One of blockchain’s first appearances in finance conversations was when Bitcoin was being touted as a hedge against inflation due to its capped supply. Considering that 13% of Americans had traded cryptocurrency by July 2021, blockchain was evidently making its way into the finance world. Even public companies like Tesla and MicroStrategy bought some crypto.
However, the dream of using it as a widespread medium of exchange had slightly subsided since it was quite tricky to scale transactions on the blockchain and make it an efficient payments platform.
So developers continued working on other layer-one blockchains like Ethereum, partly to address such challenges. Ethereum would offer a variety of transaction capabilities through decentralized applications (dApps), an effort that started as far back as 2015.
The intersection between dApps and Finance
The idea behind dApps was to enable two parties to transact without an intermediary if the transaction requirements are met. This status would be verified by a smart contract, which automatically executes the code for completing the transaction once everything is in order.
“Multiple parties that wouldn’t fully trust each other, can use a blockchain to leave an immutable trace of an item’s journey”
Shane Deconinck, a blockchain researcher at Howest University of Applied Sciences.
Therefore, these applications simplify post-transaction auditing.
Since the advent of decentralized applications, numerous companies have entered the blockchain space to innovate and cover as many use cases as possible. dApps can eliminate middlemen, a quality that has popularized them in finance, where third parties are prevalent in several forms, such as banks, foreign exchange bureaus, stock brokers and more.
This trend has birthed a sector we now know as Decentralized Finance (DeFi).
The major applications in this sector include:
- Borrowing and lending platforms, like Aave and Compound
- Token exchange platforms like Uniswap
- Derivatives trading platforms like Synthetix
However, as application usage increases, the blockchain becomes more congested, and transactions become more expensive. Pursuing solutions to this problem has led to fundamental changes in the blockchain’s operation that come with lucrative opportunities for investors.
These changes encapsulated in the ongoing Ethereum 2.0
upgrade include:
Transition to Proof-of-Stake
Proof-of-Stake is a consensus mechanism where instead of running miners to perform complex calculations and create blocks with transactions, you stake units of the blockchain’s native cryptocurrency (Ether in this case) to validate transactions. This appeals to investors because:
- Staking comes with rewards from the network in the form of Ether.
- Proof-of-Stake minimizes the hardware costs involved in transaction validation and therefore is more accessible than Proof-of-Work mining.
- Proof-of-Stake is more environment-friendly, which appeals to investors looking for cleaner ventures.
- Investors can also run businesses by staking on behalf of larger groups of people whose individual crypto holdings are below the minimum of 32 ETH required to be a validator.
Sharding
This technique involves splitting a blockchain’s information into several parts. As a result, each connected node doesn’t have to store and process all the data generated during each real-time user transaction. Consequently, workloads are shared, and validation happens faster.
Sharding benefits investors because:
- Sharding means you don’t have to handle a copy of the entire blockchain’s data, but only the data relevant to your shard. Therefore, validation becomes more accessible as investors of various sizes can participate.
- Every application they create can support more customers since the underlying blockchain will be able to process as many as 100,000 transactions per second.
Reduced transaction costs
Periods of heightened activity drive up gas fees for transactions, and they often reach hundreds of dollars. Therefore, investors moving small amounts of crypto don’t find the service feasible, and the same goes for retail-level users.
EIP-1559 has made fees more predictable and introduced a tipping option, and Ethereum 2.0 will carry on by massively reducing transaction fees. Subsequently, investors can build applications without worrying about them becoming too expensive to use during peak times.
As you can see, blockchain techniques like sharding will further democratize data commercialization in the future.
“With this new WEB3 system, we are moving towards an Internet where data will be the property of individuals and companies, and no longer of a few companies in the world, which will upset the all-Internet economy.”
Sven Van de Perre, the creative director at Tropos AR