In 2021, Ethereum is positioned to become a high point of yield.
In the traditional financial world, yields have dried up. The yield of US Treasuries has never been lowered before. The yield on 10-year Treasury bonds is now less than 0.9%. At around 2.1%-2.3%, AAA corporate bonds are not much better.
Knowing this, and at the same time hearing the Fed’s strong intention to allow inflation to exceed 2%, it is no wonder investors want to abandon low-yield assets and invest in more speculative investments. People are allocating capital in increasingly distorted ways. Otherwise, how do they get rewarded?
On Ethereum, revenue incentives are inseparable. Earnings incentives are the default way for decentralized finance (DeFi) to attract capital.
In the simplest terms, lending applications like Compound and Aave provide 4.6% and 6.2% interest on USDC deposits, respectively. More sophisticated rate of return aggregators, such as Year, generate 7.8% in their basic rate of return strategy, while in more aggressive strategies, the rate of return is as high as 16%.
Uniswap, which has an average weekly transaction volume of more than $1 billion, is awarding its 0.3% transaction fee to LP. Those LPs that provide Uniswap with ETH~USDC trading pair liquidity have obtained an amazing annual return of 35% on a 50-50 ratio of ETH~USD mixed positions in the past 30 days.
No negative interest rate
The structure of the DeFi economy is fundamentally different from the structure of the traditional economy. DeFi requires over-collateralization. No one can borrow more than their deposits. So far, this simple safety net is the basis for the existence of DeFi.
This is why Ethereum and DeFi will become synonymous with “yield” in 2021. In DeFi, interest rates cannot be negative. In DeFi, there is no partial reserve borrowing because it breaks the trust model that makes these applications work. In order to eliminate trust and centralization, you must over-collateralize.
Part of the reserve loan is cancelled in the DeFi economy, which is why the rate of return can always be found in DeFi. Negative rate of return is impossible in Compound or Aave, and mathematically not allowed. Because the premise of these agreements is to guarantee 100% repayment ability, so in the case of zero borrowing demand, then the rate of return is also zero, but not a negative number.
ETH: Internet bonds
The launch of the Ethereum 2.0 beacon chain opened the long-awaited function: pledge ETH and get ETH currency standard returns.
In addition to the attribute of value storage, the introduction of ETH pledge turns ETH into a productive asset. Other agreements also have similar pledge income, but the unique charm of ETH’s pledge income lies in the support of its underlying economic model.
When the scale of the Ethereum economy increases, the pledge income will naturally reflect its growth. For traditional bond investors, the relationship between the Ethereum economy and ETH should be familiar. A healthy economic ecology has high value, and its native bonds will naturally have a certain premium.
Ethereum will not default on the proceeds of ETH bond holders. The newly issued ETH to ETH bond holders serves as their compensation for ensuring network security. Ethereum does not need to levy taxes or generate revenue to compensate those whose rate of return is priced in ETH. The removal of this requirement is a positive for the valuation of ETH bonds because there is no risk of default. Ethereum has no debt to pay, and it is designed to be solvent.
Bitcoin has recently penetrated into the thinking of the traditional investor class, showing that people are interested in a currency asset that is subject to agreement. In addition, DeFi has exploded under the support of extremely high yields that can not be found anywhere else in the financial world, indicating investors’ desire for reliable yields.
The combination of ETH’s dividends to bondholders and the limited maximum issuance creates a unique and compelling position for ETH as a macro asset in 2021 and beyond.
The last bastion of yield
In 2021, Ethereum is positioned to become a high point of yield. While Bitcoin blasted the door to the investability of digital assets, it also exposed a world with attractive returns behind Ethereum.
The diversity of asset types and different yield generation strategies are likely to attract the attention of all types of yield pursuers. Whether investors are seeking stable and low-risk USD-denominated returns or active high-yield speculative tools, Ethereum provides investors with a series of financial products to choose from.
In addition to dollar-denominated returns, the positioning of ETH as an Internet bond is to provide an upside risk tool for the growth of the Ethereum economy, while generating ETH-denominated yields for those who are prepared to accept its volatility.
