Money Reimagined: How Ethereum 2.0s Lock Up Will Drive DeFi Innovation

Saturday 17 October 2020, 1:37 AM AEST - 1 week ago

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The Summer of DeFi might be over, but a looming event will give DeFi engineers a great incentive to crank up their lego innovation model and build more decentralized finance products: the Ethereum 2.0 upgrade. (See CoinDesks explainer here.)

With thousands of Ethereum 2.0 validators expected to stash more than 500,000 ether in a restrictive multi-year lockup, there will be significant demand for a creative solution that unlocks the value of those funds without undermining the upgrade mission. DeFi innovators will be happy to oblige.

Its a process of demand and supply thats similar to how Wall Streets engineers respond with new financial instruments when rules imposed on traditional markets put constraints on investors. It matters not that the behavior-constraining rules are imposed by a government regulator or, in the Ethereum 2.0 case, by a protocol. Constraints create an incentive for financial creativity.

Also, as with many Wall Street inventions, this one will create an interesting byproduct. As markets arise in the new instruments, their price signals will indicate how people think this massive Ethereum protocol change is performing.

As discussed during CoinDesks invest: ethereum economy conference this past Wednesday, phase 0 of Ethereums migration to a proof-of-stake blockchain involves having 16,384 validators each commit to place 32 ETH in a soon-to-be-announced deposit contract. Those tokens will then be staked to secure and govern a new parallel Ethereum blockchain known as Beacon, which will function as a live environment for testing the proof-of-stake system to which all of Ethereum will eventually migrate.

The key point is that the locked ETH cannot be sent back to the original Ethereum blockchain and cannot be accessed until the two systems are merged and the duplicate ETH on the legacy chain destroyed.

Read full story on CoinDesk

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