2020 was a perfect year for Ethereum, for lack of a better word. It saw the explosion of DeFi and the foundation stone of Ethereum 2.0 was laid with Phase 0. Now that we have just entered the new year, let’s take a look at what the prospects for 2021 might be.
Decentralized Finance (DeFi)
Among the relevant phenomena, we definitely find DeFi in pole position. Given the steady development of DeFi in 2020, it is virtually certain that this movement will continue to make headlines in 2021. It is possible that 2021 will shake up the current ranking of DeFi projects, with the arrival of new projects, or the evolution of existing ones.
However, the DeFi craze in 2020 has also led to a large number of hacks and attacks of all kinds, exploiting vulnerabilities in the architecture of the projects. In this respect, for the year 2021, we can hope that smart contract developers and users will learn from past mistakes and implement best practices.
An important aspect concerns systematic audits of smart contracts, the regular absence of which was the main cause of many hacks in 2020. This is a necessary maturation step for Ethereum. If the community as a whole does not apply best practices, DeFi on Ethereum could see its reputation ruined.
Ethereum 2.0 Phase 1
It is impossible to talk about Ethereum without addressing the topic of Ethereum 2.0. In fact, phase 0 of Ethereum 2.0 has already made its debut on December 1st, 2020. This phase is the first of a multi-step process spanning several years. While phase 0 focused on creating the Beacon Chain, the backbone of Ethereum 2.0, phase 1 will introduce the so-called shards.
Shards have the unique feature of allowing the blockchain to be divided into a multitude of sub-networks, which are responsible for the independent execution of their data. Shards are an integral part of Ethereum’s scaling strategy.
According to announcements by the Ethereum Foundation, Phase 1 could see the light of day in 2021. Then again, Ethereum 2.0 is accustomed to delays, and it cannot be ruled out that these deadlines will not be met.
Emergence of second-layer solutions
While excellent for Ethereum in terms of adoption, 2020 did not solve the scalability limitations of the blockchain. The network found itself congested too many times, resulting in significant increases in transaction fees. These periods of paralysis for the network have had many negative effects and, besides annoying users, have also caused the loss of several million dollars. We can hope that 2021 will be the year of the emergence of second-layer (or L2) solutions.
Ethereum 2.0 is expected to solve scalability issues and give Ethereum’s performance a boost. But this upgrade will not be fully implemented until 2022, or even 2023. It is therefore essential to put solutions in place already now, while waiting for the full release of the new version of Ethereum.
In 2020, much progress was made in Ethereum’s second-layer solutions. Worth mentioning in particular is the work done by OMG Network, DiversiFi and Loopring. Many DeFi giants have already announced their desire to migrate their applications to the second layer, such as Uniswap, Aave or Synthetix.
With the rise of DeFi and the proliferation of opportunities that this blockchain offers, more and more traditional investors are jumping on Ethereum’s native asset, ether. As early as 2020, we could see well-known fund managers, such as Grayscale, offering Ethereum-based investment solutions. And the results are crystal clear. In the last quarter of 2020, the fund saw inflows of $204 million, ten times more than in 2019.
Similarly, the volume of options on Ethereum (the preferred financial product of institutional investors) also exploded in 2020. Ethereum is on the verge of becoming an asset commonly found in the portfolios of many asset managers.
Indeed, the year 2020 has allowed bitcoin to become popular among institutional investors, even among those who were firmly against it a few years ago. If bitcoin is now also being driven by the influx of so-called “smart money”, the second crypto to benefit from this phenomenon can only be ether.
Ethereum is not alone in the blockchain race to conquer the smart contract sector. Over the years, many competitors have emerged who have tried to dethrone Ethereum. Blockchains such as Polkadot, Cosmos or Avalanche will try hard to solve the problems Ethereum encountered before Ethereum 2.0 and grab part of its community.
It is therefore imperative for Ethereum to continue evolving even before the final release of Ethereum 2.0.