Even in 2022, more than 13 years after Bitcoin first launched in January 2009, cryptocurrencies are still mostly characterized by speculation, with market participants trying to time price swings in hopes of making a quick profit. But for real followers and supporters of the asset class, the belief is that cryptocurrencies and blockchain technology can fundamentally disrupt certain industries.
One of the most promising use cases for cryptocurrencies relates to its potential to upend traditional financial services, an industry plagued by excessive risk-taking, misaligned incentives, and fee-extracting middlemen. In that same vein, three top cryptos to look at are Ethereum (ETH -1.94%), Solana (SOL -1.53%), and Aave (AAVE -0.58%).
RJ Fulton (Ethereum): Lending platforms like Aave, Maker, Compound, and Curve have become viable options for those in need of traditional financial products like borrowing or lending, but prefer to take advantage of the benefits crypto offers such as anonymity, security, and decentralization. These protocols have minor differences, but they all have the same goal — to provide a blockchain-based alternative to traditional finance, better known as decentralized finance (DeFi). Another important characteristic they have in common is that they are all built on the Ethereum blockchain.
Ethereum’s rise to the second most valuable cryptocurrency is primarily due to the fact that it was the first blockchain to introduce programmable smart contracts. With smart contracts, developers can then build things like stablecoins, decentralized exchanges, and more specifically, lending protocols.
It could help to think of Ethereum as the underlying software that these DeFi applications are built upon. Smart contracts are used to automate nearly every task that would usually have to be handled by a person at some traditional financial institution.
Because smart contracts can be customized and programmed to perform particular tasks, they can be built to do things like ensure there is always a sufficient balance of funds to maintain liquidity, pay users when necessary, or even set conditions for things like interest rates and loan durations.
Since Ethereum was created, the number of smart-contract based blockchains has increased substantially. New smart-contract enabled blockchains like Solana, Cardano, and Avalanche are all jockeying for position in the DeFi economy. Despite valid efforts, these competitors have been unable to dethrone Ethereum as the blockchain of choice for DeFi.
The stranglehold Ethereum has on DeFi is no small matter. We can look at a statistic called total value locked (TVL) to compare the collective value of a blockchain’s DeFi ecosystem. If needing to equate to traditional financial terms, think of it like the market cap of a company. Out of the $68 billion across all of DeFi, nearly $39 billion is on Ethereum’s blockchain. Of that $39 billion, lending protocols Aave, Maker, Compound, and Curve make up a combined amount of just under $23 billion.
Simply put, without Ethereum, there is no DeFi. For this reason, investors looking to find the cryptocurrency that could upend current traditional financial institutions the most don’t need to overcomplicate their research. Investors should look no further than the cryptocurrency that is responsible for enabling the creation of DeFi in the first place.
Neil Patel (Solana): Solana operates a proof-of-stake consensus mechanism, meaning that token owners can lock up their holdings, earn yield, and help to validate transactions on the network. However, Solana also incorporates something called proof-of-history, which allows computers to agree on time without having to communicate about it with each other, freeing up block space and speeding up transaction throughput. This innovation is why Solana has the capacity to process 50,000 transactions per second, far more than Ethereum’s 13.
Naturally, the incredible theoretical speed of Solana’s network makes it a possible threat to a very important industry not only in the financial services sector, but in the overall economy as well, and that is the payments space. Companies like Visa, Mastercard, PayPal, and Block, with a combined market capitalization of $960 billion as of this writing, immediately come to mind as players dominating payments. But Solana’s new product introduction should keep these large incumbents on their toes.
In February, Solana Labs, the organization that spearheads the blockchain’s advancement and development, launched Solana Pay. Solana Pay essentially allows for a direct transaction connection between merchant and consumer, using SOL or a stablecoin like USD Coin, with a QR code and no middlemen in between. It not only creates almost zero-fee transactions, something low-margin retailers would really appreciate, but also instant settlement and the adoption of feature-rich loyalty programs. To the latter point, because transactions occur on the blockchain, Solana Pay merchants could incorporate non-fungible tokens into the sale of goods, which will let them drive deeper engagement with and excitement from consumers.
Less than two months after launch, Solana Pay’s adoption totaled more than 600 merchants. Investors should definitely keep an eye on progress going forward.
Michael Byrne (Aave): While the likes of Solana and Ethereum are well positioned to disrupt peer-to-peer payments and a host of other industries, Aave, a $1.5 billion cryptocurrency built on Ethereum, is focused specifically on disrupting the lending industry. Aave is a decentralized lending protocol that enables users to borrow and lend crypto without the need for a central intermediary. Aave users can lend or borrow major cryptocurrencies such as Ethereum or top stablecoins like Tether and USD Coin.
Rather than needing to find a counterparty to match up with for a loan, Aave makes this process easy by creating pools of capital (called liquidity pools) that users can deposit into or withdraw from. Aave users who lend their crypto to the platform earn a yield on it, while borrowers put up collateral and pay interest for the assets they are borrowing. A key advantage for depositors is that they can earn passive income on their assets that is well above that of putting money into a traditional savings account or certificates of deposit, while the ability to get instant liquidity without going through a lot of red tape and paperwork is appealing to borrowers.
Furthermore, someone who owns a lot of Ethereum, for example, and needs access to capital for an unexpected expense but doesn’t want to sell their Ethereum, can put it up as collateral and borrow against it without having to close their position. Aave was initially limited to Ethereum and ERC-20 tokens, but it now has marketplaces for other prominent cryptos like Avalanche and Fantom. There is currently $12 billion of capital locked into these liquidity pools on Aave, making it a robust marketplace.
What’s perhaps most interesting is that users can even lend or borrow tokenized versions of real-world assets such as real estate, emerging market consumer loans, and even cargo and freight forwarding invoices. We are still a long way off from Aave actually usurping traditional banks, but it certainly has the building blocks in place to one day become a viable competitor.