Understanding Ethereum’s DNA: With the surge of DeFi, will Ethereum reappear its darkest moment in the post-ICO era?

Ethereum has continued to hit new highs this year and seems to be recovering from the doubts about its collapse that year. However, compared with its historical peak of 137.6 billion US dollars, Ethereum's current circulation value is about 43 billion US dollars, which is still down about 70%.

However, after entering August, Ethereum entered a period of "stagflation" from a technical perspective, with its circulation value fluctuating between US$43 billion and US$50 billion. After failing to reach US$50 billion, it entered a sideways trend.

This situation reminds people of Ethereum in 2018: it went into a downturn due to the decline of ICOs, and now DeFi is breaking away from Ethereum. Now some new competitors have shouted the slogan of "surpassing Ethereum".

So will history repeat itself this time? Is Ethereum surviving a catastrophe or waiting to be surpassed?

The Dark Ethereum in the Post-ICO Period

Ethereum has been the second largest cryptocurrency since 2017, but in the second half of 2018, it was overtaken by the old project Ripple and fell to third place. On the one hand, Ethereum was questioned after being overheated, and on the other hand, Ripple soared due to its cooperation with Japan's Mitsubishi UFJ Bank in the field of cross-border payments.

The second half of 2018 was the darkest moment for Ethereum. The Enterprise Ethereum Alliance (EEA) continued to expand, but Ethereum's price was revalued due to doubts. The following factors, except for major bugs discovered by security companies, are almost impossible to reproduce in the current DeFi boom:

1. Regulatory storm. By comparing the price trends of Bitcoin and Ethereum, it is easy to get the time of the turning point. Ethereum started a round of plunge in May 2018, which is different from the trend of Bitcoin. After May, the ICO market ushered in a regulatory storm in many countries, especially the regulatory agencies led by the SEC, which are even studying whether Ethereum is a security - this means that Ethereum may be regulated by the SEC, which has caused market concerns. But this factor has been eliminated in March 2019, and the SEC announced that Ethereum is not a security.

2. ICO ebbs. According to some data and research institutes’ reports, the ICO bubble burst after May, and the number of ICO cases dropped sharply in the second half of 2018. According to Coingecko data, the number of ICOs in the third quarter of 2018 was almost the same as in the second quarter, while the amount of financing dropped nearly five times, and the trend continued to decline in the fourth quarter. This means that the biggest demand that directly affected the price of ETH at that time was disappearing. At the same time, due to the continuous decline in the price of ETH, if denominated in fiat currency, the financing amount of some project parties that had completed ICOs also shrunk, and panic selling began to occur, accelerating the continued decline in the price of ETH.

3. Ethereum centralization is criticized again. Ethereum centralization has always been criticized, especially in April 2018, when Bitmain launched Ethereum ASIC mining machines. The Ethereum community was worried that ASIC would improve mining efficiency and cause ETH to fall, so it proposed to modify the Ethereum algorithm to make it incompatible with ASIC, and the proposal was passed by the majority. However, the core developers of Ethereum were hesitant, and this hesitation was based on the fact that Ethereum was planning to transition from POW to POS algorithm. Ethereum founder Vitalik Buterin publicly opposed it, saying that Ethereum is not Bitcoin and miners have no say. Ethereum's self-confidence once again put itself on the "impossible triangle" gallows and made the community criticize Ethereum for being ruled by plutocracy. But somehow, Ethereum ASIC mining machines eventually disappeared from the market with little success.

Some well-known security companies have also set their sights on Ethereum and are actively looking for vulnerabilities in Ethereum. In the second half of 2018, many Ethereum bugs were disclosed by security companies one after another, which caused a short-term negative impact on ETH, but in the long run, helping Ethereum fix vulnerabilities actually improved the security of the Ethereum network.

ETH fell to around $430 per coin in the second half of 2018, but Ethereum co-founder Joseph Lubin said that Ethereum's ecosystem is excellent, and that Ethereum is successful precisely because of its sharp rise and fall that attracted public attention. In addition, ConsenSys, the company he led, was working to build infrastructure in the Ethereum network to drive the deployment and popularization of decentralized apps (Dapps).

DeFi Exodus and Ethereum Congestion

The significance of DeFi to Ethereum today is not the same as that of ICO back then. In the previous article "In-depth丨Understanding Ethereum's DNA: Disassembling the Path, How Does Ethereum Move Toward Success Step by Step?", we have specifically analyzed the inevitability and contingency of Ethereum's success in the field of smart contracts. Today's DeFi remains in the first stage of ICO's effect on ETH, that is, it relies on ERC20 to issue assets, but in the use of DeFi, DeFi does not rely on ETH, but more on stablecoins.

Guosheng Securities' report pointed out that the rapid development of the DeFi industry has not led to real demand for ETH. Although there are many DeFi projects on Ethereum, the collateral of DeFi projects on Ethereum has begun to rely less and less on ETH. ETH is not a necessary collateral option, but has made more and more tokens become native assets.

Ajian, the editor-in-chief of Ethereum Enthusiasts, told Babbitt that DeFi and ICO have similarities and differences: "The similarity is that the final form of such exploration activities is a speculative boom, or in other words, only when the speculative boom occurs, people realize the exploration and efforts involved. But the difference is that the rise of DeFi is after the dApp boom, and everyone has learned a lot of lessons, and the construction of components is much more solid. For example, the stablecoin DAI, an important component of DeFi, was launched at the end of 2017, and the DEX trend appeared long before DAI. DeFi does not have to grow on Ethereum, nor does it have to be guaranteed by ETH to be called DeFi. However, this means that other underlying assets need to compete with ETH in the dimension of trustless guarantee assets, and other smart contract platforms need to compete with the Ethereum protocol in the dimension of ease of use and network effect. Taken together, Ethereum is still the most suitable in the foreseeable future."

Ethereum developer a186r (pseudonym) said that the concern about DeFi backfiring on Ethereum is reasonable. The prosperity of the application layer has not currently contributed to the security of the protocol layer, and most of the value lies in the application layer: "This is a conflict between the protocol layer and the application layer. The current state of DeFi is that the application layer can obtain data and users shared by the protocol layer, while the growth of the application layer will not be fed back to the protocol layer to increase the value of the protocol. In the previous assumption, fat protocols and thin applications, like ICO, applications bring users, and users bring demand for ETH, thereby raising the price of ETH. But in DeFi, the application layer and the protocol layer do not work as above, and most of the value falls on the application layer. Moreover, the prosperity of the application layer has not contributed to the security of the protocol. Instead, it has increased the possibility of the protocol being attacked, and there is also the risk of application forking the protocol, which is what we don't want to see."

Having built DeFi applications on Ethereum, Chen Pin, founder of Peili Technology, told Babbitt reporters that DeFi projects do not rely on Ethereum, but high gas fees and Ethereum transaction congestion may open up competition opportunities for other public chains. Peili Technology is a Taiwanese project, and Chen Pin started developing Ethereum in 2017 and is an early Ethereum developer.

"During ICO, Ethereum was the currency accepted for fundraising for most projects, and investors generated a large demand for Ethereum in order to invest in ICO. In today's DeFi world, the US dollar stablecoin Stablecoin is the core of most protocols, and Ethereum is only used as a payment for Gas fees. However, the massive increase in transaction volume demand has highlighted the bottleneck of Ethereum's TPS, further leading to a competition for Gas Price, causing most applications other than DeFi on Ethereum to decline sharply. High Gas fees are only acceptable and affordable for DeFi users with potential high profits. Transaction congestion and high Gas fees on Ethereum are indeed opportunities for other public chains. Against the background of the continuous extension of the ETH2.0 schedule, if other public chains can establish a complete DeFi underlying protocol ecosystem and show significantly better results than Ethereum in terms of Gas fees and TPS, it will indeed be a major inducement for many developers and users to migrate." Chen Pin said.

The congestion brought by DeFi to Ethereum transactions is similar to that of ICO. Glassnode data shows that the current Ethereum gas fee is high, close to the level in mid-2018. Although it has not reached a record high, the high gas fee has made some traders miserable. In some DeFi communities, some investors have said that "the current gas fee is so high that the liquidity pool cannot be withdrawn."

Vitalik, who was aware of the problem, proposed the Ethereum EIP1559 proposal. In short, it is a gas fee reform, which will change the technical transaction fees that do not have to rely on ETH to those that must use ETH, and the Gas that must be calculated with ETH will be destroyed. Some analysts believe that the EIP1599 proposal can reduce the total transaction fees and transaction volatility, while others believe that the reduction in supply may eventually drive up the price of ETH.

Guosheng Securities pointed out in the report that the EIP1559 proposal may cause some powerful DeFi projects to have the idea of ​​"forking" (or choosing another platform), that is, the exodus of DeFi. In addition, the lower ETH price and the conversion of the PoS mechanism are bound to bring external security risks to the system.

According to the news, EIP1559 is currently on the agenda and is expected to be launched within the next 6 to 12 months.

Migration did not happen. Ethereum is still the best choice for DeFi projects.

The exodus of DeFi has become the current concern of the market. However, according to feedback from developers, Ethereum is still the best choice for DeFi.

Chen Pin said that due to the overly strong clustering effect of the Ethereum network, a symbiotic relationship between upstream and downstream has been formed. At present, the phenomenon of developer migration is not significant, but there are more expectations for ETH2.0.

"Most of the products we develop are mid-to-upper-level derivative financial applications that rely on integration with underlying protocols, so a sound ecosystem on Ethereum is very important to us. In addition, Ethereum has the most sound DeFi ecosystem, from the underlying stablecoin DAI to the lending protocol Compound. Since DeFi can be stacked and integrated with each other like Lego, the development of many upper-level applications must rely on these underlying protocol components, so Ethereum is still the most ideal choice at present. In addition, although most DeFi products use US dollar stablecoins as the protagonist, there is still a certain degree of linkage between DeFi and Ethereum. For example, the stablecoin DAI needs to be minted through a large amount of Ethereum collateral. At the same time, many derivatives are also extensions of the Ethereum price. The correlation between industrial development and currency is still high." Chen Pin said.

ar186r expressed the hope that Ethereum 2.0 can solve the above problems and improve the Ethereum economic system so that applications can enhance the value of the protocol and create a positive cycle that keeps moving forward. "I haven't tried to develop on Polkadot (Ethereum's new competitor) yet. I may try it later. I have some interest in it, but this means changing the development language."

Ajian pointed out that the integrity of the Ethereum ecosystem is its moat. Although many people realize that Ethereum has a large developer community, few people realize that Ethereum also has a considerable user base: "Users are well informed or educated, and the latter may be more critical. This makes people more willing to choose Ethereum whenever they want to create a project. One manifestation of this moat effect is that although everyone now realizes that decentralized finance is a path to explore and is willing to join this trend. As far as I have observed so far, the most cutting-edge innovations always come from the Ethereum ecosystem."

In April 2019, Joseph Lubin outlined Ethereum’s vision of becoming a global financial settlement layer. It is unknown when Ethereum’s strategy to transform from a world computer to a global financial settlement layer first began, but it was definitely not due to the DeFi craze in 2020.

Based on this, Ajian said: "I don't quite understand what the so-called 'the current situation is different from the original design' means. Whether it is 'world computer' or 'global financial settlement layer', they are narratives created in different time periods to make it easier for everyone to grasp the core of Ethereum, but the core of Ethereum has never changed. These two narratives are essentially the same. The global financial settlement layer requires a world computer, and one application of the world computer is financial settlement. Ethereum's own iterations have always been promoted around the functionality and sustainability of the protocol, which is very clear."

DeFi is relatively independent of Ethereum, which actually means that Ethereum will be relatively independent. So, when the tide recedes, it will be revealed who is swimming naked.

Ethereum completed the upgrade from the "Byzantium" version to the "Constantinople" version under the Metropolis version in early 2019, and at the same time returned to the second place, again pulling away from Ripple. Now, three years have passed since the third version of Ethereum, "Metropolis", was released, and the fourth version, "Tranquility", or ETH.20, is about to be launched. If you are familiar with the history of Ethereum, you will understand that each iteration period will start the cycle of ETH.