Ethereum economy, On February 22, an unexpectedly humorous headline emerged in the business section of The New York Times: Why a Pop-Tart-bodied, animated flying cat went for $600,000.
If you were online in 2011, you certainly recognise the cat. In fact, Chris Torres, the creator of the internet-favorite “nyan cat” GIF (which depicts a pixelated kitten soaring through space on a rainbow), sold his 10-year-old meme for over $600,000.
And Torres wasn’t the first one to discover a method to sell digital information that was formerly regarded almost useless, in part because anybody may copy and paste a digital item indefinitely. Just throughout the last several weeks:
- Christie’s announced its intention to auction the first “all-digital” piece, a sequence of photographs made by an artist called Beeples with an opening bid of $100.
- A cool-looking lo-fi monkey from the Cryptopunks series was auctioned for $1.5 million.
- A set of 3D models for “impossible furniture,” such as a bubble gum table, earned $450,000.
- Mark Cuban, entrepreneur and owner of the Dallas Mavericks, sold a single tweet for $952.
All of these tales were essentially about the same thing: individuals purchasing virtual, digital-world property for substantial amounts of money in the real world.
This expanding market is enabled by a type of cryptoassets known as NFTs. An NFT, which is an abbreviation for “non-fungible token,” is basically a certificate of authenticity that verifies that your version of an infinitely copyable digital asset (such as an image, a movie, a song, or nearly anything else) is the legitimate one.
Typically, NFTs are issued on the Ethereum blockchain, using its “smart contract” capability, and may be purchased or traded on specialised markets. (While they’re now generating a lot of hype, NFTs are not exactly brand-new. You may remember the 2017 mania around the digital cat-trading game Cryptokitties.)
A NFT is a token in the same way that Bitcoin is a token, and it can typically be purchased or sold via exchanges that facilitate the sales. In contrast to Bitcoin, where each coin has almost similar features, each NFT represents a unique digital asset. (Therefore, non-fungible.) They have been used to sell anything from celebrity memorabilia and NBA “digital treasures” to virtual real estate and Deadmau5 live performances.
With expected sales of more than $100 million, NFTs have provoked philosophical discussions over the idea of ownership as they have become a surprisingly large industry. Is collecting digital artefacts much different than collecting rare shoes, vinyl music, or even Picassos?
These are intriguing topics, but they don’t even touch on the larger narrative that NFTs may help us comprehend. The smart contract technology that enables artists, meme-makers, and musicians to sell their virtual commodities is also generating a new, decentralised alternative to the present banking system. In this alternative system created to empower people economically, cash will move through open-source protocols that are quicker, cheaper, more transparent, and accessible to everyone.
The term is Finance 2.0. And it has already begun to appear if you know where to look.
The year of Ethereum’s breakthrough
Ethereum economy, Prior to the NFT mania, Bitcoin dominated recent non-cryptocurrency media news. However, when the subject of Ethereum is brought up, those already in the field tend to get even more enthusiastic. And it’s not because Ethereum is the second-largest cryptocurrency in terms of market capitalization, after Bitcoin.
Ethereum is not just another kind of digital currency, a fact that is often missed by casual observers. Ethereum’s blockchain was designed to be a very adaptable decentralised computing platform, allowing developers to establish digital art marketplaces and running “decentralised finance” (or DeFi) systems such as Compound and Uniswap, which have seen hundreds of billions of dollars travel through them.
A portion of the Ethereum narrative is comparable to the Bitcoin narrative. Similar to Bitcoin, ETH (the native cryptocurrency of the Ethereum blockchain) has increased in price and popularity, rising from $300 to over $2,000 in February.
In recent months, Ethereum has also witnessed record-breaking worldwide search attention. (Bitcoin remains behind its peak search period, which occurred amid a rush of mainstream media attention in late 2017 and early 2018).
Another measure of increased public participation? Reddit topic boards devoted to Ethereum (and crypto in general) have experienced an influx of new users in recent days:
A major reason for this is the cost of ETH. ETH’s price has increased faster than Bitcoin’s since the beginning of 2021, in part because to an influx of retail investors with additional leisure and disposable cash as a result of the COVID epidemic who are experimenting with novel investing techniques. While Bitcoin’s price has increased by around 65 percent since the beginning of the year, Ethereum’s price has increased by more than 112 percent, giving it a market value of $177 billion (bigger than Morgan Stanley or Square).
Understanding the Ethereum economy in its entirety
However, rising market capitalization is just half of the tale. The really exciting aspect about Ethereum is that ETH’s value is just the most apparent aspect of the larger economy that the Ethereum blockchain enables.
Consider ETH to be the visible portion of an iceberg. Due to the elasticity of the Ethereum blockchain, substantial economic activity is occurring just under the surface in the form of Ethereum-powered crypto categories such as DeFi, stablecoins, wrapped tokens, and NFTs.
The market capitalization of the Ethereum economy, as measured by the total market capitalization of the largest ERC-20 tokens released on the Ethereum blockchain, has skyrocketed to over $250 billion in recent weeks (excluding NFTs, since it is difficult to do apples-to-apples comparisons).
Stablecoins, which are meant to limit volatility by being tied to a reserve asset like as the US dollar, are one of the most promising and fastest-growing segments of the ETH economy. They have been widely embraced as a reliable payment mechanism between exchanges.
The total cash value of stablecoins on the Ethereum blockchain has topped $30 billion as of February 2021.
Wrapped tokens enable non-Ethereum native cryptocurrencies, such as Bitcoin, to be used on the Ethereum blockchain and to interact with DeFi apps with ease. This is a tiny but rapidly expanding portion of the Ethereum economy. As a consequence, the value of Bitcoin tokens has surged significantly.
When Reddit met DeFi
Ethereum economy, So what has been motivating all this action recently? Obviously, most of it is tied to the larger crypto bubble. Reddit’s internet-savvy “memestock” investors, who were spurred by their frustrations with the conventional financial system to seek decentralised alternatives, are an intriguing subgroup that merits greater examination.
These decentralised technologies (also known as “DeFi” or “Finance 2.0”) enable investment, trading, interest-bearing savings, new types of “flash” loans, and a great deal more. Fabian Schar, a professor and researcher at the University of Basel, asserts that Ethereum-powered DeFi apps “have the potential to construct a genuinely open, transparent, and irreversible financial infrastructure.”
If you’re just getting your bearings, the DeFi landscape consists of three kinds of applications, all of which strive to become faster, more efficient alternatives to the inefficient, sluggish, and sometimes costly conduits through which money moves in the present financial system.
- Decentralized exchanges such as Uniswap and Sushiswap enable users to trade tokens directly.
- Protocols for savings and loans, such as Compound and Aave, let users to borrow and lend tokens directly.
- Oracles such as Chainlink strive to supply DeFi apps with real-world data.
DeFi was a logical fit for the Reddit-based traders whose faith in Finance 1.0’s infrastructure had been damaged. Because these online investors were already discussing ideas and techniques at a rapid pace, they were able to assist each other in exploring sophisticated new protocols. (Given that DeFi markets may be quite volatile, it is advantageous if the organisation be risk-tolerant.)
At least one notable speaker started explicitly proselytising DeFi to the most active stock traders on Reddit. Mark Cuban said in an AMA held by the wallstreetbets subreddit that DeFi will “make markets considerably more efficient, transparent, and accessible to small investors.”
And he was not alone. Alexis Ohanian, co-founder of Reddit, made his own argument for DeFi in a webcast with U.S. Congresswoman Alexandra Ocasio-Cortez: “No one is going to wake up in a week and say, ‘Let’s all go back to way it was.'” “The public cannot unsee this, thus I believe there will be more and more motivation to discover decentralised solutions. There is so much enthusiasm for something that cannot rig the game.”
As of February 2021, the overall DeFi market has surpassed $40 billion due in part to this new focus. The largest decentralised exchange, Uniswap, has witnessed $100 billion in volume since its introduction in May 2020, which is a significant measure of how rapidly these technologies have acquired popularity.
In January, the monthly volume of all decentralised exchanges surpassed $50 billion.
Institutionalization of the Ethereum protocol
Ethereum economy, The economics of Ethereum has also attracted the interest of big financial organisations. Due in large part to the popularity of stablecoins as a non-volatile way of moving money between exchanges and DeFi protocols, the Ethereum blockchain has become one of the most prominent payment channels for U.S. dollars.
In 2020, Ethereum handled $874 billion worth of dollar payments, rivalling big consumer-facing systems like as Zelle ($307 billion) and PayPal ($966 billion), but remaining far lower than the amount processed by central bank payment systems like Fedwire ($840 trillion).
Visa will link its worldwide payments network of 60 million businesses to the U.S. Dollar Coin (USDC) stablecoin in December 2020. (The USDC is supported by a consortium that includes Coinbase and Circle.)
Paypal has just authorised limited ETH trading for its enormous U.S. user base, with plans to roll out the feature to all 325 million members worldwide. In a 2021 earnings call, CEO Daniel Schulman said, “The existing banking system is archaic, and we can imagine a future when transactions are done in seconds, not days.” We are making substantial investments in our new crypto, blockchain, and digital currency business unit in order to help design a future that is more inclusive.
In the meanwhile, institutional investors are beginning to invest in Ethereum. Over the last year, the Grayscale Ethereum Trust (which enables investors to obtain exposure to Ethereum via conventional brokerages) has expanded dramatically. The fund now possesses 3 million ETH worth more than $4 billion.
CME futures, another avenue for institutional Ethereum exposure, just went online and its first day of trading generated over $33 million. And in December 2020, One River Asset Management, a Connecticut-based hedge fund, disclosed pledges that would “raise its Bitcoin and Ether holdings to around $1 billion by early 2021.”
Ethereum is progressing
When Ethereum was founded in 2014, its founding team was acutely aware of a fundamental flaw in the blockchain that would ultimately need to be addressed. Because it employs a “consensus method” called Proof of Work, blockchain traffic may cause transaction times to slow down and fees to skyrocket.
The enormous volume of transactions processed by DeFi and the other smart-contract-powered applications mentioned in this article has caused scalability issues. Consequently, the network has grown more costly to use. As of February 2021, ETH “gas” costs for each transaction cost around $10.
However, substantial remedies are imminent. Reddit and the non-profit Ethereum Foundation have formally joined to find answers and new applications for the technology. Nearly two dozen developer teams submitted scaling suggestions for Ethereum to Reddit in August 2020. Optimism and rollups are examples of projects that might help the blockchain handle hundreds of thousands of transactions per second (although each solution presents unique challenges).
The Ethereum community has launched the long-planned shift to the Ethereum 2.0 (or ETH2) blockchain, which is quicker, cheaper, and presumably more secure.
The ETH2 network, which employs the Proof of Stake consensus process, should substantially enhance capacity. In February 2021, more than 3 million ETH are invested in the ETH 2.0 contract, which started rolling out in December 2020. And by the conclusion of this multi-year update, the Ethereum economy should be one giant step closer to realising its promise to make all types of financial transactions quicker, cheaper, and more accessible.