Decentralized Finance (DeFi) products soared to All-Time Highs (ATH), surpassing the $800 million mark in total value locked (TVL) in USD. While the price of Ethereum (ETH), the platform hosting these DeFi apps, has performed rather poorly over the past two years, the growth in DeFi products has grown to obscure heights. Can ETH be the first cryptocurrency to breach the $1 trillion dollar mark in market capitalization?
Ethereum set to power a global trustless economic bandwidth
(This section is derived from Bankless Substack article by Lucas Campbell of Fitzner Blockchain Consulting & DeFi Rate)
The past few years has seen a rise in money protocols being built on the Ethereum Network such as DeFi apps – which have exponentially grown in the past two years to over $800 million TVL in USD. The increasing affinity to DeFi products is just the start according to Lucas, who believes the Ethereum ecosystem can power a global economic trustless bandwidth, which will require ETH to provide value to these protocols.
“Ether is trustless value supplying economic bandwidth for Ethereum’s permissionless money protocols.”
DeFi witnessed extreme growth in the last weeks of 2019, as TVL soared over 80% in the last half of the year, occupying close to 3% of Ethereum’s economic bandwidth. However, the price of Ether has been on a decline as the value in DeFi increased through 2018 and 2019.
2/ ETH consumption keeps rising despite the bear market
Use of ETH as economic bandwidth increased in 2018 and 2019 massively even as the price of ETH fell
ETH is the reserve bandwidth source for DeFi pic.twitter.com/HXbmJhvDji
However, the negative correlation does not mean that DeFi is not directly affected by ETH price as Lucas explained. He writes,
“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.”
This means that the total liquidity of ETH represents the overall economic bandwidth of the network whereby a growth in ETH price opens up for more collateralization of financial assets on the network.
The trillion dollar case for Ethereum (ETH)
As seen above, a growth in DeFi products is directly associated with the price of ETH. Currently there exists a huge network of traditional finance money that can be applied to DeFi products, which makes the case for ETH’s market cap hitting $1 trillion USD in the near future if only a fraction of the traditional finance money is transferred to DeFi.
Let’s assume the Dai (DAI), a stable coin collateralized using ETH and one of the many economic bandwidths on ETH, hits $1 billion market cap in 2020, the total value of ETH required to be locked will jump up to 15.34% of the total value of ETH, everything else including the collateralization rate, price of ETH and the liquidity of ETH remaining constant. However, if the price of ETH rises to $500 USD in 2020, a 200% increase from today’s price, and all else remaining constant, only 4.60% of the total circulating value of ETH – representing close to double economic bandwidth currently used by all DeFi products.
8/ The traditional synthetics & derivatives market is $640T, imagine if 1% of that was trustless & built with ETH as bandwidth?
The marketcap for ETH could get in the double-digit trillions in scenarios like these
Crazy? I remember when $10b ETH seemed crazy
Now as ETH targets the global market, imagine just 1% of the $670 Trillion USD in the traditional derivatives market getting into DeFi. Ethereum price may hit five figure digits and possibly become the first cryptocurrency to hit a $1 trillion USD market cap.
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