Ethereum Ecosystem Primer

Part 1: Ethereum’s Hidden Card — The Investor’s DeFi Primer

From Bitcoin to ICOs: The Fundraising Boom That Changed the Course of Crypto

It all began with Bitcoin’s decentralised network of validators. These entities have the crucial role of securing blockchain networks and making sure they are protected from external manipulation. Multi-sig contracts came after validators; enabling added security to on-chain settlement through requiring multiple cryptographic keys be used to authorise a transaction. Advances in blockchain security were side-lined by initial coin offerings, also known as ICO, in 2017.

Bitcoin and Tokens Seeded the Ecosystem’s Value

While Bitcoin undoubtedly carries the gauntlet for the digital asset space, it is important for investors to be aware of the vast amount of digital assets that are now available. Bitcoin, in our view, should make up the lion’s share of any investment allocation to the space. However, that does not mean it is the only asset worth buying.

Smart Contracts Are a Platform for Innovation

Although scalability issues are often mentioned, Ethereum consistently accommodates over 7mn weekly transactions, which, as we can see from our Terminal, is magnitudes larger than Bitcoin’s 2mn weekly transactions. Ethereum’s smart contracts are on-chain contractual agreements between several parties which enable users to engage in trustless deals; a feature that is responsible for much of this unparalleled throughput.

Decentralised Finance is Here to Stay (on Ethereum)

DApps drive value to Ethereum through several different protocols. However, readers should question whether this growth will be exclusive to Ethereum in future. Platforms like Flow’s, CryptoKitties, and the wider gaming sector will likely leave Ethereum in the future. Nonetheless, we believe that DeFi and financial innovation will continue to thrive on Ethereum.

De-Risking Counterparties

DeFi will continue to excel as it enables two very positive factors. Firstly, the tools made available to developers and financial experts by Ethereum have enabled fast-paced creation of superior open-source finance products, and at a fraction of the cost of old-world counterparts. Secondly, and perhaps most importantly, investors do not have to rely on ‘Too-big-to-fail’ middlemen or brand-backed contracts, but instead mathematical smart contracts that run on a network of decentralised global computers. This provides both certainty and transparency of a transaction being settled when required, (unlike Lehman Brothers).

This Does not Make DeFi Riskless

Ethereum’s DeFi has a long way to go with de-risking its systematic issues. In 2020, 17 major DeFi exploits and ‘hacks’ took place, totalling to $150m in losses, according to CoinGeek. Readers should be aware that the vast majority of these exploits were aimed at lending and borrowing protocols and happened at the start of the DeFi Summer. We describe most events as ‘exploits’ because users tend to lose money from entities that exploit protocol mechanisms in insecure infrastructure; in contrast to stolen funds from a nefarious ‘rug-pull’*.

Summary

In conclusion, Ethereum’s ecosystem should not be underestimated. It provides value for investors through its smart contracts, tokens, throughput, and DeFi. All these attributes should be considered when choosing the next digital asset to include in portfolios.

Applied data for digital asset investors. ByteTree provides real-time data, fundamentals, technical and deep blockchain market analysis for Bitcoin, and more.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store