Ethereum (CCC:ETH-USD), the blockchain-based platform, represents a turning point in cryptocurrency and could eventually serve as the backbone of the financial industry as well as revolutionize gaming.
The introduction of Ethereum led to more than 2,300 monthly active developers building innovative applications on top of its blockchain.
Ether, the Ethereum network’s underlying cryptocurrency, has the second highest market capitalization within crypto behind Bitcoin (CCC:BTC-USD). BTC has seen insane price appreciation over the past 10-plus years. It’s gain in value stems in part from adoption as a store of value (combating the erosion of U.S. dollar), its network effects and other reasons.
Based on the history of Bitcoin’s price ascension, I believe ETH may follow a very similar path, and at even greater speeds.
What is Ethereum?
Ethereum was built as an open-source, decentralized software platform with an underlying smart contract programmable computer language. Its design allows developers to build protocols and applications on top of the Ethereum blockchain as if they are Lego blocks.
Developers can program a set of rules for the contract (protocol) into the code itself, therefore removing the need for a trusted central party.
Founder Vitalik Buterin describes Ethereum as a smartphone where developers can build robust applications on the general purpose code (Ethereum blockchain). This makes it “programmable” and flexible, allowing the blockchain to continually improve.
One of Ethereum’s key intended principles is “non-discrimination and non-censorship.” This has gained a lot of attention over the last year.
Where Are We Now?
In the first quarter, six years after Ethereum’s launch, transactions totaling $1.5 trillion were settled on the Ethereum blockchain. This compares to $936 billion total payments settled by global e-payments leader, PayPal (NASDAQ:PYPL), in all of 2020.
A large part of crypto price appreciation results from utility and network effects.
As of Oct. 31, 2017, Ethereum had a 738 monthly active developers building on its blockchain. By Oct. 31, 2020, that number had grown to 2,325 monthly active developers for a compound annual growth rate (CAGR) of 33.23%.
This is what makes Ethereum and crypto in general so powerful. Ethereum’s blockchain and associated protocols display compounding effects and growth.
Ethereum and others are penetrating the financial industry with decentralized finance (DeFi) tools.
The traditional finance industry has long wait times and massively inefficient processes. I saw this working for a large bank for four and a half years. Workers had to use three and four systems to simply send money to another party.
Moreover, as an avid trader/investor, I feel the pain of moving money from my checking account to my brokerage to buy shares of stock.
Uniswap is one DeFi example. It’s decentralized (although some argue not fully decentralized) exchange (DEX) connects peers via smart contracts to purchase and sell tokens directly. As a result, no interaction with a central intermediary (i.e. Robinhood or Fidelity) is necessary. And, there is virtually no settlement wait time. The Block calculates that at the current growth rate of Uniswap, the DEX is set to generate more than $1.3 billion in annualized fee revenue.
By using a DEX to get exposure to certain digital assets, you have full control. And, you avoid the possibility of your broker shutting out your ability to purchase specific assets so that their biggest clients don’t get crushed. Traders saw this happen with GameStop (NYSE:GME).
Other notable DeFi protocols that have burst onto the scene are Compound, Nexus Mutual, 1INCH and Synthetix.
Final Thoughts on Ethereum
Crypto and Ethereum fanatics should keep their eye on the upcoming release of Ethereum 2.0. It promises less congestion and other improvements.
But in the meantime, it is worth checking out the ETH-BTC chart. From mid-February to mid-April, Ethereum formed a beautiful cup with a small handle pullback. Ethereum has since broken out to new all-time highs, but I think this is just the beginning.
I believe that Ethereum will be one of the top performing assets for the remainder of the year. The reasons include its massive developer migration, compounding network effects and ETH 2.0. There is also a growing desire for a new decentralized financial industry.
As of this writing, Thomas Logue, CFA, has (either directly or indirectly) positions in the securities mentioned in this article.