of them have been developed on Ethereum. Currently, the Maker Protocol claims the top spot on DeFi Pulse with nearly $12.8 billion in TVL. Maker is classified as a lending protocol and the second-largest in terms of TVL project, Aave, is also a lending protocol.
Compound, which currently ranks third on DeFi Pulse in terms of TVL, has been categorized as a lending protocol as well. Below is a brief description of what these protocols have to offer.
DeFi Lending Protocols like Maker Introduce Governance Token Concept
Maker (MKR) is the governance token of the MakerDAO (DAO stands for distributed autonomous organization) and Maker Protocol. Both the DAO and the protocol are based on the Ethereum blockchain and they allow users to both issue and manage the DAI stablecoin.
Founded in 2015 and then officially launched in December 2017, Maker is an initiative that is focused on operating DAI, which is described as a community-governed “decentralized” virtual currency with a stable value “soft-pegged” (roughly) to the US dollar.
MKR tokens serve as a type of voting share for the organization that manages DAI. Although they don’t distribute dividends to their holders, they do provide holders with voting rights regarding the ongoing development of Maker Protocol. MKR tokens may increase in value in accordance with the success of the DAI stablecoin.
Notably, the Maker ecosystem is one of the first DeFi initiatives that has taken advantage of the smart-contract capabilities of Ethereum.
One of the main functions of a complete financial system is its ability to issue loans and then have an effective way of rewarding the loan issuers while providing manageable ways for borrowers to pay back what they owe. Traditional banking has depended heavily on its ability to disburse loans in an efficient manner while minimizing overall risks for borrowers and lenders.
This same lending system is being built in the DeFi space, but it’s arguably better because the lending process does not rely on too many trusted third-parties or intermediaries. The lending process has been automated via smart contracts, but this hasn’t been perfected since there are still too many hacks and vulnerabilities being discovered, almost on a daily basis.
Despite these issues, there’s no denying that many of these DeFi lending protocols are not only here to stay, but they are only going to get (much) better with the passage of time and a lot of hard software development work. By far, Ethereum has the largest number of talented developers working to further improve its ecosystem than any other crypto project (even Bitcoin). That’s one of the main reasons why Ethereum has the potential to become the foundation of the world’s financial infrastructure in the coming decade.
Some strong early signs that the future financial system will leverage decentralized protocols are already here. Visa (NYSE:V) recently announced that it’s “bridging digital and fiat” currency by integrating the USDC stablecoin. Visa said that by enabling USDC, it is creating the ability to one day support Central Bank Digital Currencies (CBDCs).
Visa had explained that after months of planning the company successfully completed a settlement transaction in March 2021 with Crypto.com sending USDC to Visa’s Ethereum address at Anchorage. Expectations are to launch this same capability for other partners this coming year.
Aave Now has More than $11.2 Billion in TVL
But getting back to Ethereum lending protocols, Aave currently has over $11.2 billion in TVL. As previously reported, Aave is a DeFi protocol that lets users lend and borrow crypto-assets.
Lenders on Aave are able to earn interest by depositing digital assets into liquidity pools. Borrowers are able to use their cryptocurrency holdings as collateral in order to take out a flash loan, by using this liquidity.
Aave, which means “ghost” in Finnish, was first called ETHLend when it was initially launched in November 2017. However, the rebranding to Aave took place in September 2018.
The AAVE token offers holders the chance to benefit from discounted fees when using the platform. AAVE is also a governance token that gives holders a say in the ongoing development of the protocol.
Aave has a number of selling points when compared with other protocols in a crowded DeFi market. During the DeFi mania in mid-2020, Aave was one of the most prominent projects in terms of the TVL.
The AAVE project lets users borrow and lend in around 20 different digital currencies, which means that people have many options when it comes to conducting transactions. One of Aave’s main or flagship products are “flash loans,” which have been referred to as the very first uncollateralized loan option in DeFi. However, these so-called flash loans need to be returned as part of the same transaction.
Another major selling point for Aave is how users who take out loans can switch between fixed and variable interest rates. Although fixed rates may offer some certainty in terms of expected costs (during increased volatility in crypto-asset markets), variable rates may be a good option if the prospective borrower believes that prices will decline in the foreseeable future. (Note: to learn more about Aave, check here.)
DeFi Protocol Compound Offers “Flash Loans”
As covered, Compound is currently the third-largest DeFi lending protocol with over $9.7 billion in TVL at the time of writing.
Compound lets people earn interest on their crypto by depositing them into one of several different pools that’s supported by the platform. When someone deposits tokens to a Compound pool, they get cTokens in exchange for the deposited funds. These cTokens represent the person’s stake in the pool and may be used to redeem the underlying crypto that was initially deposited into the pool at any given time.
For instance, by depositing Ethereum (ETH) into a pool, you will get cETH in return. Over a certain timeframe, the exchange rate of the cTokens to the underlying asset should rise, meaning that you may be able to redeem them for significantly more of the underlying asset than you may have deposited (so that’s how the interest is distributed via the Compound protocol).
Borrowers using Compound are able to obtain a secured loan from Compound pools by putting up collateral. The maximum loan-to-value (LTV) ratio can change based on the collateral asset. At present, it ranges from 50 to around 75%. The interest rate paid also changes based on the borrowed asset and borrowers may have to deal with automatic liquidation if their collateral happens to drop below a certain maintenance level. (Note: to learn more about this protocol, check here.)
Much More than Lending Protocols, Ethereum Ecosystem Offers Payments, Derivatives, DEXes
So far, we have only briefly discussed DeFi lending protocols. However, there’s a lot more to decentralized finance than just these types of platforms. Currently, there are many different payments, derivatives and decentralized (or non-custodial) exchanges being developed (or already built) on Ethereum.
These important developments have been highlighted in an extensive new report, shared by James Wang (on May 17, 2021). They are as follows:
Total Ethereum transaction fees, also referred to as network revenue, surged 200x to $1.7 billion in Q1 2021, compared with only $8 million during Q1 2020. In April 2021, Ethereum managed to generate an annualized revenue run rate of $8.6 billion, which is comparable to Amazon Web Services back in 2015.
Total transaction volume on Ethereum surged 20x to $713 billion in Q1 2021, when compared with just $33 billion in Q1 2020.
Median transaction fee grew 126x to $7.63 in Q1 2021, when compared with just $0.06 in Q1 2020. Daily active addresses, which can serve as a proxy for daily active users, grew 71% to 607k in Q1 2021 (compared with 364k in Q1 2020).
Staked Ethereum “reached 3.6 million ETH in Q1 2021” with staking only recently being introduced in December 2020.
As mentioned in the report shared by Wang, DEX volume surged 76x to $177 billion in Q1 2021, (compared with merely $2.3 billion in Q1 2020).
DeFi total value locked “increased 64x to 52 billion in Q1 2021, compared with $0.8 billion in Q1 2020,” the report revealed while adding that stablecoin volume “increased 100% to $40 billion in Q1 2021, compared with $20 billion in Q1 2020.”
Wrapped BTC, the tokenized version of Bitcoin that runs on the Ethereum blockchain, saw its volume “increase 95x to 170k BTC in Q1 2021, compared with 1.8k BTC in Q1 2020.” Approximately 1% of bitcoin supply is “wrapped as ERC-20 tokens and traded on top of Ethereum.”
Non-fungible tokens or NFT art sales “increased 560x to $396 million in Q1 2021, compared with $0.7 million in Q1 2020.”
Anthony Sassano, Founder of The Daily Gwei, remarked:
“Q1 was a phenomenal quarter for Ethereum. On-chain metrics from active addresses to transaction volume reached all time highs.’
David Hoffman, Founding Father of Bankless, stated:
“The popularity of DeFi shows that Ethereum is more than just a crypto currency, it is the world’s best programmable money.”
Justin Drake, a researcher at the Ethereum Foundation, noted:
“People are realizing that Ethereum isn’t just money, it’s ultra-sound money. While other crypto currencies may boast of having a supply ceiling, Ethereum will soon have no supply floor.”
The report also mentioned:
“Ethereum’s strong Q1 growth was not without pains. Gas prices spiked in Q1 due to the incredible popularity of DeFi and NFT applications. Level 2 scaling, which is already being deployed across the ecosystem, aims to alleviate congestion and bring cost and power consumption down to near zero.”
Ethereum Ecosystem Highlights
Metamask—the widely-used Ethereum wallet for desktop and mobile—managed to reach 4 million monthly active users (MAUs) in Q1 and “crossed 5 million MAUs in April,” the report confirmed while noting that Metamask mobile “saw strong global growth, especially in India, Indonesia, Vietnam, and Nigeria.”
Metamask’s MAUs is now “comparable to mainstream consumer applications such as Robinhood and Clubhouse,” the report added.
Meitu—a Chinese mobile software firm —purchased 16,000 ETH for its balance sheet. Meitu’s board has “allocated up to $100 million for the purchase of cryptocurrencies to diversify its treasury,” the report noted while adding that Ethereum “makes up its largest position.” Meitu is currently evaluating whether it should develop applications on the Ethereum blockchain.
Notably, Canada has approved four exchange-traded-funds or ETFs for purchasing and trading ETH. Evolve Ether ETF (TSX: ETHR), CI Galaxy Ethereum ETF (TSX: ETHX), Purpose Ether ETF (TSE: ETHH), and 3iQ CoinShares Ether ETF (TSX:ETHQ) all aim to offer convenient and economical ways to hold ETH as part of a regular brokerage account.
Outlook for Ethereum
As stated in the report:
“2021 is perhaps the most important year in Ethereum’s history. The two key themes for 2021 are economic security and scalability. In April the Ethereum core dev team approved EIP1559—a software update that improves the bid process for block space and introduces a burn mechanism for the base portion of the transaction fee.”
The report added that fee burn should offset a considerable portion of Ethereum issuance, which could help pave the way for long-term network security with “minimum dilution.” The report also mentioned that Ethereum Improvement Proposal or EIP1559 is now “on track to be deployed on test nets on June 9, 2021, followed by official rollout via the London hard fork on July 14, 2021.”
The report further noted:
“Ethereum has a dual pronged approach to scaling network capacity—rollups and sharding. Rollups batch and compress transactions off-chain, increasing transaction throughput by ~100x. Sharding breaks the Ethereum main chain into sub-chains to enable parallel computation, further improving throughput by ~100x. By employing both technologies, Ethereum 2.0 at maturity could process upward of 100,000 transactions per second versus 15 today.”
The report continued:
“In early Q2, Ethereum ecosystem partners launched a number of projects powered by rollups. dYdX launched its zk-rollup platform for perpetual futures trading while Immutable X launched a zk-rollup based platform for minting and trading NFTs. Transactions via rollups consume negligible energy compared to the main chain, addressing one of the main criticisms of the NFT economy. Uniswap—the most popular decentralized exchange for Ethereum is expected to launch rollups via Optimism in the coming weeks.”
Toward the end of 2021, Ethereum “aims to switch from its current proof of work algorithm to proof of stake,” the report confirmed while adding that the initial version of the proof of stake chain (“beacon chain”) went live in December of last year.
On May 12, 2021, developers carried out a “successful merge of the two chains in a test environment,” the report revealed while noting that proof of stake will “reduce Ethereum’s energy consumption by 99% while providing democratic access to staking rewards for all ETH holders.”
The report also noted:
“At the start of Q1 2021, the Ethereum Foundation’s treasury had 460k ether valued at $560 million. At the end of Q1 2021, the treasury’s balance was 430k ether, valued at $826 million. The Ethereum Foundation spent 30k ether during the quarter but the treasury’s value in USD terms grew due to ether-USD appreciation.”
(Note: to view other Ethereum results, check here.)