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Ethereum’s price has been rising in recent days, with the altcoin momentarily reaching the $2,000 threshold before slipping down below it. Although ETH has risen exponentially in the latter half of 2020 and during 2021, it is fascinating to see how DeFi in 2021 has been a key factor in ETH’s development.
In contrast to the price of ETH at the start of the year, the altcoin has increased by more than 180 percent in just three months. While one might argue that this is attributable to the increased popularity of the DeFi ecosystem, it is worth mentioning that ETH has had a fascinating love-hate relationship with the room.
During the DeFi summer of last year, the TVL locked in DeFi rose from a billion to nearly 13 times that number. Data from DefiPulse revealed that the TVL was about $45.45 billion at the time of publishing – a staggering rise. ETH saw an increase in user engagement and interest over the same period in 2020, all of which translated well on its price charts.
However, the same curiosity in DeFi raised doubts about Ethereum’s long-term stability as a forum. With growing interest in DeFi, transaction costs and Gas on Ethereum increased, resulting in increased criticism and scrutiny of the network.
When it comes to this subject, a recent study by CoinMetrics illustrated how 2021 differs slightly from the previous year. According to the paper, “Decentralized finance (DeFi) surged back into the mainstream in early 2021 after its initial rise in summer 2020.” All of the big DeFi tokens had a phenomenal first year, with the bulk increasing by at least 100%.”
Furthermore, the recent increase in demand, recognition, and popularity of NFTs may have played a significant role in driving acceptance and the valuation of ETH. The study continued,
“But Ethereum’s biggest Q1 storyline was undoubtedly the explosion of non-fungible tokens (NFTs). Ethereum has hit the mainstream media more than ever before thanks to huge cryptoart sales headlined by Beeple’s Christie’s auction, celebrity attention from Mark Cuban, Elon Musk, and others, and the explosion of digital collectibles like CryptoPunks and Hashmasks.”
This year, DeFi tokens have seen tremendous price gains. Uniswap (UNI) led the way for large-cap DeFi tokens, with up to 486 percent gains since the beginning of the year. Other DEX tokens, including SUSHI, CRV, BAL, 1INCH, and ZRX, saw strong gains in Q1 and have risen by at least 250 percent since the beginning of the year.
2021 has proven to be an eventful year for the venue, with DeFi tokens on the rise and NFTs refocusing the spotlight. One could argue that this has also translated well for Ethereum, and recent price increases have arisen not only from fundamentals, but also from the expansion of DeFi.
Surprisingly, this has interpreted favourably for Ethereum’s business fundamentals. According to the data presented, there are nearly 800,000 more addresses with at least 0.1 ETH than there were at the start of the year. In addition, Glassnode announced that the number of active addresses (7d MA) reached a one-month high of 33,257.149.
Such an uptick in activity is a promising indicator for ETH in the long run, but it may cause some problems in the short term. The paper summed up these short-term troubles and read,
“Ethereum transaction fees have shot up to new highs in early 2021. For context, at the peak of the 2017/2018 bull run, average Ethereum transaction fee reached $5.70. Ethereum average transaction fee has been more than $5.70 every day since January 18th, 2021. The median transaction fee has been above $10 for most of the year. ”
Furthermore, since the introduction of DeFi in the summer of 2020, blocks have consistently been 95 percent or more full. According to CoinMetrics info, blocks were 97 percent -98 percent complete on average in March 2021. Full blocks cause network congestion and result in high gas fees.
This is a challenge that Ethereum has had in the past and appears to have today. Although DeFi has been a critical driver for ETH’s long-term expansion, it has also raised challenges to the network in the short term. This was the case in 2020, and a lot needs to change going into 2021 in terms of sustainability.