Ethereum Price Hits 2020-High $325, Thanks To DeFi Market Expansion

Ethereum rallied to $325 after two months of consolidation as excitement over decentralized finance continues to affect the blockchain where majority of DeFi smart contracts are built.

Ethereum ended its $240 sideways trend with a massive breakout on July 22. The world’s second-largest cryptocurrency only printed green candles soon after. It represented a 31% increase since the breakout, higher than Bitcoin’s 20% increase in the same time frame. When Bitcoin broke $10,000 on Sunday, July 26, Ethereum took a minor backseat with a modest 1% gain, only to continue its uptrend with a 5% increase.

While the upcoming testnet of ETH 2.0 is big news in itself, Ethereum had actually benefited from the continued surge in decentralized finance. A new approach to the financial system, DeFi uses the Ethereum blockchain to create a peer-to-peer financial network. This effectively puts the control away from central financial authority and middlemen.

DeFi protocols have $3.75 billion in total value locked, majority of which are in Ethereum. The popularity of DeFi protocols led to an increase in their number of users, which all contributed to the total lock-in value. One DeFi token, Yearn.Finance (YFI) increased in value from $31 on July 18 to $4,661.97 seven days later, a 500% surge.

If there is one negative effect of DeFi on Ethereum, it’s the rising gas fees. Activities in Ethereum, including the execution of smart contracts, need gas. The gas fees increased corresponding to the rising demand because users had no choice but to pay the higher gas fee or else the transactions will not be executed.

Ethereum creator Vitalik Buterin was concerned with the rising transaction cost. He said this would make the network less secure because greedy miners would abuse the "system" and take advantage of such fees. He proposed improvements, wherein base fees will be burned and miners will only receive tips on the transactions they prioritize.

Still, TradeBlock researcher John Todaro said rising gas fees are contributing to Ethereum’s price appreciation. “There is no doubt the rapid growth in demand for DeFi will push ETH price higher longer term,” he tweeted.