July 8, 2020
by Peter Seed
How Ethereum has captured decentralized finance.
Perhaps you have read that the latest trend in robo-advisory is DeFi. DeFi stands for decentralized finance. “So what?”, you might ask, “Why should I care?”
Well, let me just say that Defi has significant value to self-directed investors. It is based on the Ethereum blockchain which is used for creating smart contracts in the blockchain. These smart contracts are fully automated applications. They are infinite machines that operate without a centralized authority devoid of administrator interference and inefficiency.
One of the biggest advantages of DeFi applications is staking. Staking is a process where Ether (the blockchain’s unit of value) can be locked up as collateral in a smart contract that functions like a robo bank.
No financial investment is risk free, but properly executed, staking can take advantage of interest and capital gains on Ether at the same time. Borrowers can borrow digital money pegged to the dollar, called stablecoin, without a loan application. All that is needed is collateral in the form of Ether – the utility token that powers the Ethereum blockchain.
If low interest loans are not your thing, you can deposit your Ether in a smart contract that pays you interest. Interest rates can be as high as 10% but typically vary from 5% to 10% — depending on demand. Interest is compounded in real-time and you can withdraw your money in any amount at any time.
Does this mean that staking Ether pays risk-free interest? Not quite, but it sure beats the typical 1% interest you might get from money-market sweeps of free cash in a brokerage account. Right now, interest on a 3-month T-bill is 1.28%. UpTrade incorporates an easy to use staking process that makes the process easy to implement.
Ether has been on a tear, lately, in anticipation of what is called Ether 2.0 — a major overall of the Ethereum public blockchain that will increase the scalability of Ethereum ten-fold. A price chart of Ether shows the price of Ether has tripled since March 2020.
The resurgence of the price of Ether is likely due to it’s dominance in the DeFi marketplace with sites like Oasis or Staked. Unlike Ethereum, the Bitcoin blockchain cannot hold smart contracts. If the trend holds, Ethereum will likely led the way.
At the very least, Ether is a good diversification asset. More importantly, Ethereum has brought self-directed banking to people who want to control their own financial future without having to sell an underlying asset and without having to wait until the bank is open for business.