Hey DEFI TIMES community,
Have you been through DeFi summer 2020? If not, I will give you a quick recap of what happened.
It all started with Compound issuing their governance token COMP. COMP was probably the first yield farming token. People could lock their assets inside Compound and earn COMP proportionally to their deposited funds.
Yield farming wasn't a thing back then - but shortly afterward, more and more DeFi protocols started to imitate Compound. The result: Hundreds of DeFi protocols issued their tokens and implemented yield farming everywhere!
Yield farming was an excellent way for people to earn tokens without having to buy them. You just had to deposit your assets to a DeFi protocol, and you would earn inflation rewards in the form of governance tokens.
Of course, people got greedy, and a bubble emerged. The bubble peaked with so-called "food tokens." - meme coins without utility.
COMP was the spark for the bubble to kick off. Could we see a similar situation in 2021? Could there be a similar event like the issuance of COMP in 2021?
History doesn't repeat itself, but it rhymes!
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DeFi Summer 2021
DeFi Summer 2021 could be just around the corner despite the recent price dump! Today, I want to give you some reasons why we could see a very similar situation to the one we had in July/August 2020.
In 2020, COMP kicked off the hype - In 2021, it will be sidechains, second layer solutions, and… EIP-1559!
Sidechains Are Catching Up
Last year's hype was stopped by one particular fact: Gas fees were too high. People were paying $100 for a single Uniswap trade. It was unsustainable!
It quickly became clear that we needed to improve Ehtereum's scalability to move on. However, sharding was still far away. That's why developers started to focus on alternative layer two solutions like sidechains.
Sidechains are sovereign blockchains with a strong focus on Ethereum. While they have their own consensus algorithm, their branding is heavily in favor of Ethereum. Sidechains are no "Ethereum killers." The opposite is true: They try to complement the Ethereum ecosystem by adding more block space and more transactions per second.
Polygon is the most prominent sidechain right now! It has grown quickly during the last months and weeks, and its ecosystem doesn't show any signs of slowing down.
The state of Polygon reminds me of Ethereum's state in early 2020. A bunch of powerful applications that had the potential to explode. However, there's one big difference: Polygon is scalable - it supports up to 7,000 transactions per second.
Sidechains could be the "COMP moment" of 2021. People will realize that DeFi has developed and that it's actually fun to use DeFi service again! If DeFi summer 2021 kicks off, it will also take place on Polygon. However, this time without high gas fees, many more applications, and ten times the capital!
Are you ready?
Optimistic Rollups Are Coming
Just as sidechains could be the "COMP moment" of 2021, Optimistic Rollups could trigger an explosion in DeFi usage. Optimistic Rollups offer the same scalability as sidechains, but with one significant difference: They leverage the security of the Ethereum blockchain.
In contrast to sidechains, Optimistic Rollups are just another layer on top of Ethereum. That means when you use Rollups, you have to pay Ethereum gas fees. Of course, this directly positively impacts Ethereum because these transaction fees will be burned under EIP-1559. This stands in contrast to the usage of sidechains, where users don't require gas.
There are already many applications that are confirmed to launch on Rollups. The most prominent application is Uniswap, which recently partnered with Optimism.
Uniswap launching on Optimistic Rollups could trigger another DeFi hype; however, this time, much faster and cheaper!
Imagine you could instantly trade on Uniswap - without high gas fees and stuck transactions. This time could be different. Uniswap's Rollups implementation will support thousands of transactions per second while being as secure as the Ethereum blockchain itself.
DeFi summer could be just around the corner... and sidechains and rollups could be the spark that lights the fire!
Once that has happened, we have another upgrade in the pipeline, which will have a much bigger impact on Ethereum in the short and long term: EIP-1559!
EIP-1559 Will Launch in July
Sidechains and second layers solutions like Optimism will be the spark to light the fire. But once the fire is lit, EIP-1559 will be the last piece of the puzzle to bring DeFi summer 2021 to life.
EIP-1559 will essentially burn the majority of transaction fees on Ethereum. While Optimistic Rollups bring back activity to Ethereum, EIP-1559 uses this activity to make ETH more valuable.
By burning the transaction fees, ETH could become a deflationary asset. By burning the transaction fees, Ethereum can keep inflating the currency without sacrificing ETH's scarcity. As long as the burned transaction fees are equal to the issuance, there is no inflation. If the burned transaction fees exceed inflation, we could even see a negative issuance, turning ETH into the hardest money on earth. This stands in stark contrast to Bitcoin, which relies on transaction fees to secure the network.
EIP-1559 will eventually make ETH more valuable. With the recent Elon & China FUD, people completely forgot about fundamental changes in the Ethereum ecosystem. People were scared.
However, now that most fear is gone, people slowly realize that DeFi is still growing. Once Optimistic Rollups are live (they launched on Friday), we could see another DeFi summer emerging.
Just as COMP started DeFi summer in 2020, Optimistic Rollups, sidechains, and EIP-1559 could kick off another DeFi hype - but this time, with a lot more applications and capital… This could be DeFi summer 2.0.
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DISCLAIMER: All information presented above is meant for informational purposes only and should not be treated as financial, legal, or tax advice. This article's content solely reflects the opinion of the writer, who is not a financial advisor.
Do your own research before you purchase cryptocurrencies. Any cryptocurrency can go down in value. Holding cryptocurrencies is risky.