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The Bithumb Blog

[Insight] DeFi is Leading the Digital Asset Rally

Bitcoin was a leading figure in the rally and soared up to USD 42,000 at the beginning of the year. But recently, it had fallen back to USD 30,000. Now, after its adjustment, Bitcoin is aiming for a recovery of USD 40,000 again. At the same time, Ethereum, the second-largest digital asset in the market cap, has finally breached the wall of USD 1,700 for the first time in history, continuing its high score rally. It seems the digital asset market is regaining its vigor.

The reason that the market is not losing its fever for such a long time is basically because of the bountiful liquidity the market itself possesses. Though the vaccination process is ongoing, the end of the COVID-19 pandemic is still far from over. And there are growing concerns about the revisit of economic recession for some areas such as the Eurozone. In such circumstances, the quantitative easing by the governments and central banks of each country seems to continue.

The increasing global liquidity is leading the money flow into risky assets such as stocks, raw materials, and Bitcoin. Among these assets, Bitcoin has its own merit as the ‘Digital Gold,’ for it is an asset that can partially hedge the concerns related to the inflation caused by the increased liquidity. And that is why the institutional and individual investors are investing their funds to solidify Bitcoin’s base whenever its price is going down.

However, one of the reasons that we can keep our optimistic view towards the digital asset market is not just because of its liquidity but also another favorable factor: the activation of decentralized finance (DeFi). As a well-known fact, DeFi is a financial service served on the blockchain network that makes the remittance and loan of digital assets or trade of derivative products possible without an intermediary such as a bank.

If you wish to take loans or make remittances in banks, you need to possess some deposited assets as collateral for the transaction. The same goes for the DeFi. You need to possess some deposited digital assets such as Bitcoin or Ethereum. The more the locked-up assets you have deposited, the more the scale of remittance or loan you can mediate will increase. According to the recent data from DeFi Pulse, a data analysis firm, the scale of the locked-up assets for DeFi has reached about USD 32.8 billion(approximately KRW 36 trillion and 850 billion). Especially, it has shown a growth rate of 197% within the last three months.

Since the demands for the DeFi is increasing, it is natural to expect that there will be some increase in the demands for lock-up. The demands for lock-up have also increased because of those who are concerned about the price adjustment of Bitcoin or Ethereum, which have shown a sharp increase recently and aiming for gaining interest earnings.

According to the analysis by Constantine Kogan, a partner of a digital asset investor firm, Wave Financial said, “One of the reasons that Ethereum’s price is achieving new records is because of the mass increase of the demands for DeFi.” Since DeFi is mostly operating under the Ethereum Network, that is to say, the increase in DeFi demands are directly leading to the increase of demands for Ethereum.

Grayscale that has currently grown into one of the representative digital asset management firms in Wall Street, also said that “Ethereum is functioning well as a new currency.” It also added, “Though it is difficult to forecast the future value of the Ethereum, it is right to say that Ethereum is holding enough financial value as one of the consumer goods or deposit assets.”

Furthermore, holding Bitcoin or Ethereum in digital asset exchange means that you can sell it anytime. But if you lock them up within DeFi, that means that you can bear their price drop to a certain level due to the interest earnings. That is to say, the more digital assets are locked-up, the more defensible the digital asset’s price becomes.

Since the demands for Ethereum is increasing, further commodity futures for hedging the price is also showing up. Chicago Mercantile Exchange (CME), the world’s largest derivatives exchange, is also planning to release Ethereum futures within this month. The appearance of the commodity futures means that there will also some increase in selling for speculative purposes. But in the long run, that also means the demands for holding Ethereum for the long term will also increase due to the easier-to-hedge system. This was also proved by the release of Bitcoin futures.

But the commission fee that is soaring high due to the increasing use of Ethereum can be a bit problematic. For the first time in history, the average commission fee for Ethereum (gas price) transaction has surpassed the USD 20. That means the commission fee has grown more than twice within a year. This costly commission fee could be a factor that can shrink down the demands for Ethereum or increase the supply amount by the miners.

However, as we have seen from the GameStop short squeeze, resistance by the individual investors against institutional investors, the market had slowly started its journey heading towards decentralization, rejecting the concept of centralization. With DeFi at the core of this journey, we can expect that the high volatility of the digital asset market can grow lower substantially.

*This research and analysis document has been prepared for the purpose of providing information that can be used as a reference based on our reliable data and information but we cannot guarantee its accuracy or completeness.

*The document has reflected the individual’s opinion and it may not be consistent with the company’s official point of view.

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