After rather chaotic previous years, Ethereum (ETH) 2020 has exceeded many expectations. Not only the Decentralized Finance sector (DeFi), but also the Non-Fungible Token (NFT) market saw tremendous growth. In addition, the First Phase of the long-awaited Ethereum 2.0 upgrade started. We take a look at the most burning issues and review 2020.
Ethereum 2.0 Phase 0 is live
The wait is over. Ethereum 2.0 has become a bit of a reality in 2020, and on December 1, the upgrade that the community has been waiting for for a long time launched into its first phase. As planned, the mainnet successfully went live in the first attempt and there were no major complications. On the contrary, the rush to the ETH deposit contract, which enables the staking of Ether, was overwhelming.
Currently, the equivalent of over $1.2 billion worth of Ether has been staked. By staking, investors, simply put, help secure the Ethereum network and receive an ETH return in return. However, it is not yet clear how long Ether will be tied up in the so-called Deposit Contract – possibly years. However, the huge amount of Ether already staked is a good demonstration of how optimistic many investors are about the future of the smart contract platform.
One of the most important features of Ethereum 2.0 is known as „sharding.“ „Sharding“ enables simultaneous processing of transactions, which is expected to take the current speed of the Ethereum network to the next level. This will allow decentralized application (dApp) developers to create cheaper, more complex, and more user-friendly dApps. Solving the scaling problem could therefore help emerging sectors such as DeFi and the NFT space to innovate further, and some of the most pressing problems that have long plagued ETH may finally be solvable. In addition, entirely new sectors could emerge for which it has not previously seemed practical to build decentralized applications on Ethereum due to cost.
Decentralized Finance: Revolution of the financial sector
2020 was undoubtedly a successful year for Decentralized Finance. While a few crypto enthusiasts have been quite familiar with the emerging sector ahead of time, DeFi experienced a lot of hype in 2020.
What is DeFi?
DeFi shakes up the traditional understanding of the financial world and redefines some of the rules of the game. In DeFi, there are no central institutions or intermediaries. This means that banks, brokers, and all other middlemen are eliminated because the blockchain doesn’t need them to function. Everything is decentralized via the Ethereum Blockchain and smart contracts.
Still, the sector is in its infancy and can currently be considered experimental. Not all DeFi projects are 100 percent decentralized yet, but the road ahead is paved.
One of the most important indicators to analyze the growth of the DeFi space is the Total Value Locked indicator. The indicator measures the total value in U.S. dollars of all ETH and all other ERC-20 tokens locked into the corresponding smart contracts of the DeFi protocols. For this reason, not only Ethereum is among the assets held in DeFi protocols, but also Stablecoins, tokenized Bitcoin, and in some cases already NFTs.
Since the beginning of the year, assets held in DeFi protocols have grown from under $1 billion to more than $15 billion currently. But what kind of applications have dominated the DeFi sector in 2020?
Tokenized Bitcoin (WBTC), in particular, gained prominence over the past 12 months. WBTC allow users to use Bitcoin Aussie System on the Ethereum blockchain to make them usable in the DeFi space. For example, WBTC can be used in various lending protocols such as Aave (AAVE), Compound (COMP), or Maker (MKR) to generate returns with bitcoin.
Decentralized exchanges are booming
In addition, there has been a lot of drama in centralized exchanges (CEX) this year. For example, the Kucoin hack and the hack of the UK exchange Cashaa, in which several million euros were captured, are worth mentioning. However, not only hacks endangered some exchanges, but also new challenges are coming to the centralized exchanges. Decentralized Exchanges (DEX) have shown rapid growth in 2020 and were among the main winners of the DeFi hype.
As DeFi grew exponentially this year, so did the volume and user base of decentralized exchanges. Decentralized exchanges like UniSwap and SushiSwap now see trading volumes of over $100 billion almost daily. On September 1, 2020, UniSwap even surpassed Coinbase Pro’s 24-hour trading volume. DEX recorded a record volume of over $950 million and Coinbase Pro only $780 million during the same time period. Those interested in a more in-depth analysis of the DeFi sector should take a look at the sector review.
Non-fungible tokens on Ethereum increasingly popular
Not only Decentralized Finance experienced hype this year, but also Non Fungible Tokens.
NFTs became popular in 2017 due to CryptoKitties, but a lot has happened since then and the NFT sector has matured significantly. Non Fungible Tokens are unique, non-exchangeable tokens and can have many different uses. They can be used as collectibles, gaming items, insurance, or even as digital counterparts to real-world assets. This is why NFTs are closely related to the concept of tokenization. Currently, it is believed that the NFT space is still one of the most undervalued sectors on Ethereum and could explode in 2021 because of it. The top five marketplaces for Non Fungible Tokens can be found here.
What is the potential for NFTs?
Everything in the real world can theoretically be tokenized in an NFT and mapped on the Ethereum Blockchain. For example, it is conceivable in the future that real estate, artwork, securities and much more will be tokenized. Just a few weeks ago, the German cabinet passed a law on the issuance of electronic securities. While this does not yet mean that one is allowed to tokenize shares with immediate effect, the law has thus set the course for tokenized shares and in the future it would even be conceivable that real estate could also be tokenized.
When that is a reality, you could tokenize your house and then take out a loan backed by the house’s NFT. In addition, it would be possible to sell and lend properties via the blockchain and manage the whole thing with the security granted by the blockchain.
Currently, mainly artists use NFTs to create their digital artworks and sell them on the Ethereum Blockchain. The most popular marketplaces for NFT artworks are Rarible and Opensea. According to NonFungible, the all-time trading volume of all NFTs currently comprises $149,158,007.17.
Platforms responsible for much of this volume include Decentraland (MANA), CryptoKitties, Axie Infinity (AXS), SuperRare, and Sorare. The first three of the largest NFT applications are predominantly concerned with collecting gaming items. Superare, on the other hand, is a platform where you can create and trade artwork. Sorare focuses on the sports sector and can be described as the digital equivalent of Panini cards, as it is mainly collectible cards of soccer players that can be traded on Sorare.
Some of the NFTs are already traded for several 100,000 US dollars. The artist Beeple even sold an entire NFT art collection for the equivalent of $3.5 million just a few weeks ago.
Ethereum comes to the CME
Bitcoin isn’t the only currency coming into the sights of institutional investors. On December 16, the Chicago Mercantile Exchange (CME) announced that they will be listing ETH futures. This will make it possible to trade Ethereum on the world’s largest futures exchange starting February 8, 2020.
Ethereum is also coming of age and will be integrated into traditional financial markets. This event is another sign of ETH’s growing maturity and investments by institutional investors in the world’s second largest cryptocurrency will become more likely as a result.
2020 was an eventful year for Ethereum. The DeFi space has made huge strides and is challenging the way we look at traditional finance.
However, the most exciting thing this year has certainly been that Bitcoin and Ethereum have headed for new price highs. The bear market seems to be over and the bulls have taken over.
With all the technical developments and the positive price performance, it will be exciting to see in which direction Decentralized Finance and the NFT space will continue to develop. In addition, it will be interesting to see how regulators will react to a parallel evolving financial system.
However, it is not just NFTs and DeFi that will shape 2021, as progress on Ethereum 2.0 will also be crucial to the future of the world’s largest smart contract platform.