Ethereum Ecosystem: The Birth Of A New Financial System

Ethereum Overview

Ethereum was the first blockchain that put smart contracts into use. By enabling smart contracts, different applications with different features can be built on top of Ethereum, hence forming a whole new innovation ecosystem called DeFi.

Ethereum aims to be the world computer with EVM (Ethereum Virtual Machine). All participants in the Ethereum network (Ethereum nodes) agree on the state of this computer and execute smart contracts via it.

Ethereum Blockchain Statistics

• Transactions: 1,476.94M.
• Hash rate: 986,269 GH/s.
• Med gas price: 51 Gwei ($2.94).
• Number of Unique Addresses: 188,231,543.
• Number of daily active Ethereum Addresses: 467,529.
• Total ETH burned: 1,867,907.87 ETH ($6,786,187,307).
• Total number of nodes: 2,275.

Reference: All you need to know about Ethereum

Ethereum development & current situation

For a detailed history of Ethereum, you can check out the article below to learn about the basic information of Ethereum.

In this section, I will mention the development of Ethereum DeFi, specifically.

First of all, let’s talk about MakerDAO - one of the very first DeFi protocols on Ethereum. Back in 2014, the project was formed by Rune Christensen from the inspiration of another project BitShares – a blockchain created by Dan Larimer.

MakerDAO is a market maker that backs DAI - an algorithmic and decentralized stablecoin. Via MakerDAO, users can collateralize their assets (only ETH was available at first) and mint DAI. Up to this moment, DAI has become one of the largest decentralized stablecoins in DeFi.

There is no doubt that MakerDAO is one of the first projects to start the explosion of DeFi later on. Then, what are the other projects? Before talking about them, let’s take a look at the era when they were born - the ICO era.

In 2017, ICO (Initial Coin Offering) brought Ethereum a massive use case where instead of raising money using traditional methods, new projects began to offer their own native tokens in exchange for ETH.

It was at this time that many key DeFi protocols appeared, after raising funds via ICO. Some of which can be mentioned as Aave, Synthetix, REN, Kyber Network, 0x, Bancor,...

After the ICO era came the bear market. However, during this time, other innovative products got into play: Uniswap, Compound, Kyber, 0x,... which prepared for the explosion of DeFi summer in 2020. But what was the catalyst?

In May 2020, Compound with its COMP tokens launched an incentive called “Liquidity Mining Program”. Compound incentivized its users to participate in the platform by lending and borrowing assets. In return, they would receive COMP tokens as a reward.

This has helped Compound gain a massive number of users and, at the same time, created a model called liquidity mining that every other project started to apply to their products afterwards.

By using liquidity mining, Yearn Finance in July 2020 was able to launch its token, YFI, without any fundraising. Without any doubt, Yearn Finance quickly grew with its community as the base, turning its native token YFI from $6 to more than $30,000 in only less than 2 months.

Wrapping up the DeFi Summer in 2020 with uncountable DeFi projects emerging and growing rapidly, we have the DeFi Winter, whereas the prices of most DeFi tokens were down 70-80% from ATH.

At this time, many doubted the actual availability of DeFi - is it really innovative, or is it just a temporary get-rich-quick scheme? The answer became clear at the end of 2020 when Bitcoin broke its all-time high, and DeFi tokens recovered by more than 50%.

In summary, DeFi was an actual innovation, and it has created a real use case for Ethereum specifically and blockchain platforms in general. By being the first mover, Ethereum has the biggest developer community, as well as the largest user pool.

This explains why even though a wide range of new blockchain platforms have emerged recently and “stolen” a part of Ethereum’s users and TVL, most of the value in DeFi still accrues back to Ethereum after others getting saturated with no innovations (like Binance Smart Chain).

Ethereum Ecosystem Overview

As mentioned above, Ethereum was the one to ignite DeFi. As a result, there is no doubt that most (if not all) of the blue chips and innovations are on Ethereum. So, how does the Ethereum landscape look, actually?

AMM

First of all, let’s take a look at AMM. AMM (Automated Market Maker) is the key liquidity source of any DeFi ecosystem. For finance applications to operate, they need liquidity, and AMM provides them with such things.

The most prominent AMM on Ethereum, without a doubt, is Curve Finance. Curve Finance is an AMM made specifically for assets with the same price, such as stablecoins. Currently having $17.4B locked solely on Ethereum, Curve far exceeded other competitors in the same niche.

Behind Curve stands Uniswap. Uniswap was the first AMM to succeed on Ethereum, and in crypto in general. Even though Uniswap is having less TVL than Curve Finance, it has had a bigger Market Cap, and more Trading Volume as well as revenue. If we consider more metrics than TVL solely, it is arguable which one is the biggest AMM on Ethereum, Curve, or Uniswap.

Behind those two are numerous first-gen DeFi AMMs, which are SushiSwap, Balancer, Bancor, Kyber, etc... Each and every one of them has its own innovative features that made them a success, and most of the current available AMMs on the market have followed their paths and ideas.

In general, the AMM sector on Ethereum has become pretty clear: Most of the value has gathered to a few core names. With a long history of development and growth, it is arguable that any new project can surpass them at the moment.

Lending

In the lending niche, we have 3 notable names: MakerDAO, Aave, and Compound.

As mentioned above, MakerDAO with DAI was one of the very first DeFi protocols. With the first-mover advantage, MakerDAO now remains the biggest lending protocol on Ethereum and even in DeFi with $16.2 in TVL, far surpassing other competitors like Aave (Ethereum), Compound (Ethereum), or Anchor (Terra).

MakerDAO supports minting DAI by over-collateralizing assets with 150% value of the minted DAI. In this case, DAI will always be guaranteed to be backed by a larger value of assets, which ensures the price of DAI is pegged at $1.

At the moment, MakerDAO has a collateral ratio of 162.53%, meaning an LTV (Loan-To-Value) ratio of 61.7%. As a CDP (Collateralized Debt Position) protocol, MakerDAO has had a much higher LTV than other lending protocols, namely Aave or Compound, which usually have a 30-50% LTV to ensure their collaterals won’t be liquidated.

In the three of MakerDAO, Aave, Compound, Aave was the latest to be released. However, Aave succeeded in surpassing Compound - the pioneer of the liquidity mining program, thanks to its debut of a unique feature called Flash Loans, whereas users can borrow assets without collateralizing and repay within just 1 transaction.

Currently, Aave is having $8.1B in TVL on Ethereum, while Compound is having $6.5B. These 3 are now dominating this sector on Ethereum, and even though there are new lending markets appearing like Abracadabra, Iron Bank (from Yearn Finance),... it will take a great amount of effort and time to even equalize with these veterans.

DEX Aggregators

When liquidity exists (from AMMs), DEX Aggregators come into play to maneuver that liquidity efficiently.

The picture above demonstrates how 1inch, a DEX Aggregator, works. As you can see, as many AMMs exist, liquidity is getting divided between various protocols instead of only one. As a result, to find the best trade offer, users have to go through each and every AMM.

DEX Aggregators solve this problem by computing all possible trades via every AMM, hence providing the cheapest swap option. Although 1inch used to dominate this sector on Ethereum, many promising competitors have arisen, and taken 1inch’s number one spot.

The “cake” has now been mainly shared by Matcha, Metamask, Cowswap and Zapper, with Matcha having the highest market share. In terms of Trading Volume, the ranking is pretty similar.

This can be due to the fact that users are “hunting” for airdrops from these DEX Aggregators. It can be easily seen that these protocols which are having a high market share and trading volume, have not released their tokens, while other DEX Aggregators on Ethereum like 1inch, Paraswap,... have released and airdropped their tokens.

It is a fact that airdrops on Ethereum have been extremely generous, especially from those of DEX Aggregators like 1inch ($400) or Paraswap ($20,000). It is understandable that users want to receive such massive airdrops, which is why they are “grinding” trading volume in such protocols.

Yield Aggregators

While DEX Aggregators find the best route for trading assets, Yield Aggregators offer different strategies to find the best yields for farming/staking assets. This is one of the most important sectors in DeFi as it helps users gain a massive amount of profits, which is one of the main reasons why anyone would want to participate in DeFi.

The innovator, and pioneer of this space, is indeed Yearn Finance. Being one of the main catalysts for the DeFi Summer in 2020, Yearn Finance succeeded mainly for its model.

Yearn Finance optimizes yields by directing users’ assets to places with the best yields and compounding those yields with additional strategies. By using Yearn Finance, users can earn up to 2-3 times higher than the original APR.

As Yield Aggregators need to transfer users’ assets across various protocols to earn the best yields, they actually tend to create a DeFi ecosystem of their own in order to achieve this.

As a result, rather than having to keep users’ assets in other protocols (where they are not totally under control), which may impose trust issues for the original Yield Aggregator, the original protocol can actually create their own products (AMMs, Lending,...) and let users earn yields there. This is the ideal scenario.

Let’s take a look at the top Yield Aggregators on Ethereum in TVL. For example, Yearn Finance has developed its own lending protocol: Iron Bank (revamped product of Cream, also a product by Yearn Finance); or Alpha Finance, who is developing a total suite of DeFi products (leverage, derivatives,...) and the same goes with Rari Capital.

This is indeed the evolutionary development of Yield Aggregators, which is happening mostly on Ethereum when such protocols have reached a specific accomplishment with their products. This cannot be done by Yield Aggregators on other ecosystems which are still working on how to compound interest efficiently.

Stablecoin

Before going into deeper Layers on Ethereum, let’s take a look at the stablecoin sector - one of the most important factors in DeFi. Without stablecoin, liquidity will have difficulty in flowing across the crypto market and participating DeFi activities. $20B TVL locked in Curve Finance alone is enough to state how stablecoins are being the focus in DeFi.

Learn more: What is Stablecoin?

Ethereum has the most fertile field of stablecoin with numerous stablecoins of many kinds. First of all, Ethereum has the highest number of USDT and USDC supply - the two most popular fiat-backed stablecoins at the moment.

And then, it was on Ethereum that the top decentralized stablecoins were born: DAI (MakerDAO), MIM (Abracadabra), FEI (Fei Protocol),... just to name a few. While most crypto participants used to use only USDT and USDC, Ethereum proved that decentralized stablecoins can really work in DeFi.

Although decentralized stablecoins have their own risks of losing peg (which is a big matter in a volatile market like crypto), they enable farming/staking with much higher yields than ordinary USDT/USDC staking (30 - 40% APY compared to ~ 6 - 10%).

Ethereum is also the place where innovative stablecoin products have been developed. Some of which can be mentioned as FXS (Partial-reserve), AMPL (Algorithmic), RAI (non-USD pegged),...

Launchpad

Launchpad is a great way to attract more projects, investors, and builders to an ecosystem. By returning investors with high profits at low risks, Launchpad is usually the go-to place for any kind of investors, from beginners to veterans.

On Ethereum, DAO Maker and Polkastarter are the two most prominent projects in this niche. They have launched the most number of IDOs compared to other launchpads on every ecosystem, with 99 (Polkastarter) and 95 (DAO Maker) projects in total. At the same time, DAO Maker is currently having the highest average ROI (Return on investment) number with 413.9%.

By having such astonishing statistics, users wanting to participate in launchpads will surely pay attention to Ethereum at first glance. Even during a red market right now, if you join all IDOs on DAO Maker, you will still be able to receive a 413.9% profit.

This is why launchpads on Ethereum have been able to draw so much attention and users to the Ethereum ecosystem. Even though various launchpads on other ecosystems have been released, their quality cannot exceed that of these two.

DAO

DAO (Decentralized Autonomous Organization) has existed for a long time to serve the decentralization vision of blockchain. However, it used to appear only at the protocol level as every DeFi protocol must address its governance system to ensure that the network remains decentralized.

Nevertheless, at the end of 2021, more types of DAO have been implemented. Instead of being a small of a protocol, DAO now can be a separate product itself. Such DAOs have provided multiple businesses, namely Funding (Investment) DAOs, Service DAOs, Collector DAOs,...

A typical example of this new kind of DAO is BitDAO. BitDAO works as a decentralized treasury whereas BIT holders contribute, propose and vote on how to use its treasury. By growing its treasury in a decentralized way, the protocol can operate and grow without being owned by any specific human being.

Nevertheless, voting power within the protocol is defined through the possession of BIT tokens: The more BIT you have, the more voting power you own. This is the problem with most currently available DAOs: One can accumulate a large number of tokens to gain dominance over a DAO.

Although DAOs on Ethereum are still flawed at the moment, they have the biggest landscape. Ethereum has not only every kind of DAOs but also many of them in each kind, ranging from Protocol DAOs (MakerDAO, BadgerDAO, KeeperDAO,...) to Investment DAOs (BitDAO, The LAO,..), and a lot more.

NFT

In 2021, NFT (Non-fungible Token) arose with numerous of them being sold for millions of dollars, and it all started on Ethereum with NFT Collections like CryptoPunks, Bored Ape Yatch Club,...

As the pioneer of the NFT space, Ethereum gathers most of NFT activities. Compared to other blockchain platforms, Ethereum far exceeded others in NFT Trading Volume, even to NFT-specialized blockchains like Flow.

If so, where do most of the NFT trading activities happen on Ethereum? At the moment, we have 2 most famous names: OpenSea and LooksRare.

To give you the context, OpenSea used to be the biggest NFT Marketplace on Ethereum if you look at the statistics back in August 2021. It remained dominant in this niche, until LooksRare came in, with an airdrop of 12% total supply to OpenSea users.

This vampire attack, along with LooksRare being a community-driven protocol, drags users and trading volume from OpenSea directly to LooksRare. As users are incentivized to trade NFTs on Looksrare in exchange for valuable rewards, Looksrare now exceeds OpenSea in daily trading volume and will possibly take down OpenSea if it can sustain the rewards and incentives.

Even though the competition between the two seems tough, they still far surpass other competitors like Magic Eden or Solanart (Solana). As stated above, this is understandable when the most popular and expensive NFT collections are on Ethereum.

Nevertheless, most of the traded NFTs on Ethereum marketplaces are solely collectibles rather than interactive ones, which means that these NFTs have no use case. To some extent, this limits the potential growth of the current NFTs.

This leaves room for the NFT sector on Ethereum to grow even more drastically. Besides GameFi which we will talk about next, NFTs on Ethereum need to gain more use cases and real interactions.

GameFi

Emerged as one use case of NFT, GameFi (Game + Finance) is a relatively new market that has tremendously exploded recently. Promising as it is, it is reasonable that this market is even larger than arts and collectibles, even though it was born later.

It all started with CryptoKitties in 2017 - the first on-chain gaming application. CryptoKitties is a casual game that allows players to purchase, breed, and trade virtual cats at different rarity levels and prices.

It didn’t take long for CryptoKitties to attract crypto users’ attention. Shortly after the launch of the product, the game caused a massive increase in transaction volume on Ethereum, and at time accounted for about 25% of the total network traffic on Ethereum. This made Ethereum congested and highly raised the gas fees of the network, which can explain why the project’s success was not really significant and could not last long.

However, it was the catalyst for the explosion of GameFi in 2021, beginning with Axie Infinity. Axie Infinity, with a smart tokenomics and gameplay, started to attract myriads of both native and non-crypto players with the new term P2E (Play to Earn). Users participated in the game, and made profits simply by playing it.

Even though GameFi became popular more than ever, there were flaws in both gameplay and tokenomics, which is when innovations are needed. On Ethereum, we can witness the development of GameFi in the clearest way.

The majority of current on-chain games were born knowing their multiple weaknesses in both gameplay and tokenomics since they can still make tons of profits. The GameFi landscape on Ethereum hits different: There are big games that are trying to innovate the space.

This can be mentioned as Decentraland, Sandbox,... or games in development like Illuvium, Ember Sword,... these games focus mainly on 2 most important factors of a successful on-chain game, which are gameplay and tokenomics.

As GameFi is getting saturated and unsustainable, innovations are needed, and most of them are currently on Ethereum. If GameFi is to continue growing and develop, such AAA games on Ethereum will probably be the first to explode.

Derivatives

The Ethereum ecosystem has the most liquid market in crypto, which enables them to develop products at higher layers - Derivatives and Options. In this section, we will talk about Derivatives on Ethereum.

A derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate. In a derivative market, users trade contracts rather than assets. Therefore, the derivative market and the stock market run independently of each other, even though they are closely related.

On Ethereum, Perpetual is currently the most developed derivative sector. While there are a few protocols up and running in this sector, dYdX is dominating it totally.

DeFi 2.0

Last but not least, DeFi 2.0 is another notable niche on Ethereum. Ethereum was the first to start the DeFi 1.0 wave with MakerDAO, Uniswap, Compound, Yearn Finance,... and it continues to be the first to innovate DeFi 1.0 into DeFi 2.0.

In fact, the majority of DeFi 2.0 innovations have originated from Ethereum, whereas most DeFi 2.0 protocols on other blockchain platforms are simply forks.

To summarize, DeFi 2.0 features focus mostly on capital efficiency - something that DeFi 1.0 lacked as liquidity cannot be fully optimized. Such features can be mentioned as Uniswap V3’s Concentrated Liquidity, Olympus DAO’s bonding, Tokemak’s liquidity directing,... so on and so forth.

Learn more: What is DeFi 2.0? What to prepare for this mega trend?

Convex Finance is a perfect example of how much capital efficiency matters in DeFi. By building on top of Curve Finance and allowing boosted yields (with just the same amount of capital), Convex Finance has successfully taken over Curve.

This so-called Curve Wars has changed not only the two protocols themselves but also the whole DeFi in general. Ever since this event, similar wars have taken place on other blockchain platforms as well.

It can be clearly seen that Ethereum is the pioneer of the DeFi space. There is no better place than Ethereum to anticipate such innovations, indicating that DeFi 2.0 on Ethereum is unique. We can expect even more tremendous growth of this niche on Ethereum.

Predictions about the Ethereum Ecosystem

If you have read this whole article, I hope that you have received deep insights on Ethereum in multiple aspects. Based on the analysis, I have a number of predictions about the Ethereum Ecosystem:

• Ethereum will continue to stay and grow as a DeFi ecosystem. Even though more and more blockchain platforms have emerged with their own DeFi ecosystem and cutting technologies, it is obvious that most DeFi innovations happen on Ethereum. It is hard to believe that DeFi on Ethereum can be alternated elsewhere.
• DeFi experience on Ethereum will be improved significantly. Although Ethereum has a wide range of applications, its high gas fees and slow transaction speed have made the network almost unusable, especially for retail investors. For Ethereum to continue growing, it needs to modify its technical flaws by implementing Layer-2s or Ethereum 2.0.
• More (most) innovations will take place on Ethereum. This has been the case, and it will continue to be. Ethereum has the most liquid markets and the highest security, which allow both investors and builders to be safely involved. With the biggest developer community, Ethereum will continue to produce more and more innovative protocols, which will eventually draw more users and cash flow to the ecosystem.
• However, Ethereum needs to be quick in action so that it can maintain its market share. It can be seen that blue tips like SushiSwap or Aave no longer stay still on Ethereum, but they have gone multichain to other ecosystems. If Ethereum cannot fix its issues soon enough, DeFi users on Ethereum can start migrating to other ecosystems in order to use the same applications but faster and cheaper.

Investment opportunities with the Ethereum Ecosystem

Invest in Ethereum tokens

As the Ethereum ecosystem has grown tremendously, investing in Ethereum tokens will no longer return high profits, but it will be one of the safest investments you can make in this space. Big names on Ethereum have become reliable in not only security but also in the way that they are having real use cases and revenues.

Some possible options to invest in Ethereum are:

• Native token: ETH.
• AMM: Uniswap (UNI), SushiSwap (SUSHI), Curve Finance (CRV),...
• Lending: MakerDAO (MKR), Aave (AAVE), Compound (COMP),...
• Yield Aggregators: Yearn Finance (YFI), Alpha Finance (ALPHA), Rari Capital (RGT),...
• GameFi: Axie Infinity (AXS), Illuvium (ILV), Gods Unchained (GODS),...
• DeFi 2.0: Abracadabra (SPELL), Convex Finance (CVX), Popsicle Finance (ICE),...
• …

Disclaimer: Research carefully before investing. This is Not Financial Advice.

Skin in the game

Ethereum provides users with tons of high yet safe yields. You can take advantage of this by directly using and participating in DeFi on Ethereum. On Ethereum you can:

• Farm by using AMMs like Uniswap, Curve, Balancer,...
• Farm by using Yield Aggregators like Yearn Finance, Popsicle Finance,...
• Supply assets by using Lending protocols like Aave, Compound, Iron Bank,...
• Supply liquidity by using DeFi 2.0 protocols like Abracadabra, Tokemak, Olympus DAO,...

Participate in GameFi

Even though we need to wait for the development and modification of GameFi, it does allow you to Play to Earn. In a bull market, playing P2E games can return you much more profits than an ordinary investment.

Axie Infinity is a great instance. During the bull market last year, the game made a massive amount of revenue and was able to maintain it for a pretty long time. Anyone playing the game during this time would earn much more than simply holding the AXS token.

Seek Airdrops/Retroactive opportunities

$1,600 UNI (Uniswap), $2,400 1INCH (1inch), $10,000 DYDX (dYdX), $20,000 PSP (Paraswap),... that is how much you can earn through airdrops. Especially on Ethereum where there are numerous innovative products, you can earn incredibly valuable tokens by paying only transaction fees.

To get these opportunities, all you need to do is to find potential projects that have not released their tokens. Afterwards, you should spend a small amount of gas fee to try using the products, and sometimes try leaving a few feedbacks too.

If the projects you use are really promising, their tokens will be valuable. Therefore, you can make massive profits if they were to airdrop you some tokens.

You can use our potential airdrop list as a reference: List of potential Retroactive Airdrop projects

Involve in the Curve Wars

If you are early in the Curve Wars, what could you have possibly received?

• 200 - 300% profit with CRV (Curve Finance).
• 2,000%+ profit with CVX (Convex Finance).
• 1,200%+ profit with FXS (Frax).

From this Curve Wars, it comes to our mind that rather than a whole blockchain ecosystem, now we have witnessed the appearance of protocol ecosystems, like that of Curve Finance. Now that we know how beneficial a war is for us, we can seek other possible wars and invest in their tokens early.

Another way to get involved in the Curve Wars is to accumulate CRV. As more protocols want to accumulate as much CRV as possible to gain governance rights, the supply is becoming scarcer than ever. If you can afford to buy a large number of CRV tokens, you can speculate this way.