Cryptocurrency price surge
Professor Jason Potts (0401 651 142 or Jason.potts@rmit.edu.au)
Topics: bitcoin, blockchain, digital currencies, innovation, economics
“Blockchain is the third generation of the internet. It's a technology that enables digital scarcity, which means the ability to create money, contracts, property, identity and other economic fundamentals natively on the internet.
“Cryptocurrency prices have surged over the past month or so. Bitcoin (BTC) is trading at almost A$16,000, up from about A$7000 in March 2020 (but about the same as this time last year). ETH, the coin of the Ethereum blockchain, is over A$500, up from about A$200 in March, and up about 30% since mid-July.
“What's behind this? The global economic collapse (gold prices are also up) is surely driving BTC, a store of value against the massive growth in public spending and debt due to COVID-19. But it is decentralised finance (DeFI) that's driving Ethereum prices up.
“DeFi is the latest major use case of blockchain technology. DeFi is peer-to-peer finance in a decentralised framework (i.e. built upon a blockchain) that allows users to circumvent traditional financial institutions. In essence, it is a series of projects and protocols that are rebuilding financial markets for tokenised assets (decentralised exchanges, stablecoins, lending, futures markets, liquidity providers) on blockchain. Much of this activity is happening on the Ethereum blockchain, which is driving up the price of ETH.
“This is very new. Much of the DeFi space only launched this year. It's giving rise to what is called 'yield farming' - which enables people to put their existing cryptoassets to work in the financial system. (Previously, the only way you could benefit from owning a cryptocurrency as an investment was if the price went up. Now with DeFi you can earn interest or engage in arbitrage trade to provide liquidity. Just like in the real, or old, financial system.
“However, this is a very new and risky endeavour. It's completely unregulated. There are serious concerns about the security of the code. Some are probably scams or Ponzi schemes. And at the moment it is for advanced users only - you need a strong background in both finance and crypto to even understand what is going on.
“Yet this is also probably the future. The early financial markets that emerged hundreds of years ago were also pretty wild and full of crazy innovation, but they laid the foundation for modern financial services. Interest in DeFi - which is the beginnings of a new global digital financial system - is driving this current cryptocurrency price surge.”
Professor Jason Potts is the Director of the Blockchain Innovation Hub at RMIT University and his research focuses on the economics of innovation and new technologies.
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