As cryptocurrencies begin to consolidate into the broader financial system thanks to growing interest from previously cautious institutional investors and the increasing integration of blockchain technology into our everyday lives, the way is gradually being paved for a world where all money and financial products are digital. The driving force behind the final change will undoubtedly be decentralized finance (DeFi), which is slowly but surely transitioning from concept technology to business use. Stablecoins will certainly play a critical role in this space, as their inherent stability makes them much better suited for such applications. In fact, apart from private projects like Tether and Paxos, global central banks are working overtime to implement their own CBDCs (Central Bank Digital Currencies) in order to meet popular demand for low-volatility cryptocurrencies. With 2021 touted as the year of DeFi, we can expect to see even greater integration of this technology. That can only be good news for the cryptocurrency whose architecture makes it all possible: Ethereum.
So what is DeFi anyway?
DeFi only stands for decentralized finance. It basically does what it says on the tin. Eliminates the need for intermediaries in a variety of financial transactions and agreements. Using the same core blockchain technology for cryptocurrencies, two parties can sign an agreement with a virtually unlimited number of variables and stipulations. There is no need for an outside executor or middleman, as the technology itself creates a smart contract that is essentially self-fulfilling. For example, imagine that you want to agree to pay someone 5 ETH if they perform a certain task for you. Your 5 ETH will be allocated and as soon as the other party fulfills their end of the deal, the money will be paid to you immediately via the blockchain. This means that both parties have complete peace of mind that the other will deliver on its promise and, best of all, there are no high fees to pay for this guarantee. However, the potential applications go far beyond simple buy / sell contracts, ranging from personal loans to lease and rental contracts, crowdfunding and even prediction markets.
The Ethereum blockchain and DeFi go hand in hand. In fact, it’s hard to imagine how DeFi could have developed without it. This is because the Ethereum network is inherently easier to use and lends itself to creating other types of decentralized applications beyond standard transactions. In fact, the number two creator of the digital currency, Vitalik Buterin, alluded to such uses as early as 2013 in his original Ethereum white paper. As we’ve already mentioned, smart contract architecture makes all of this possible. The arrival of Ethereum 2.0 is expected to improve the scalability of such applications, with a view to making them even more popular. With a strong rebound anticipated in DeFi this year, we can also expect the newer apps to be easier to use than previous versions that mainly focused on the tech side and neglected the UI / UX aspect. Despite the crucial role that the Ethereum network plays for DeFi, it is also worth noting that other platforms such as Polkadot are equally well suited to hosting DeFi solutions, a trend that may start to emerge before the end of 2021.
What does this mean for prices?
If we compare ETH to BTC, we see that the original cryptocurrency has lost more than 40% from the recent highs, while Ethereum has only declined a little more than 35%. And while the current correction is likely only short-lived, this difference in the extent of losses is statistically significant. Many analysts attribute this to Ethereum’s integral role in DeFi applications. Looking at the three-month ETH chart below (taken from StormGain crypto trading platform), we can see a consolidation period indicating that a breakout to the upside is likely:
As we can see, since the initial correction at the end of May, Ethereum is seeing both higher valleys and spikes, which would suggest that a new uptrend is being established. This is likely due to the usefulness of ETH beyond its use as a cryptocurrency. With the launch of the Ethereum 2.0 network, DeFi applications will be even more easily scalable, driving demand for the native currency and thus increasing prices.
If we look at the same time frame for DeFi’s main altcoin, Polkadot, we see a similar pattern emerge:
Once again, the asset is clearly preparing for another charge as an incipient uptrend can be seen starting in late May. As with most altcoins, the upside potential is much higher for Polkadot as it enjoys significantly higher volatility due to its more niche status compared to ETH. While this means that it may be more difficult to find brokers that offer it, a reliable, low-commission platform that supports both Ethereum and Polkadot is StormGain. Of course, this type of investment is only for those with a greater appetite for risk, but the potential rewards are certainly very lucrative.
But where do stablecoins come from?
Stablecoins play an absolutely critical role in cryptocurrency trading as low volatility currencies that can be used as an effective store of value for both the profits made and the money you would like to invest once a suitable opportunity presents itself. However, other than that, they are absolutely indispensable when it comes to DeFi. Legacy cryptocurrencies are great ways to make money trading and investing, but the same intense volatility that makes them so lucrative means that they are highly unsuitable for traditional deferred financial operations like long-term loans and late payments. Think about it: people don’t want to expect to receive $ 10,000 (2.5 ETH in May this year) in 2 months only to end up with $ 6,300 (the current value of 2.5 ETH). That is why stablecoins will be instrumental in mitigating the concerns of the most risk-averse users as the industry develops. For example, as a forward-thinking cryptocurrency broker, StormGain offers its clients a very attractive interest (up to 12% APR) on the digital deposits held on its platform. This could represent a very lucrative investment prospect for anyone looking to get into digital currencies, but are concerned about the huge price swings common in this asset class.
We just started
Regardless of what you think about cryptocurrencies, it can no longer be denied that they will be an inevitable part of our daily lives in the future. For most of us, this is likely to take the form of DeFi technology and stablecoins / CBDC. It may seem a bit overwhelming at first, but the advantages in terms of lower transaction and financial costs will have us wondering how we managed earlier. In the meantime, it would be a good decision to gain some experience using stablecoins, either as part of an active cryptocurrency investment and trading program or as a low-risk interest-bearing engagement with a broker like StormGain offering attractive deposit schemes for users. The new era of finance is approaching, with DeFi and stablecoins at the heart of it. So become them now, and you’ll be in an ideal position to reap the full benefits of this paradigm shift when it finally arrives!