We investigate the key driving forces behind the 2020 Ethereum rally.
This week has seen the price of Ethereum reach an all-time 2020 high of over $320. Yes, this is considerably less than the price during the late 2017 ICO boom, but significant for a few reasons nonetheless.
Ethereum started 2020 very well impacted in the main by two things. An explosion in the availability and trading within Ethereum DeFi applications and the imminent launch of Ethereum 2.0.
Ethereum has its killer app
All operating systems kickstart through the introduction of a killer app. The internet had pornography, pirated music, and movies to help find its road to mass adoption. Mobile devices had Angry Birds and social media.
Ethereum is an operating system. As such, has been waiting for its killer app to arrive that would catapult user numbers to the moon and help place the technology at the forefront of the blockchain movement.
Some would argue those innovations already arrived in the form of smart contracts and the ability to launch decentralized applications (dapps). But others would argue that those developments, whilst highly useful, are still understood and utilized by a very small portion of the world’s population.
DeFi killer dapps
The first driver of the Ethereum price rally has been the bulging Ethereum DeFi space. Since May 2020, the total value locked in DeFi protocols has increased almost 4x to $3.75 billion. Top-ranked DeFi dapps, such as Compound, Maker, Aave, Synthetix, and Curve Finance, have all seen a substantial increase in users since the middle of June 2020. Users appeared quick to jump into new protocols and finance products offering considerable gains.
But are they users, or whales?
In a recent article by Ilya Abugov, DappRadar highlighted the fact that TVL or Total Value Locked, a standard metric in DeFi is flawed in many ways. In fact, the report showed that just 30 wallets account for 67% of the supply volume and 75% of the borrowing volume on Compound.
So, whilst some have been quick to report on ‘explosions of users’ in the DeFi space, it is paramount to consider the activity of whale users.
At the moment they are still the driving force behind this movement. But, where there is money to be made, there will be early adopters and more experienced users close behind.
At a time in history when people’s attention has shifted to financial independence, and blockchain and DeFi education materials are everywhere. DeFi seems to fit the bill. After all, why wouldn’t people be attracted by the ability to take hard-earned money, convert it to a stable coin like USDC and start earning 4%+ interest through a DeFi platform?
Because as with all good things – there are risks and costs to consider.
Ethereum DeFi has a bottleneck
The DeFi space has expanded with such speed that it has fell victim to the infrastructure on which it sits. Simply put, the Ethereum network is struggling to keep up with the demand it has created.
As people use Ethereum DeFi platforms, they need to send data in the form of transactions and smart contracts. In the majority of cases, they also have to utilize a decentralized exchange (DEX) to make token purchases. These actions all result in more use, slower speeds, and increasing costs for Ethereum.
In the past month, the Ethereum blockchain network has become completely saturated. As the network slows, users are required to pay higher gas or transaction fees to process payments and smart contracts.
DeFi at the expense of games
In general, the quicker you want your transaction saved, the more gas you pay. This usually isn’t a problem as the average block time for Ethereum is less than 20 seconds. But as activity on Ethereum increases, there are more transactions to be stored, and only so much space in each block.
In order to deal with this issue, the gas fee increases. In this regard, the gas acts as a priority filtering system. If you want to move $1 million of ETH or lock $100,000-worth of BAT into a MakerDAO Vault, paying – say – $10 in gas isn’t a big deal.
However, if you want to buy a $10 character for your favorite game, or spend $20 a monthly in-game subscription, a $10 fee is a large additional cost.
This explosion in DeFi came at a price. Ethereum has lost a large portion of its gaming users over the last few months and those users have turned either to versions of the same game running on another blockchain or stopped using the dapp entirely.
Arise Ethereum 2.0
The arrival of Ethereum 2.0 is supposed to fix many of the problems previously stated. The hype surrounding the launch has been mounting in 2020, especially in Q2.
The introduction of Ethereum 2.0 could be a direct price catalyst, especially as we approach the end of 2020. Ethereum developers, led by Afri Schoedon, said that the official test net launch of Ethereum 2.0 would begin on August 4th, 2020. News that has been long-awaited and instantly started an upward trajectory in the Ethereum price.
The first phase of Ethereum 2.0 is called the beacon chain. In order for it to be activated or launched, developers need to develop test nets to mimic the conditions of the beacon chain. Stable and long-term test nets are necessary to ensure a seamless launch of Ethereum 2.0, Schoedon wrote on GitHub.
So whilst many in the space are screaming for a full launch, the Ethereum team seems completely dedicated to a successful and smooth rollout – no matter the timeline.
It will be fascinating to observe the data over the next 6 months and report on the ever-changing dynamics of the Ethereum blockchain and its users. Make sure you bookmark DappRadar and sign up to our weekly newsletter below to get updates direct to your inbox.