Ethereum is more sustainable and innovative than Bitcoin and dominates the bond market of the 21st century. Thanks to the boom in decentralized finance, the number two blockchain is on the way to becoming the new economic system.
Many players in the world of cryptocurrencies do not like to make comparisons between Bitcoin (BTC) and Ethereum (ETH). They emphasize that each of these tokens has very different functions. And measured by market capitalization, BTC is still more than twice the size of ETH. But let’s compare the blockchains and their respective potential. I would argue that Ethereum is clearly better off thanks to its usage, smart contracts, decentralization and scalability. Bitcoin is the concept, but Ethereum is the practical application.
This is nothing new, except that the use decides everything in the end. The Bitcoin blockchain supports a cryptocurrency, Bitcoin (BTC), which is an alternative to traditional currencies and a (controversial) store of value and an investment to protect against inflation. But the Ethereum blockchain is the mother of all protocols when it comes to decentralized finance (DeFi). And DeFi can be seen as the new “bond market” of our time. This is also the area where we’ve seen the highest growth rates lately.
Decentralized lending and borrowing
The term “DeFi” refers to decentralized lending and borrowing via various platforms that are based exclusively on the Ethereum blockchain. On these platforms, investors can borrow money for their crypto tokens, and lenders can lend their cryptos in exchange for income. Smart contracts execute the terms of specific agreements, eliminating the need for a central authority or an intermediary such as a bank. This turns the platforms into decentralized markets for fixed-income securities, high-yield bonds and repo transactions.
Aave, for example, the current number one among the DeFi protocols, mints tokens in a ratio of 1: 1 to the assets delivered. You immediately receive interest in the form of tokens that can be exchanged or transferred at any time. You don’t have to be a genius to make money with DeFi. You simply buy and deposit ETH or other tokens and wait for the reward.
Ethereum is popular with young people
Uniswap, another platform based on Ethereum, “is a revolution in itself, with an automated market maker that enables trading between on-chain assets” (tokens and stablecoins), says Gauthier Vila, a crypto youtuber and Co-founder of Ondefy from Lausanne. He advises institutions and private clients on how to invest in this universe. “A key advantage of DeFi is that there is no intermediary managing pools of liquidity, listing project types, or allowing anyone to trade assets. Anyone can create a project and be listed. The liquidity providers on these exchanges receive incentives through the reallocation of fees and sometimes through rewards in the form of governance tokens from the respective decentralized exchange, ”he says.
The community function is attractive to young investors who appreciate being able to vote on the decisions of the protocol, interact in live chats and belong to a network. Ethereum is the system chosen by the young generation who very often get into the crypto space via DeFi.
The DeFi boom is easy to spot on the Defipulse.com website: a year ago, in August 2020, decentralized funding on loan platforms had reached a total value of $ 10 billion. We were amazed at the phenomenal growth in this section because just three months earlier, in June 2020, that amount was $ 1 billion (which was already impressive). Well, that month, the total DeFi value reached $ 84 billion. A growth of more than 8000% in 15 months. And Ethereum is at the core of this development because it enables all of these protocols.
ETH tokens have high transaction fees
“I see the two blockchains – Bitcoin and Ethereum – as the ones that reach a critical mass and are ‘too big to fail’. But they serve completely different purposes, ”says Cyril Lapinte, IT developer and founder of C-Layer in Geneva. Nevertheless, he agrees that Ethereum is the blockchain on which most of the innovations take place: “The Ethereum token is not a store of value as it is constantly being produced. The Ethereum token is instead used to support a complete ecosystem of unlimited applications ».
“You can’t create the same ecosystem with Bitcoin’s ‘proof-of-work’ system, as it is not possible to create scalable apps for it,” adds Géraldine Monchau, Head of Marketing Communication at RubiX Network, a sustainable and environmentally friendly blockchain . “Ethereum, Monchau continues,” is highly scalable and has made NFTs and games possible. It is a fact that Ethereum’s Proof-of-Stake concept is more efficient than Bitcoin’s Proof-of-Work concept ».
However, Géraldine Monchau points out the very high transaction fees for the ETH token. “If you trade ETH on a trading platform, it becomes unaffordable when the volume is high, as you can be charged an insane premium for your transactions”. That inefficiency will get better with the Ethereum 2 blockchain, the next version, she says. “The Ethereum 2 blockchain,” adds Lapinte, “will enable you to block and pledge ETH tokens, have voting rights and receive dividends. Investing in ETH becomes similar to investing in stocks in a company. ” Until then, it’s all about earning interest on DeFi platforms.
Interestingly, nothing at all happened in the DeFi area between 2017 and 2020. Nothing happened on the Fed’s balance sheet at that time either.
However, right at the time things were taking off in the DeFi space, the US Federal Reserve began buying assets again and has been pumping 4 trillion since March 2020. $ in the markets. It is all too obvious that the massive liquidity sought high returns and found it in DeFi.
Welcome to next generation returns
Traders, institutional investors and young crypto communities have all embarked on the DeFi treasure hunt. The reason for this is simple: DeFi offers the highest returns in an environment that does not require permits, does not involve third parties, and where the risk is amply rewarded. Yield farming, lending tokens to the network for fixed or variable interest, is the same as generating returns on a bond in traditional investments, with the difference that protocols are used that do not require identification or disclosure the financial history of either party.
Granted, the DeFi market is still tiny compared to the 119 Bio. $ of the traditional bond market. But the future belongs to systems in which the banks’ function as intermediaries is automated. The future also belongs to energy-saving systems. “Ethereum as a proof-of-stake system uses much less energy than Bitcoin,” says Monchau. She says that Bitcoin will remain the mother of cryptocurrencies, but that you cannot create a blockchain economy on its foundation. “We will see an economic transition where multiple protocols will compete with each other to create the best version: one that is sustainable, faster, and has lower fees.” And we can assume that this will happen on the Ethereum blockchain.
Myret Zaki started as a junior analyst in a Geneva private bank in 1997, where she learned the basics of equity analysis. In 2001 she switched to the daily newspaper “Le Temps”, where she headed the finance department for nine years. When the financial crisis broke out in 2008, she wrote the investigative book “UBS on the Edge of the Abyss”, for which she received the Swiss Journalism Prize. In 2010 she switched to «Bilan»; Zaki was editor-in-chief of the magazine from 2014 to 2019. Between 2010 and 2016, she wrote three more bestsellers on banking secrecy, the end of the dollar reserve status, and the rise of the shadow banking system. Zaki holds a BA in Political Science from the American University in Cairo and an MBA from the Business School of Lausanne. Today she is the head of the Faculty of Communication at the University of Journalism and Media in Lausanne.