Ethereum has followed the meteoric price growth that Bitcoin has recently seen, smashing through $1,000 per ETH and eclipsing a $100 billion market cap.
With these increases in price, we are also seeing a coinciding increase in total value locked in decentralized finance (DeFi) applications. As evident from a tweet by Quantum Economics founder, Mati Greenspan, “When Ethereum pumps it takes all the markets built on top of it along for the ride.”
Is 2021 the ‘Year of DeFi?’
2020 was a huge year for decentralized applications. At the beginning of January, there was less than $1 billion in total locked value (TVL) across all DeFi apps. Now, just one year later, that number is closing in on $20 billion.
With the majority of the DeFi system built on Etheruem, the rise in Ethereum prices after increased usage of applications on its platform was not a coincidence. The more value that is locked into DeFi applications, the more underlying value that the Ethereum ecosystem captures.
This also works for the increase in total locked value in DeFi increasing alongside the rise in Ethereum prices. Greenspan explains why this happens,
“The TVL figure is measured in US Dollars while much of the value is locked in Ethereum. So when the price per ETH rises, the TVL goes up with it.”
Finance in the Digital Age
DeFi, short for decentralized finance, is the implementation of traditional financial systems on decentralized platforms. DeFi applications allow users to conduct financial transactions without oversight from a third party, such as a bank or exchange.
These applications allow for transactions such as the issuance or receiving of loans, exchanging of assets, providing or receiving insurance, and more. Usually, these applications are peer-to-peer, meaning two users are directly interacting with each other.
Without the oversight and charges from third parties, users get to benefit by recapturing the value that was previously profit for financial firms This has led to massive innovations in the financial industry and is allowing for financial interactions to take place that were not possible before.