Cryptocurrencies had a great year in 2021. In this period, we have seen the market go from being classified as a billion-dollar economy into a trillion-dollar economy. Aside from that, cryptocurrencies are gaining visibility in the mainstream world with, for example, El Salvador's adoption of Bitcoin as the official digital currency. As a result, investors are looking for the "new Bitcoin" on the market, hoping to find a great alternative in so-called altcoins. Unfortunately, many traders value an altcoin exclusively…
Major corporations globally use smart contracts running on the Ethereum blockchain. That implies that the second largest cryptocurrency is performing as intended. However, the blockchain is experiencing some challenges requiring urgent redress. The Ethereum blockchain is experiencing an imbalance regarding its decentralization, security, and scalability. Vitalik Buterin calls this “trilemma of blockchain.” In this situation, the attains a maximum of two out of the three features. All blockchains struggle to achieve all of the three.
The gist of the matter is the possibility of increased lending impacting staking. This thinking has been prevalent owing to the inverse relationship between lending and Ethereum price.
A fall in Ethereum price increases the volume of Ethereum locked in Defi. The opposite is true too. This situation leads to growing concerns regarding centralization attacks if lending overtakes staking.
One Twitter user stated that competition between Defi services and the POS protocol would increase net vulnerability, attacks and centralization.
Another user in a different tweet averred that considering Ethereum’s deflationary model, reducing the PoS’ block reward with time will have far-reaching effects on the equilibrium between assets lent and staked. The effects will skew towards the assets lent.
Vitalik Buterin Says It is Erroneous Thinking
Vitalik Buterin, however, discounted this. He tweeted that it was erroneous to believe that different currencies would have the same lending rates. Mr Buterin said that the thinking is flawed as fiat assets bear interest, but cryptocurrency isn’t. Consequently, fiat’s interest rates are higher.
Buterin insists that Ethereum’s lending demand is yet to grow. Additionally, it has a “self-correcting negative feedback mechanism” to curb abnormally staked Ethereum.