After Bitcoin, it took years for another blockchain to emerge – Ethereum. Indeed, it can be traded via online exchanges and stored in various types of wallets (hardware, software, and paper wallets), but Ethereum isn’t just a cryptocurrency. Ethereum is aimed at smart contracts and decentralized apps (dApps). In plainer terms, it’s the most significant and well-established open-ended, decentralized software platform. Ethereum is the foundational backbone of decentralized finance, or DeFi for short, even if, at times, it suffers from network congestion and skyrocketing gas fees, as Binance data shows. Older cryptocurrency projects are struggling to increase their market share but remain less popular.
DeFi Operates in An Open, Borderless, Accessible, And Digital Form
DeFi makes available the same financial services as centralized finance, namely banking, loans, insurance, mortgages, and investments, but it allows customers to directly control their assets, so there’s no need to rely on traditional intermediaries like banks or centralized entities. In 2013, Vitalik Buterin brought forward Ethereum; but the blockchain didn’t go live until 2015, starting at a price of around $0.74. Ethereum was designed to function as digital money, be used for global payments, and have applications run on top of its code. The decentralized economy runs on top of Ethereum, which is critical in the coming of Web3, which is still being developed.
DeFi supplies a legitimate alternative to old systems, so people can transact by simply using blockchain technology. It’s not merely an emerging ecosystem of projects. Far from it. DeFi represents a well-coordinated effort to fill in the gaps left by traditional finance, offering more flexibility and transparency. The best finance books for beginners break down important concepts in simple terms. Some of the benefits of DeFi include but aren’t limited to:
- Programmability: Apps and services rely on smart contracts that can be programmed to execute right away when predetermined terms and conditions are met. The self-executing agreements can be adjusted to fit various needs and purposes.
- Immutability: The data and the ledger are tamper-proof, and its coordination across the Ethereum blockchain enhances security and audibility. History can’t be modified or changed after its creation.
- Interoperability: Protocols and apps are built to integrate and complement one another. Ethereum blockchains like Polygon or Avalanche can take part in the value created in the largest ecosystem. Developers have the freedom to build on top of existing protocols, customize interfaces, and integrate third-party apps.
- Transparency: All transactions and operations on DeFi are listed on the Ethereum blockchain publicly and transparently. Plus, anyone can view, audit, and build upon the existing code.
- Permissionless: Users can access the infrastructure without permission, whether they want to create their own DeFi app or use an existing one. All that’s needed is a cryptocurrency wallet and a good Internet connection.
- Self-custody: Users can interact with DeFi protocols and apps without transferring assets from custodial wallets, so they enjoy greater access and flexibility. Individuals are 100% in control of their assets.
Cryptography, smart contracts, and blockchain technology allow DeFi to exist for the sake of the global community. Ethereum takes advantage of a smart contract programming language called Solidity, which continues to improve with the help of the developer community.
As DeFi Continues to Expand, Ethereum Will Continue to Play a Significant Part
DeFi isn’t dead, nor is it declining. What is important to keep in mind is that we’re still experimenting with the technology, and mistakes will be made. Developers have succeeded in building robust systems that operate outside the confines of traditional corporations, banking rails, and even geographic borders, and DeFi’s market growth doesn’t need to be driven by FOMO (fear of missing out). All early innovations happened on Ethereum and its scalability solutions and continuous upgrades help cement its status as the leading platform in DeFi. As a blockchain platform, Ethereum ensures the necessary infrastructure and smart contract functionality to facilitate asset management, borrowing and lending, insurance, etc.
Ethereum’s Dencun upgrade will make DeFi a lot more affordable to use by reducing the costs of interacting with secondary networks like Optimism or Arbitrum. The hard fork can unlock new use cases, such as gaming and generative art, not previously practical on account of high transaction fees. Developers can start looking towards other improvements, such as running an Ethereum full node on their phones, which helps decentralize the network and improve scalability. The introduction of blob-carrying transactions will allow for further growth in the ecosystem, encouraging the development of more Layer 2 chains, thus reducing the barriers to introducing new projects.
The most significant DeFi project, MarkerDAO, which enables users to borrow and lend cryptocurrencies, was created on top of the Ethereum blockchain. Smart contracts automate the collateralization and lending of its stablecoin, DAI, designed to track the price of the US dollar. A specific amount of ETH is locked in a self-executing agreement, so it can be used to mint DAI; borrowers can withdraw their locked cryptocurrency after they’ve repaid the amount of DAI and a small interest fee. Everyone can participate in governance. Some of the most important decentralized autonomous organizations (DAOs) across the Web3 ecosystem are Developer DAO, Central Games, and Friends with Benefits, to name a few.
Concluding Thoughts
The interoperability between Ethereum and Bitcoin is of the essence when it comes to the evolution of DeFi, as data and assets can be exchanged without the need for intermediaries. Wrapped Bitcoin, for instance, makes it possible for Bitcoin holders to participate in Ethereum’s ecosystem – custodians include centralized exchanges, decentralized exchanges, and DAOs. Speaking of which, the creation of smart contracts, stablecoins, and lending/borrowing has led to the creation of decentralized exchanges. They’re one of the most important applications of DeFi, adding liquidity and helping market price discovery. DEXs provide yield farming opportunities, facilitating decentralized swapping in exchange for a small fee.
All in all, Ethereum has had a considerable impact on DeFi, making it more accessible, secure, and innovative. The community is well enough developed to support the ecosystem by supporting teams and spinning out new projects. Even if Ethereum is well-established, there’s still room for improvement, so let’s wait and hope for the best.
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