The Ethereum development system has expanded continuously almost since its beginning, bringing new features that would establish a new era in crypto.
With its smart contract functionalities, appeal for NFTs, and meme coins, the project supported the growth of crypto and blockchain by issuing and implementing assets on the network through technologies like the ERC-20 token.
As the project gained more traction and institutions became interested in it, the ETH USD price also boomed due to growing interest.
VISA, for example, collaborated with Ethereum developers to deliver the Visa Tokenized Asset Platform, accelerating the institutional adoption of the cryptocurrency. The system enables banks to issue and manage fiat-backed tokens.
Therefore, Ethereum is actively contributing to the evolution of the financial sector, including Decentralized Finance (DeFi). Here’s how it supports this sector.
Defining DeFi
DeFi is the future of finance, as it implies a global industry that’s an open alternative to our current world. DeFi stands on open-source technology, allowing developers to build on it and seamlessly improve the sector while also providing tools for borrowing, saving, investing, and trading.
With DeFi, people can control their own money, benefit from fast, anonymous, and cheap transactions, and leverage financial tools in a transparent environment. That’s why DeFi has so many use cases, such as the following:
- Sending money worldwide;
- Accessing stable currencies;
- Borrowing funds with collateral;
- Trading tokens;
- Funding business ideas;
- Managing investment portfolios;
Linking DeFi with Ethereum
Ethereum has been one of the most significant contributors to the DeFi ecosystem. The blockchain is the base for DeFi since no one owns the blockchain or its smart contracts, making DeFi available for everyone. At the same time, all products on the network work together seamlessly, boosting interoperability between apps and products.
Since Ethereum is a shared ledger, people can better keep track of transactions when using tokens and cryptocurrencies built on it, allowing users to hold their assets in self-custody wallets.
This, in essence, is what DeFi is ― a place where people don’t need intermediaries to manage their funds but have access to educational documents to improve their income streams.
What are some examples of DeFi products on Ethereum?
Developers are already accustomed to the Ethereum tool suite, which is why some of the dApps (decentralized apps) built on the ledger have become reputable services on the market. Uniswap, for example, is a liquidity protocol based on Ethereum smart contracts that prioritizes decentralization, security, and censorship resistance features.
There’s also OpenSea, a decentralized marketplace for buying, selling, and discovering limited-edition goods. Since DeFi also includes gaming and play-to-earn games, users can leverage Gods Unchained, a tactical card game where they can challenge their skills and win money.
Ethereum dApps already cover a vast array of sectors, from finance and socials to arts and technology, and will be the future’s app suite.
What are the challenges Ethereum faces in DeFi?
Considering the newness of blockchain technology and the steep curve of learning how to build a decentralized app, the growth of this sector is limited by several vulnerabilities. For example, Ethereum’s scalability and gas fees might hinder progress since the network can’t process more than 30 TPS (transactions per second).
Even with the Merge update that made the ledger more efficient, Ethereum may still struggle with network congestion.
In addition, security concerns surrounding smart contract vulnerabilities may expose users to cyberattacks. Some of these challenges include reentrancy attacks, access control vulnerabilities, and insecure randomness.
The Ethereum roadmap is one of the most innovative features in the crypto industry, as it concerns the limitations of the ledger while trying to solve these issues. The roadmap includes a series of updates that will help Ethereum have cheaper transactions, more security, and a better user experience.
With the help of the roadmap and the first upgrade called the Merge, Ethereum changed its consensus mechanism from proof of work to proof of stake, reaching its peak sustainability point.
The Merge happened in 2022 and also included the Beacon Chain integration, while the following changes were addressed:
- Staking withdrawals in the Shapella update;
- Proto-danksharding in the Dencun update;
- Enhancing EOA wallets with smart contracts with Pectra;
Each update comes with hard forks that handle different parts of the update, which is why experts believe the entire roadmap might take up to ten years to fully develop and make a difference. In addition, current updates must prepare the network for future ones.
What will shape the future of DeFi?
Several trends, such as the increased institutional adoption of digital assets and technologies, will define and redefine DeFi. Companies are more interested in experimenting with blockchain tools, which will set the tone for global adoption.
Regulatory developments will also play an important part in industry adoption and innovation. The EU and US have already started to outline the basics for thorough regulation, even if it currently only addresses stablecoins. With more regulation around taxation, for example, investors will be more confident in diversifying their portfolios.
At the same time, these factors will receive support from the growing advanced financial products. Teams and developers will sharpen their skills in app building, being able to address vulnerabilities and challenges, so as the industry becomes more reliable, government trust will increase as well.
Finally, the growth of DAOs (decentralized autonomous organizations) will contribute to the community argument around crypto and blockchain, as these organizations rule under different requirements than centralized ones, providing the benefits of transparency.
MakerDao, for example, has employed DAO governance, through which users can vote on the most important decisions that affect the brand.
Final considerations
Ethereum is one of the most revolutionary blockchain technologies, having perfected the role of smart contracts in the development of DeFi. Its contributions to the sector are plentiful, from the seamless integration between dApps and users to the commitment to making finance available to everyone around the world.
Developers have used Ethereum to create numerous financial tools for DeFi, including borrowing, lending, and trading, and the development roadmap will support faster adoption.
