The cryptocurrency market has sold off in May, pushing prices sharply lower. Juggernauts of the crypto world in Bitcoin (CCC:BTC-USD) and Ethereum (CCC:ETH-USD) have lost at least 20% to 30% of their values since mid-May.
However, Ethereum has been resilient, which has been a constant feature of its performance in the past year. Additionally, it has multiple growth catalysts, particularly its ETH 2.0 upgrade, which should play a major role in expanding decentralized finance (DeFi).
Ethereum has been on a tear this year, outperforming the top cryptocurrencies in the market. Its 12-month returns of more than 900% comfortably surpass Bitcoin returns at 280% in the same period. It continues to attract the attention of institutional investors, with a marked increase in trading volume in the first quarter of 2021.
Moreover, it accounts for 20% of the total crypto market value at this time. Looking ahead, the transition to a proof-of-stake model will pay dividends for ETH holders.
With that being said, let’s look at Ethereum’s growth drivers in a little more depth to assess its prospects.
ETH 2.0 Upgrade
Ethereum 2.0, or ETH2, is a major upgrade to the Ethereum network, expected to be rolled out in full by 2022. It essentially marks the transition of the platform from a proof-of-work model to a proof-of-stake model. The primary goals of the update are to ensure that the network is more robust, more efficient, and more scalable.
A proof-of-stake model essentially replaces miners with validators, who essentially lock up and collateralize their holdings to confirm transactions. The process is much less intensive and doesn’t require a massive amount of capital investment.
The proof-of-work model required miners to spend a sizeable amount of money buying specific hardware and expend energy to confirm transactions. Aside from the environmental benefits of the new model, it will also substantially improve the scalability of the platform.
Validators who do not have enough ETH to approve transactions (i.e., 32 ETH) can become part of staking pools. The staking process carries rewards, and ETH investors are also exploring the possibility of earning additional yields on their holdings.
Ethereum’s Role in DeFi
Decentralized finance involves the use of the blockchain in carrying out peer-to-peer financial transactions. DeFi has ushered in a new era in finance through blockchain technology, which accomplished tasks unheard of in money markets.
Services such as Compound and Balancer allow for borrowing and lending to take place in a completely decentralized manner. Moreover, it provides a strong foundation for new financial services, which could prove to be game changers.
Ethereum is the most in-demand platform in the DeFi realm. Several Ethereum-based DeFi protocols, including Uniswap, MakerDAO, and others, have become incredibly popular.
DeFi projects have been growing rapidly, and Ethereum has facilitated their expansion. DeFi Pulse estimates that roughly $64 billion worth of DeFi projects is locked up on the Ethereum blockchain. That number had grown by over five times since January, when it was $16 billion.
The Bottom Line on Ethereum
Ethereum is among the cream of the crop amongst cryptos and has proven to be resilient despite the weaknesses in the market this year. Moreover, with multiple growth catalysts in place, ETH has a massive growth runway ahead.
Some experts believe it could dethrone Bitcoin and become the most valuable cryptocurrency in the world. Though it may seem like a wild idea at this time, its upcoming upgrade and its application in the DeFi space suggests otherwise.
On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.