As cryptocurrencies begin to establish themselves in the broader financial system thanks to the increased interest from once-wary institutional investors and the increasing integration of blockchain technology into our daily lives, the way is gradually being paved for a world where all money and financial products are digital. The driving force behind the eventual transformation will undoubtedly be Decentralized Finance (DeFi), which is slowly but surely making the transition from conceptual technology to commercial use. Stablecoins will certainly play a pivotal role in this area as their inherent stability makes them more suitable for such applications. In fact, apart from private projects like Tether and Paxos, global central banks are all working overtime to roll out their own cryptocurrency (central bank digital coins) in order to meet the popular demand for low-volatility cryptocurrencies. With 2021 being declared the year of DeFi, we can expect to see further integration of this technology. This could just be good news for the cryptocurrency that makes it all possible: Ethereum.
So, what is DeFi anyway?
DeFi stands for decentralized finance. It does what is written on the tin. It eliminates the need for intermediaries in a range of financial transactions and agreements. Using the same centralized blockchain technology for cryptocurrencies, two parties can enter into an agreement with an unlimited number of variables and conditions. There is no need for a third-party executor or intermediary because the technology itself creates an essentially self-fulfilling smart contract. For example, imagine that you want to agree to pay 5 ETH to someone if they perform a certain task on your behalf. Your 5 ETH will be allocated, and as soon as the other party hands over at the end of the transaction, the funds will be immediately paid to them via the blockchain. This means that both parties have complete peace of mind that the other party will keep their promise, and best of all, there are no exorbitant fees to pay for this security. Potential applications go beyond simple buy/sell contracts, though, from personal loans to lease agreements and crowdfunding to prediction markets.
The role of Ethereum
The Ethereum blockchain and DeFi go hand in hand. In fact, it is hard to imagine how DeFi could develop without it. This is because the Ethereum network is inherently easier to use and lends itself to creating other types of decentralized applications beyond standard transactions. In fact, Vitalik Buterin, the second cryptocurrency maker, noted such uses as early as 2013 in his original white paper on Ethereum. As we’ve already touched on, the smart contract architecture makes all of this possible. It is hoped that the advent of Ethereum 2.0 will improve the scalability of such applications, with the aim of spreading them further. With the expected sharp rise in DeFi this year, we can also expect newer apps to be more user-friendly than previous versions that focused primarily on the technology aspect and neglected the UI/UX aspect. Despite the critical role of the Ethereum network in DeFi, it is also worth noting that other platforms such as Polkadot are well suited to hosting DeFi solutions, a trend that may start to emerge before 2021.
What does this mean for prices?
If we compare ETH with BTC, we will notice that the original cryptocurrency has lost more than 40% from its recent highs, while Ethereum is down just over 35% in shadow. Although the current correction is likely to be short-lived, this difference in the extent of losses is statistically significant. Many analysts attribute this to Ethereum’s integral role in DeFi applications. Looking at the three-month ETH chart below (taken from win the storm cryptocurrency trading platform), we can see a period of consolidation indicating a possible breakout to the upside:
As we can see, since the initial correction in late May, Ethereum has been seeing higher bottoms and tops, which could signal that a new uptrend is establishing itself. This is likely due to the usefulness of ETH other than its use as a cryptocurrency. With the launch of the Ethereum 2.0 network, DeFi applications will become more scalable, driving demand for native content. Currency Thus pushing prices up.
If we look at the same timeframe as the main DeFi Alt currency Polkadot, we see a similar pattern emerge:
Once again, the asset is clearly preparing itself for another charge as an emerging bullish trend can be seen in late May. As with most cryptocurrencies, the potential upside is much higher for Polkadot as it has significantly higher volatility due to its more specialized position compared to ETH. While this means that it can be difficult to find brokers that offer them, one reliable, low-commission platform that supports both Ethereum and Polkadot is win the storm. Of course, this type of investment is only for those who have a greater appetite for risk, but the potential rewards are certainly very profitable.
But where do stablecoins come from?
Stable coins play quite a pivotal role in cryptocurrency trading as low-volatility coins that can be used as an effective store of value for both profits made and the money you wish to invest as soon as a suitable opportunity arises. However, apart from that, it is absolutely indispensable when it comes to DeFi. Old cryptocurrencies are great ways to make money trading and investing, but the same extreme volatility that makes them so profitable means they are not well suited for traditional deferred financial operations such as long-term loans and late payments. Think about it: people don’t want to expect to earn $10,000 (2.5 ETH in May this year) in just two months to end up with $6,300 (current value 2.5 ETH). This is why stablecoins will be central to relieving the concerns of more risk-averse users as the industry develops. For example, as a forward-looking cryptocurrency broker, win the storm It offers its clients a very attractive interest (up to 12% APR) on any digital deposits on its platform. This could represent a very lucrative investment prospect for anyone who wants to get into cryptocurrencies but is concerned about the huge price swings common in this asset class.
We just started
Whatever your opinion of cryptocurrencies, there is no longer any denying that they will be an inevitable part of our daily lives in the future. For most of us, this will likely take the form of DeFi and stablecoins/CBDCs. It may seem a bit daunting at first, but the advantages in terms of lower financing and transaction costs will make us wonder how we managed things before. In the meantime, it would be a wise decision to get some experience using stablecoins, either as part of an active cryptocurrency trading and investment program or as a low-risk interest with a broker like win the storm Offer attractive deposit schemes to users. The new era of finance is approaching, with DeFi and stablecoins at its core. So grab them now, and you’ll be in a perfect position to reap all the benefits of this paradigm shift when it finally comes!