The rise, risks, and rewards of carrying the torch for Bitcoin.
Bitcoin seems poised to reach terminal velocity and leave orbit having broken the $17,600 barrier. Investors have tweeted 2021 predictions of $100,000 or $200,000. In fact, one of the most bullish positions we’ve seen has been from a leaked investor brief from Citibank which called for BTC to surpass $300,000 in 2021. In a note to institutional clients, Citibank stated that if Bitcoin follows the trajectory of previous bull runs, it will peak at $318,315 around December 2021 or early 2022.
What’s driving Bitcoin?
Though it’s long-term value as a store of wealth has yet to be proven, investors are treating Bitcoin as a deflationary asset. When the USD futures are looking bad, Bitcoin looks better than ever. Since March and throughout the bungled COVID-19 response, the US Federal Reserve has printed US Dollars at an unprecedented rate — and purchased more than $3.5 trillion in US securities with the newly minted dollars.
One needn’t be an economist to see what that kind impact that reckless printing can have. It’s likely to read to inflation, making the USD a less-stable store of value, and sending institutional investors looking for crypto alternatives.
TL;DR Summary — Keep your eye on Bitcoin, inflation in 2021 will make it more reliable than USD.
The DeFi Revolution
“The DeFi revolution is here to stay. It offers the promise of a bankless world, where you don’t need permission to save or invest your money. Like any nascent technology, there will be times when it gets overhyped, but DeFi is real and it’s already working in the wild. This is just the beginning.”– Tyler Winklevoss, Co-Founder & CEO of Gemini exchange, Principal of Winklevoss Capital, and Olympian
Recent weeks have shown some weakness in sentiment toward DeFi projects, but the DeFi concept and top DeFi projects like ChainLink, DeFiChain, and UniSwap remain among the great success stories of blockchain in 2020.
What piques the interest of so many retail investors in DeFi is a bunch of new use cases that still carry a very familiar theme — most of what DeFi has done well in its design is reminiscent of Bitcoin.
You can’t blame DeFi for modeling themselves after Bitcoin any more than you can blame Oasis for “borrowing” from the Beatles. And in 2020, Crypto investors have been tapping their feet and their wallets to DeFi’s familiar, yet fundamentally catchy tune. DeFi Pulse, a third-party tracking site and the reigning authority in rankings of DeFi protocols and tracking the total value locked into the smart contracts on popular DeFi applications and protocols. As of Wednesday, 11/11/20, there was $13.42 billion in smart contracts on DeFi.
Photo from DeFiPulse.com
DeFi fever has been in full effect among retail investors throughout most of 2020. In fact, DeFi tokens outperformed Bitcoin in Q2 of 2020 — the BTC bullrun of Q4 has of course changed that.
TL;DR Summary — DeFi projects have modeled their success on Bitcoin, and some DeFi projects outperformed BTC in parts of 2020.
“DeFi is like the ICO fever but on steroids… It is an amazing concept and will deliver true access to both lending and credit without needing intermediaries to sanction anyone’s involvement. Core to its success will be the governance layer, which once stable, will dictate the membership of each project, aligning people with similar world views, risk appetite, and passions,” — Jillian Godsil, award-winning blockchain journalist, keynote speaker, and founder of Blockleaders.
Image by Lee Rosario from Pixabay (customized)
DeFi Carries the Torch for Bitcoin
As a recent Cointelegraph article by Paul de Havilland reminds us, DeFi is crypto.
“DeFi, in many ways, is Bitcoin 2.0. And for that reason, DeFi — although based on Ethereum’s composability and smart contract functionality — furthers the Bitcoin narrative into the future that Bitcoin first allowed us to believe in. With each new DeFi protocol, that future is closing in on us: a world without banks as we have come to know them,” Havilland stated.
Bitcoin is, after all, the first decentralized finance project.
As described in its white paper, Bitcoin was intended as “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.”
While Bitcoin is a fantastically successful way to store and transfer value, DeFi projects take Bitcoin principles and extend them beyond simple payments.
DeFi offers a casino of options. Using smart contracts you can set all manner of contingencies on the transfer of value (transfer only on a blood moon if it’s over 90 degrees in Pennsylvania) but it also uses smart contracts to support a variety of other applications:
The most popular types of DeFi applications include:
- Decentralized exchanges (DEXs) — Online exchanges help connect users directly so they can trade a range of pairings (e.g., USD for BTC or ETH for DAI, etc.) peer-to-peer while each party maintains custodianship through the transaction.
- Asset Tokenization/Stablecoins — Using smart contracts to tether coins to real-world assets.
- Peer-to-Peer (P2P) lending and borrowing platforms
- “Wrapped” bitcoins (WBTC) as a way of sending bitcoin to the Ethereum network.
- Decentralized prediction markets enabling betting on future events even in areas where centralized betting might not be allowed. (Including sites like Augr and copytrade sites like HedgeTrade.)
TL;DR Summary — DeFi projects use smart contracts on Ethereum to deliver use cases that go well beyond making payments.
Farming, Mining, and the Appeal of Free Money
In addition to following and expanding on the mission of Bitcoin, DeFi projects benefit from having made some new inroads in reaching crypto investors with new ways to earn based on positive participation in the ecosystem:
DeFi goes beyond the airdrops of other projects to give users new ways to earn, including:
- Yield farming – Yield Farming is a way for more experienced traders to make yields on deposits, constantly seeking the most profitable pools to hold their DeFi assets.
- Liquidity mining – This form of Yield Farming is a way of blockchain projects giving users rewards for using their platforms.
- Money legos – DeFi uses smart contracts to allow users to snap together assets to create new pairs and nearly limitless ways of holding value.
The Future of DeFi – Boundless and Untested
Unfortunately, the Altcoin Season of Summer 2020 has led to a slowdown in the rapidly expanding DeFi market. Comparisons to the ICO boom of 2017 are not comforting from the point of view of investors who have already been left holding wallets full of dead and near worthless altcoins in the past. Slow-downs in returns from yield farming added some chill to the DeFi enthusiasm, but DeFi projects continue to be some of the hottest crypto projects of 2020.
Jonathan Ige, a researcher at Amun AG stated: “The mellowing in immediate hype for DeFi will be disappointing for the short-term trader but is likely good overall for the industry. The bubble over the summer was not sustainable but did show that various aspects of DeFi (lending, trading, DAOs) are actually useful for particular use cases.”
Steady growth and less frenzied coverage of DeFi projects are likely to allay investors’ anxieties about DeFi — and the institutional investors have become involved pumping more money into the projects.
The Future of DeFi is waiting on Ethereum 2.0
“DeFi holds a promising future. We are also excited to see ETH2 launch, and we may even see more users go from BTC to ETH to acquire the 32 needed to stake.”– Jordan Anderson, COO at Bitbuy
The boom of DeFi which relies on the Ethereum network has caused network congestion, latency in transactions, and higher fees.
However, hope is on the horizon in the form of Ethereum 2.0 (Eth2). The first phase, called phase 0, will be released by the end of 2020 according to Ethereum. Eth2 is promising throughput 100x faster, able to support thousands of transactions per second.
Eth2 was originally scheduled for launch in November 2020, though the launch of the first phase (named “phase 0”) has been pushed back to December. At the time of writing, Phase 0 of the ETH 2.0 upgrade is intended to launch on December 1.
However, in order for Ethereum 2.0 to be used, a minimum of 32 Ether per validator needs to be locked into the deposit contracts. This translates to roughly $15,000 per validator or staking pool at time of writing. Ethereum co-founder Vitalik Buterin has dedicated 3,200 ETH to Ethereum 2.0, which translates roughly to $1.4 million in today’s prices. In other words, even if it launches on schedule, Eth2 may not have enough ETH put aside for the level of usage it will have. Analysts tracking smart contract deposits have warned that 3,200 ETH is only 18.6% of the ETH needed. More will be needed to be locked in to handle the anticipated traffic, leading Ethereum’s biggest DeFi fans to preemptively complain about the limitations of Phase 0 before Eth2 has even launched.
TL;DR Summary — DeFi projects are relying on Ethereum 2.0 to speed transactions and reduce fees. This makes Ethereum both a strength and a vulnerability for DeFi.
DeFi has had a spectacular year. It is directionally sound, has built-in incentivization for involvement, and is a logical extension of the real strength of crypto and electronic currencies staying in the wheelhouse of financial services.
If you are going to speculate, DeFi projects like DAI are a great place to start. But Bitcoin itself — only 11 years old — is still considered an uncertain store of wealth. If institutional investors regard BTC as untested, then DeFi is completely uncharted waters.
Technically speaking, congestion and lag on the Ethereum network it relies on is a major vulnerability for DeFi projects. Assuming Eth2 launches in December, we will learn a great deal about the future prospects of Ethereum.
However, Block Producers are already investigating using other blockchains to support DeFi projects. In a recent episode of the DeFiAnt podcast, Sam Bankman-Fried FTX exchange co-founder and CEO said that Ethereum (ETH) — even Eth2 — is incapable of handling DeFi’s growth so he tested 30 blockchains and chose Solana for his DeFi project.
The secret in the strength of DeFi is the concept — these are essential services and block producers will find a way to make them a reality that can scale to a mass audience.
Whether it will be on Ethereum is a question that impacts Ethereum’s future as well as DeFi’s.
“The DeFi boom was fast and furious over the past few months. Yield farming projects have cooled off and had their time in the limelight, but a lot of interesting infrastructure elements, such as borrowing and lending platforms, came out of the craze and will be everlasting. As always, Ethereum has the largest developer network and userbase so these products are predominantly ETH based. If ETH 2.0 brings significantly lower transaction costs then this would be welcomed since gas fees were extremely high and cost-prohibitive for the retail market to participate during the DeFi boom. The high gas costs affected our HedgeTrade (copy trade) platform as the smart contract execution costs went parabolic. We’re looking forward to ETH 2.0 ourselves and even looking at certain alternatives to our infrastructure to limit our dependency on fluctuating gas fees.”– David Waslen, Founder & & CEO of HedgeTrade
Are you ready?
This is just one cross-section of a multi-faceted subject that is DeFi.
I do sincerely advise you to do your own research — this is not intended as investment advice, and so on, but more importantly it’s good to be an informed buyer, especially when you are investing in abstract concepts of wealth.
If you are ready to invest, start your journey with an easy and reliable buy/sell platform like Bitbuy. It’s the most convenient way to purchase ETH tokens at the best possible market prices and makes it easy to send those tokens to MetaMask so that you can keep all of your wealth on decentralized platforms. The nature of payment and stored value is ever-evolving — the concepts are hard, but your buying experience needn’t be.