What does the DeFi hype mean for blockchain solutions from companies?

The DeFi hype with countless projects

The crypto sector is currently in an upswing. The value of Ethereum has developed above average in recent weeks. The cryptocurrency with the largest market capitalization Bitcoin is also continuously trading above the 11,000 US dollar limit.

The area of decentralized finance (DeFi), which combines classic financial concepts with the advantages of blockchain technology, plays a larger role in this. Information about transactions stored decentrally on a public blockchain is accessible to all participants. No individual participant has control, responsibility or administration. Access rights are not required to participate in the public blockchain. For many years, countless developers around the world have been working on the various applications of blockchain technology and their implementation in everyday life. Demand is constantly increasing. The focus is on the Ethereum blockchain, as the absolute majority of the most important protocols for DeFi are based on Ethereum.

Another indicator of the rapid development of DeFi are decentralized exchanges, especially Uniswap, which even had a higher trading volume than Coinbase in September. The special thing about Uniswap is that the exchange keeps Ether and tokens in stock to enable the exchange of even marginal niche currencies at stable prices, without a central authority. Uniswap is the first decentralized exchange that is used widely and internationally.

Blistering with DeFi?

DeFi projects currently exist like sand by the sea. There are various reasons for the greater demand for DeFi projects and the current run on cryptocurrencies. Many DeFi projects are based on the Ethereum blockchain and require Ethereum to be deposited as security. In addition, the Covid pandemic of 2020 combined with the flood of money from central banks has weakened trust in financial systems. In unstable times, people and investors are increasingly looking for alternative financial systems or currencies that they consider to be a safe and profitable investment, and find what they are looking for in crypto projects.

Decentralized Ethereum Ecosystem: Market leader with increasing performance

Ethereum is an open-source platform that is based on a blockchain. Unlike the blockchain of the cryptocurrency Bitcoin, Ethereum is a decentralized ecosystem for various projects. With the open protocol, various applications and projects can be implemented. Compared to central storage of data on servers, blockchain technology offers an alternative that ensures forgery-proof data.

With the ecosystem as a basis, numerous decentralized applications have already been programmed or the use of smart contracts has been implemented in the past. Digital investments in tangible assets, tokenized securities and other digital financial products are therefore possible. In the long term, Ethereum could disruptively change numerous areas of life. According to a study by PWC, Ethereum is the next stage of development after the Bitcoin blockchain, in which public blockchains enable a connection to smart contracts.

Volatility of transaction costs and solutions

The Ethereum blockchain is of great importance in the entire DeFi sector today. Recently, the hype surrounding Ether and Ethereum-based coins was expressed by an enormous increase in transaction costs on the Ethereum blockchain. Because the more popular the coins and tokens in the Ethereum ecosystem become, the more transactions must be processed by Ethereum miners. They can choose which transactions they process first. Logically, miners choose transactions that are more lucrative for them. Customers who wanted to exchange Ethereum coins on Uniswap recently had to pay fees of up to 1,200 US dollars — for just a single transaction.

How will the problem of Ether bubbles be solved? There are two possible developments. Either technical innovations manage to economically optimize the Ethereum blockchain and reduce the strong volatility of transaction costs, or highly scalable blockchain technologies could outstrip Ethereum in the DeFi sector in the long term. Technical solutions could be within reach in the form of Ethereum 2.0. The upgrade to the Ethereum network should make the blockchain more efficient, make it more scalable and increase transaction speed on the Ethereum platform many times over. The implementation of Ethereum 2.0 is planned for the next five to ten years.

Is blockchain suitable for mass production and more practical?

Using Ethereum as an example, some special features of the public blockchain can be shown, which make it problematic for massive use in the public sector. In contrast to private blockchain (permissioned blockchain), access is not regulated. There are no eligibility rules that could restrict access. One of the major advantages of public blockchain in the form of accessibility for everyone is also becoming the biggest risk. As popularity grew, transaction costs exploded and transaction speed slowed down. Ethereum can currently calculate around 15 transactions per second. In order to be usable for mass-ready, everyday payments, around 100 times more transactions per second would have to be possible.

Only through technical optimizations and the rapid implementation of ETH 2.0 can the public chain Ethereum confirm its importance in the DeFi sector. If this is not successful, new solutions must be developed that make the use of blockchain technology suitable for mass use and practical use.

Public blockchain and permissioned private blockchain: equal models for different areas

One interim solution is the Permissioned Private Blockchain. Since such closed blockchains are usually offered by companies as a service to customers, they are subject to special procedural and compliance requirements. Just like the public chain, the permissioned private chain also characterizes a variant of blockchain technology as a so-called peer-to-peer network. But while public blockchains allow everyone to participate in the network, access is restricted with private blockchains.

The central regulation of authorizations limits access to blockchain technology and data. As a result, inflationary use of the blockchain is not possible, which could jeopardize the stability of the entire system by exploding costs. Only those who are customers and receive verified access from the provider can use the blockchain for transactions. The provider of the private blockchain controls, manages and regulates access. It is generally stated that public and private blockchains were designed for different areas of application. Both variants are justified and will find their place in a digitalized world.