Most cryptocurrency investors are conscious of the hype behind DeFi and are curious of the impact it will have on the whole ecosystem.
Ethereum usage is at all-time highs, hype and new utility is flooding the market, DeFi projects are locking up Ethereum and offering high yields, with their native token charts looking similar to the explosive run-up in price we saw at the latter part of 2017 to January 2018.
Will the outcome be the same, with a sharp decline in price after the bubble pops, or is there more to this new emerging market than just speculation?
What impact will DeFi have on the Ethereum, decentralized finance and also on the next wave of emerging technology?
One of the biggest issues currently impacting DeFi is the current congestion and inflated fees from Ethereum. Taking advantage of yield farming, utilizing different apps and decentralized exchanges to optimize yields can mean that transaction fees are needed at every stage in the process.
If transaction fees eat up profits and potentially cost even more than a potential arbitrage opportunity, certain yield farming features are just not viable while the fees are the way they are.
Ethereum is entering its final Testnet in August 2020, whereby the long-awaited upgrade is meant to last three months. After that, if no issues are encountered, the Mainnet and Proof of Stake will be live, drastically reducing transaction fees, increasing scalability and allowing holders to stake tokens.
This will mean that on top of the locked up Ethereum tokens in DeFi projects, there will also be a significant amount tied up in staking. Much lower fees and real scalability can provide the environment for viable mass adoption of the trend.
Banks were given the green light this week, allowing them the right of custodianship over digital assets for their customers. Banks can now hold cryptocurrency private keys and invest customers funds into crypto projects.
This is a significant move as the attitude seems to have gradually switched from a negative perspective to a positive one, as the regulatory structure and guidelines have been set in place.
If banks enter DeFi, ironic as it sounds, there could be a huge influx of capital into the ecosystem. There could be new strategies of hedging against fiat, utilizing interest and profiting from appreciating coin prices.
We may see movement into the development of DeFi platforms and dashboards, as well as other decentralized financial instruments from the banks themselves.
On July 24th 2020, Bitcoin was recognised as form of money by a Judge in Washington, during a court case against Larry Dean Harmon, due to it being used as a “means of exchange & store of value”. This sets a precident and will be interesting to observe how the perception and laws change over time.
A factor which needs to be considered is the potential for regulatory bias, or “stamping out” of real decentralized finance.
By the very nature of decentralization, this effort would be very hard to be properly inforced, however if a law was passed prohibiting users from using certain platforms that aren’t regulated, it would deter a significant amount of users.
Most participants have on-ramped and aim to off-ramp their profits via exchanges that require KYC, which leaves a paper trail so users will not want to risk a penalty for breaking the law if utilizing certain instruments in the ecosystem is made illegal (e.g. unregulated lending facilities if laws are made to prohibit such behaviour in the future).