Potential Risk Behind Ethereum Price Pump

In the past two weeks, the price of Ethereum has pumped by 78%, in addition to the currency price, Ethereum’s trading volume and number of active addresses boom as well.

DeFi has become the key to support the rejuvenation of Ethereum. The decentralized consensus mechanism and perfect infrastructure make Ethereum the “only public chain” of the DeFi space. But DeFi’s constantly expansion may bring new crises to Ethereum.

Rejuvenation

While Ethereum price pumped by 78%, it was only 32% for Bitcoin. Ethereum’s rejuvenation is more than the currency price. In terms of transaction, data from Etherscan shows that since January this year, the daily transaction volume of Ethereum has shown an obvious upward trend. At the beginning of the year, the lowest number of transactions was 435500, recently, the number increased to 1261400, about 189% up.

The emergence of a large number of unconfirmed transactions pushed up the transaction fees of Ethereum. Data from Etherscan shows that since May this year, Ethereum transaction fees have shown an obvious upward trend. Over the past three months, Ethereum’s fees have risen by at least 600%. The rise of coin price and network activity shows that the recovery of Ethereum is not just a simple price pull.

Reasons

In 2020, DeFi l no longer be the favorite of geeks, but become the focus among almost all crypto players. Recently, the mainstream crypto wallet apps have built-in DeFi applications such as compound, making it easier for players to participate in DeFi.

Ethereum, on the other hand, is a public chain platform supporting almost all of the DeFi services. It’s like the original ICO. If players want to participate in ICO, they have to buy Eth first. Defi promotes the recovery of Ethereum, and Ethereum is also an excellent platform for the application of DeFi.

“Now it costs nearly $1 for an Ethereum transaction. The completion of a Compound loan requires multiple transactions, and the highest handling fee may be more than $10. “

Said Zhang Peng, a DeFi player, improving the performance of Ethereum platform has become a top priority. On August 4, the high-profile Ethereum 2.0 project ushered in the latest progress, and its test network, Medalla, has been launched. The official network of Ethereum 2.0 is expected to be launched in 2-3 months. In order to improve performance, Ethereum 2.0 has two major upgrades. One is to change the consensus mechanism to POS, and the other is to use sharding to improve concurrent performance. In contrast, the technology of POS is not complicated, but there is almost no precedent to follow for the sliced public chain platform, which is extremely difficult to develop. As for Ethereum, DeFi is a dangerous double-edged sword.

The core of DeFi is still the core of traditional financial business, namely mortgage lending. Due to the technical structure, currently, DeFi can only carry out digital currency mortgage lending, but not credit or fiat money lending. But obviously, people’s demand for digital currency lending is not that big. Therefore, projects such as Compound will launch new ways such as “liquidity mining” to encourage players to borrow on the platform. Stimulated by the mining mechanism, some players began to borrow and borrow assets repeatedly on Compound to obtain COMP tokens. These repeated borrowing and lending activities have increased the systemic risk of the entire DeFi ecosystem. Compared with traditional finance, DeFi is too idealistic and lacks rationality and logic of traditional finance.

 

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