The Present And Future Of The Ethereum Network
- The adoption and the development of applications interacting with the Ethereum network have never been stronger, opening many possibilities across a variety of industries.
- The rise of Decentralized Finance (DeFi) is gaining momentum and creating new investment opportunities for both active and passive investors.
- Ethereum 2.0 first step, Phase 0, it's very close to being launched. I believe the update will bring substantial benefits to the network and Ether holders.
- At current price levels, the risk is low compared to the currency's very high potential.
Still living in the shade of Bitcoin (BTC-USD), the Ethereum network and its currency, Ether (ETH-USD), currently occupies the second place in the cryptocurrencies market rank by capitalization. Despite the second place, Ethereum continues to be the innovation hive of the industry. The adoption and the development of applications interacting with the network have never been stronger, opening many possibilities across a variety of industries. The deployment of Ethereum 2.0 should be a powerful catalyst for the network and Ether price growth. The current price of ether stands far below its highs of 1400 dollars in January 2018, and I believe that the most recent 20% drop in price provides a low-risk high-reward long entry point.
An Ocean Of Possibilities - The Rise Of DeFi
Bitcoin is the pioneer of cryptocurrencies and the first successful implementation of the blockchain technology. While the debate is still ongoing about Bitcoin's ability to store value, or to be used as a viable form of payment, it's on other separate blockchains that innovation is thriving.
The Ethereum network, started in 2013, was conceived as a way to fully exploit the potential that the technologies and ideas introduced by Bitcoin brought to the world. In fact, by design, Bitcoin is quite a limited network. Its structural strength is achieved allowing only a limited amount of low complexity operations to be done within the system. Currently, most Bitcoin engineering and development efforts are focused on the addition of transaction features and the general optimization of the network. The bitcoin blockchain could not handle more than payment related development anyway, due to its designed structural limitations. On the other hand, the Ethereum network is versatile and dynamic. Building on the concept of "the world virtual computer", Ethereum allows almost any code to live on the blockchain through the deployment of "smart contracts", which allow entire apps to independently live on the virtual machine powered by Ethereum users worldwide. Decentralized applications (DApps) range across various categories, from Games and Gambling to Finance, Security, Health and Insurance; showing that the benefits of decentralized applications can be applied not only for an amusement purpose but also to improve the most important aspects of society.
DApps by industry - Source: State of DApps
Particular attention should be posed to the Financial ecosystem that is developing on the Ethereum platform. Called Decentralized finance (DeFi), this range of applications aims at bringing financial tools on the blockchain, achieving benefits such as the removal of a single point of failure and the need for a trusted intermediary.
DeFi platforms allow digital assets holders to perform financial operations typical of fiat money, such as lending and borrowing, posting digital currencies as collateral. Earning interest is the most straightforward opportunity for digital currencies holders. It is in fact now fairly easy to lock up digital currencies in DeFi platforms and earn interest. And the interest offered on these platforms is quite competitive, currently averaging around 7%.
Source: DeFi rate
More sophisticated DeFi platforms are experimenting with complex derivative instruments, giving more tools to speculators but also providing new opportunities for risk management and insurance. Financial engineering using digital currencies and blockchain technology is only just starting. Entire financial ecosystems are emerging (such as Synthetix), providing possibilities that could dim traditional financial tools. Overall, the DeFi ecosystem is poised to attract a significant injection of capital to the Ethereum platform, as more people are attracted to the new opportunities arising.
Source: DeFi Pulse
Unfortunately, as of today, many of these DeFi DApps are not fully decentralized. As many projects are still in their "beta" days, developers leave backdoors open in smart contracts they deploy on the blockchain. This allows developers to modify and upgrade the system should something go wrong or a bug be found. Nonetheless, in this way the pure concept of a decentralized system is essentially defeated, since the single point of weakness becomes the key these developers hold, and the identity to trust becomes the developers themselves.
Many DeFi DApps are currently working on this issue and expect to achieve full decentralization once the system has been tested for a longer time. That being said, the powerful thing about the blockchain is that there is no necessity to blindly trust what the DApp administrators say. The code is published on the blockchain, and anyone with enough expertise can perform a careful analysis of these contracts to spot inconsistencies between words and actions.
Indeed, the network is attracting more and more developers. The benefits of increasing developers range from an increase in applications building speed and number of ideas to more important improvements in security (generally, the more eyes on the code the better it is). Over 2019, more than 1000 developers have contributed only to the ETH GitHub project. Overall current developers on the platform are estimated at 200 thousand, and the Ethereum foundation recently launched a campaign to help reach 1 million developers on Ethereum by the end of the year. Already by far the project with most contributors, the increase in developers is not only enhancing security and decentralization but also applications adoption and innovation. The project is not going away anytime soon, and it looks like the weight is well shifted towards the growth side.
While all these possibilities concern the Ethereum network per se, the good news for Ether investors is that the benefits are directly translated to the Ether price. All the applications that run on the Ethereum platform need ETH to run the code. The computation power to execute all the smart contracts that power the ecosystem gets the name of "Gas", and expending gas costs Ether, increasing its demand as the system grows. The increased demand, coupled with an increase in applications usage, points to an organic increase in the price of ether. The growth catalyst, however, is the imminent introduction of a major system upgrade: Ethereum 2.0.
The Problem To Fix
The main problem of the Ethereum network as it is right now is scalability. The ultimate goal of Ethereum is to become a virtual computer that executes smart contracts, DApps and financial transactions for all its users worldwide in an efficient way. Currently, efficiency is diminished by the speed of the network, which has incurred intense network congestion a couple of times in the past. In 2017 at the peak of the CryptoKitties gaming app, the traffic clog caused transaction fees to skyrocket to around 0.2 ETH. More recently last September, the network congestion by the cryptocurrency Tether (USDT-USD) (which is built on Ethereum) caused more than 100 thousand on-chain transactions to get stuck waiting several hours to be processed. These problems are addressed, on top of other improvements, in the next step of Ethereum development, Ethereum 2.0.
Fixing and Growing - The Catalyst
Ethereum 2.0 constitutes a series of updates to improve Ethereum on several aspects such as speed, scalability, and performance. To achieve this, the updates will include new concepts such as Sharding, an upgraded virtual machine (eWASM) and Proof of Stake. The latter is what I believe creates a straightforward opportunity for investors.
For those familiar with Bitcoin and Blockchain technology, the term "mining" is a well-known buzzword. Mining is how the blockchain is secured and refers to the process of solving complicated mathematical operations to validate transactions. This process requires significant computational power, which in turn requires substantial electricity usage (i.e. costs), and for this reason, "miners" are rewarded coins for each block of transactions they validate. Bitcoin and Ether are both currently mined through this "Proof of Work" function. For Ether (or the new Ether2), Ethereum 2.0 will revolutionize this process by shifting to a "Proof of Stake" model to secure the blockchain, in which the block creators are chosen randomly between stakeholders, the owners of the currency. Becoming a validator will allow investors to earn interest on the currency they provide as stake, with a rate between 2 and 6% according to Vitalik Buterin, with analysts predicting up to 10.3%. The minimum stake to become a validator is 32 Ether, which costs around $7000 at current prices. Ethereum wallets counting more than 32 ETH are growing steadily, a trend which indicates investors may be trying to accumulate the necessary stake ahead of the first update (Phase 0) of the series, expected to launch in July 2020.
I believe the combination of all these factors represents a huge upside with relatively low risk.
The price of Ether is significantly below all-time highs (1400 dollars), moving on a higher trend and with strong support in the $220s, $200s and $160s level. I expect a breakout over $300 approaching Phase 0, and through all-time highs following Ethereum 2.0 full deployment.
Source: Seeking Alpha
The recent developments in innovation on the Ethereum network point to a substantial increase in possibilities, security, and adoption. There are already financial opportunities for Ether holders to gain income from their assets through DeFi tools, and more possibilities are constantly arising. Ethereum 2.0 will bring about improvements that will solidify the network's place as the innovation hive of the digital currencies industry, having proven its potential to foster radical change across a variety of industries. I believe Ether is currently massively undervalued, and the current price provides a long opportunity to capture both the industry growth before the trend accelerates even further, and to collect dividend income through the soon to be introduced staking-for-interest mechanism.
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