Ethereum is still knee-deep in a vicious two-year bear market. Today, ETH has been hovering at $170 levels which were last seen in mid-2017 before crypto assets skyrocketed in December of that year during the ICO boom.
While the performance of ETH is nothing to write home about, DeFi protocols supported by ethereum have been on a roll. And based on the exponential growth of these DeFi products, ETH has the potential to unlock billions of dollars in capital, ushering in a trillion-dollar market valuation for the crypto asset.
Growing Demand For DeFi Products
Decentralized Finance (DeFi) enables users to lend or borrow digital assets through smart contracts. This cryptocurrency sub-sector has been gaining traction over the past two years, registering more than $750 million in total value locked (TVL) in USD and analysts expect this to continue into the foreseeable future.
According to a recent post by Lucas Campbell of Fitzner Blockchain Consulting & DeFi Rate, there has been an increase in money protocols built on the ethereum blockchain. These protocols are utilizing ETH to build an alternative world of finance.
“Ether is trustless value supplying economic bandwidth for Ethereum’s permissionless money protocols.”
DeFi continued to grow in 2019 despite the price of ETH languishing for the better part of the year. The total value in USD locked in DeFi grew by 140%. Locked in this case means the amount of money that is no longer in the fiat world and is gaining attractive interests being loaned out, or traded in crypto open finance.
In ETH terms, roughly 3.1 million is currently locked in DeFi smart contracts or 2.75% of the total circulating supply. Overall, money protocols on the Ethereum ecosystem like Synthetix, MakerDAO, Compound consume 3% of ETH’s economic bandwidth.
Even though DeFi has been rising amid a bear market, this does not mean that it is not affected by depressing ETH prices. Lucas Campbell noted that:
“Trustless value is only possible with decentralized crypto-native assets that settle on-chain with no central backing. BTC and ETH can be seen as trustless assets in their respective networks. The aggregate liquid value of these trustless assets is the network’s trustless economic bandwidth.”
In other words, the total ethereum bandwidth is tied to ETH’s price. Hence, an increase in the price of ETH encourages users to collateralize more assets on the network.
The Rationale Behind Analysts’ Trillion-Dollar Ethereum Scenario
There is a hefty chunk of capital currently idling in traditional finance which if transferred to DeFi would make the case for ETH’s valuation soaring past $1 trillion.
If, for instance, DAI, a collateralized stablecoin, was to reach a market capitalization of over $1 billion this year at current ETH prices, it would require 15% of ethereum bandwidth. But, if ETH hits $500 this year, only 4.6% of bandwidth -the equivalent of almost twice the economic bandwidth currently used by all DeFi protocols- would be consumed.
Currently, the traditional derivatives market is valued at $640 trillion. If only 1% of this was transferred to the DeFi market, ETH’s price would moon and its market cap would break beyond $1 trillion.