by Tim Frost, CEO and co-founder of YIELD App
Over the past year, the cryptocurrency market has entered parabolic territory. From a low of $149 billion in March during the first wave of the Covid-19 panic, crypto’s total market cap now stands at an astonishing $1.4 trillion — an increase of about 900%. For so many inside and outside of the space, this sort of level would have been truly unimaginable even a few months ago. However here we are, with the wave continuing to rise.
This swell has been due to a number of factors, not least the truly stratospheric levels of money printing going on at US central bank the Federal Reserve, which in June 2020 printed more new cash than it had since its founding. This, many fear, will depress the value of the US dollar and so many investors have bought into Bitcoin especially as a preserve of wealth akin to gold in the real world (although with significantly higher growth potential).
DeFi: the engine of crypto innovation
However, growth in the crypto-space has also been propelled in no small part by the rise of decentralized finance (DeFi), which has risen from $600 million in total value locked (TVL) in March 2020 to more than $36 billion today, an increase of 5,900%. This space, which is arguably achieving what Bitcoin never could, is the engine room of innovation in cryptocurrency, bringing new solutions to the world of digital saving, investing and trading on an almost daily basis.
The attractions of DeFi are clear: the ability to earn yields in excess of 10% on stablecoins that are pegged to fiat currencies, predominantly the US dollar, is something that has been missing from traditional finance for more than a decade since central banks embarked on their money printing sprees. Add to this the ability to borrow based on staked collateral to earn more yield and the increasingly valuable native tokens issued as rewards, and you have a recipe for true financial transformation.
Success, congestion and sky-high gas
However, the attractions and evident success of DeFi’s leading platforms (which now boast market-caps in the multi-billions of dollars) is coming at a cost, and this cost is increasing congestion on the Ethereum network. As most DeFi users will be aware, currently the vast majority of DeFi operates on the fully programmable Ethereum blockchain, a key attraction of Bitcoin’s main rival. However, Ethereum is not the speediest network around, able only to process around 15 transactions per second. This compares with the 2,000 per second the Visa network is able to process, for example.
This congestion is causing a huge spike in the fees, known as “gas”, that Ethereum developers charge to process all of the transactions that happen on Ethereum, and subsequently DeFi. Such is this congestion that Ethereum’s average transaction fee has risen from an average of $0.09 in February 2020 to an astonishing all-time high of $25.19 on 5 February 2021 (falling to around $22.54 at the time of writing on 9 February 2021). As we covered in a YIELD App blog post, the implications of high gas fees for lower value users are dire, while sky-high gas fees are also a challenge for DeFi protocols. Many applications are fast being drained by gas for every user wallet opened, regardless of whether a user transacts through it. For hastily launched platforms with little in the way of cash reserves or investor backing, this situation is potentially ruinous.
With solutions in view, DeFi will not be derailed
There is little doubt, then, that a solution must be found to Ethereum’s gas problem if DeFi is to continue to attract the type of users it is intended for: the average person that has for so long been left behind by traditional finance. Thankfully there are some on the table. Ethereum 2.0, which will increase transactions to a reported 100,000 per second is arguably the best solution, however, it is not expected to be completed until the end of 2021 at (probably) the earliest. As highlighted above, 11 months is an extremely long time in DeFi.
It may be, then, that DeFi will find itself shifting toward challenger blockchains, some of which we covered in our most recent blog post. Indeed, Polkadot, Avalanche and Solana have already started to attract some of DeFi’s biggest names and if the trajectory of the past 12 months is anything to go by, this migration might not take much time at all. Or it might simply be these chains take some of the pressure off the network until Ethereum 2.0 is ready. In DeFi and crypto more broadly, anything is possible.
The key takeaway from current market conditions, however, is this: the attraction and success of DeFi is clear and will not be hampered by some technical difficulties. With precious little other options for wealth creation based on low volatility assets like stablecoins available either in cryptocurrency or in traditional finance, DeFi’s users are going nowhere. Innovation is coming thick and fast, innovation that YIELD App is proud to be a part of with its price-sensitive investment profiles and, while we may be slugging through an oil slick at present, we will soon be back to cruising speed.
About the author
Tim Frost is CEO and co-founder of YIELD App. He has extensive experience in Fintech, marketing, business development, and operations. YIELD App is the third digital bank Tim has helped launch. He was a founding member of the Wirex team and supported operations, business development, and marketing for the first 18 months. Tim joined and helped take EQIBank to market a global digital challenger bank with an average client AUM of $250,000, and also helped accelerate the early stages of many successful blockchain projects including QTUM, NEO, Paxful, Polymath, Selfkey, and Everex.