Decentralized finance (DeFi) protocols have attracted billions of dollars worth of crypto capital this year alone, with investors oft-punting on projects that promise sky-high yields and other avenues that promise returns.
Read our latest deep dive into the biggest trends in decentralized finance. https://t.co/9HYSZEg2Hh
— ConsenSys (@Consensys) October 27, 2020
However, the enticing profits could impede the allure of ETH 2.0, Ethereum development lab ConsenSys said in its DeFi report this week. ETH 2.0 returns are projected to be in the 5%-9% range, popular DeFi projects boast anything from 5% to over 1,000% (temporary) returns. This could act as a deterrent for newer investors, the firm indicated.
“If various DeFi protocols offer higher returns than ETH 2.0 staking, ETH holders may elect to direct their ETH elsewhere, thus leaving ETH 2.0 without the threshold of staked ETH required to render it sufficiently secure and decentralized,” the report said.
For the uninitiated, the ETH 2.0 upgrade sees Ethereum shift from its current proof of work design to a proof of stake consensus mechanism, allowing traders to lock up their ETH (for an as-yet-unspecified time) to generate variable yearly returns.
ETH 2.0 has competition even before launch
ConsenSys said Ethereum’s upcoming Beacon chain — which is expected to be launched in December — may see limited interest. The new chain will not help scale the network but holders of 32 ETH and above to stake their tokens on the network.
The firm said existing and upcoming DeFi protocols would also serve as a competition for liquidity, as investors’ funds remain limited but higher profits are sought.
“It is not unreasonable to worry that ETH holders would (at best) wait to see how early staking returns compare to DeFi returns, or (at worst) decide altogether not to ‘risk’ locking up ETH until Phase 1.5 (which is likely at least a year away).”
However, ConsenSys said DeFi projects could offer/issue tokens that represent the value of an investor’s staked ETH. This could, in turn, be used as collateral on other protocols to burrow actual ETH which can then be staked on the Beacon chain.
The report displays a massive shift in interest from ETH 2.0 to other DeFi protocols in the past few months, buoyed by higher returns. As CryptoSlate reported earlier this year, wallets holding the 32 ETH required for staking surged to an all-time high, with over 65% of people, as part of a survey, expressing their interest in staking on the network.
Only time will, however, tell if protocols build on Ethereum can end up stealing the spotlight or not.