During the past year, the advent of blockchain technology has accelerated throughout developing regions, including Southeast Asia, with Ethereum functioning as the preferred network for many financial institutions and various developers.
The growing popularity of Ethereum can be linked to the fact that it is used by thousands of developers who set up decentralised apps that power everything from the DeFi and Metaverse movements to the sale of non-fungible tokens (NFTs).
According to Joseph Lubin, the co-founder of the Ethereum project, many developing nations are gradually improving the financial and technological infrastructures of their respective countries using Ethereum.
For instance, Chile has utilised Ethereum’s proof-of-work blockchain to track energy data. According to the National Energy Commission, the country chose Ethereum because of its ability to “augment levels of security, integrity, traceability, and confidence in the information available to the public.”
Being one of the most popular chains to build on, traditional institutions also leverage Ethereum. For example, Union Bank, one of the largest banks in the Philippines, has partnered with Lubin’s ConsenSys to develop banking solutions run on Ethereum for the country’s rural sector. The government has also decided to offer Manila residents rewards in Ethereum tokens for cleaning up their polluted beaches.
Despite the rise in adoption of Ethereum across emerging markets, there are also growing concerns regarding high transaction costs caused by increased usage and demand. Why then is adoption still growing strong in emerging markets?
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Many factors influence these dynamics, which will be explored in the following sections.
Decentralised finance: An alternative for the underbanked
Ethereum was the major catalyst in introducing DeFi or “decentralised finance”, a protocol that aims to provide financial and banking services on the blockchain network that is also geared toward disrupting intermediaries like banks.
When compared to the traditional financial system, DeFi is a form of financing that specifically adds value to the rising miseries of the underbanked since anybody may join and connect to this novel system framework, even without KYC and without a bank account.
As of now three biggest DeFi lending protocols are Maker, Curve Finance, and Aave, with a total value of US$17.5 billion, US$15.2 billion, and US$11 billion, respectively, all of which are built on the Ethereum Network.
In many developing nations, the existing loopholes in the financial system prevent many individuals from opening their bank accounts, much alone using them for business.
Especially in regions like India, the Philippines, and more, lending and borrowing are challenges because most people under the poverty line struggle to provide proper documents and collateral.
For such places, almost anyone with access to an internet browser can start using DeFi protocols and begin lending and borrowing without signing anything.
By doubling down on the path to lower barriers to entry and easily accessible loan activities, the idea of DeFi gained popularity with TVL at 96 billion as of 14 Jan.
For example, imagine a DeFi loan built on top of a smart contract on the Ethereum blockchain. With this digital financial instrument, borrowers and lenders can put up their collateral, where a tamper-proof smart contract is responsible for distributing interest payments. The technology is securing the collateral in case of default.
DeFi also has other use cases built on Ethereum, like digital remittances. As predicted by the World Economic Forum, the adoption of digital remittances might drive the growth of the global economy.
This way, families may save money on remittance costs while still contributing to long-term development. Furthermore, DeFi provides an alternative to hefty transfer costs, which are currently estimated to be 7 per cent of each dollar sent home by migrant workers.
While it is too early to know if DeFi is the only answer to assisting the unbanked, they constitute a viable opportunity for individuals to investigate other financial possibilities.
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Growing adoption is driven by culture
Without any doubt, Ethereum-based blockchain innovation is delving into one of Asia’s most vibrant cultures, that of gaming and e-sports.
NFTs and play-to-earn games such as Axie Infinity have swept the APAC regions, especially growing economies like Southeast Asia, demonstrating the influence that decentralised applications based on Ethereum have on communities.
One of the major innovations in blockchain technology is the development of play-to-earn gaming, which allows users to earn money while playing. What previously was simply a source of leisure in communities is now becoming a source of income that enables gamers to play the games they love with purpose and deeper vested interest.
The growth of play to earn gaming can be attributed to the success of Axie Infinity in the Philippines since there has been a boom in the number of daily users for a slew of games built on the Ethereum network, including Alien Worlds and Gods Unchained.
Due to lower minimum wages in developing countries, more people are drawn to GameFi, speeding up the industry and developers who build on Ethereum.
The money usually generated from play-to-earn gaming can go near approximately US$50-US$100, which may not be as high for developed regions like the US. Still, in emerging economies with lower capital income, the amount earned through game playing can put at least a day’s meal on the table.
Another popular choice is the NFT fantasy soccer game Sorare, built on Ethereum, which allows players to manage their soccer teams via digital player NFT cards.
Play-to-earn and GameFi dApps are making a noticeable impact due to their attractive model incentivising passive income, especially in lower-income countries.
Limitations of Ethereum in emerging markets
Regardless of its growing popularity, scalability has been a major issue for the Ethereum platform. As more individuals embark on Ethereum, the network starts to encounter problems.
Ethereum uses a Proof of Work (PoW) model, allowing only 30 transactions per second (TPS) compared to the massive demand of 1.355 million TPS every day, causing network congestion and excessive transaction fees.
Nonetheless, early efforts to resolve the problem have resulted in unacceptable compromises regarding security matters or other factors such as the user experience.
For emerging economies, while there are many reasons to join the various blockchain trends like DeFi, NFTs, and GameFi, the high costs of entry have been a major hurdle.
For example, NFT minting fees on the Ethereum blockchain fluctuate according to the supply and demand for processing power, ranging from US$50 to US$100.
There has been an emergence of other networks like Solana, popular among developers who no longer want to deal with Ethereum’s volatile transaction fees, with Solana advertising itself as the cheap and more efficient alternative.
Also Read: NFT adoption is soaring in Southeast Asia. Here’s why
Ethereum’s scaling solutions
Scaling solutions are needed if Ethereum’s smart-contract-based blockchains are ever to grow to support finance and Web3 applications for billions of users. Thankfully, the cavalry is beginning to arrive, with many proposed solutions coming online recently.
Today, there is a vast community working towards solving the issues of high transaction costs on the Ethereum network.
Being around longest, the Ethereum community is strong, with billions of dollars of investment going into scaling solutions that will bundle up transactions off-chain, introducing a newly emerging ecosystem of Ethereum congestion alleviation. One of these solutions includes zk-rollup technology, a scaling technology that enables reduced transaction fees and improves user experience.
In general, there are hundreds of transactions on the main blockchain, but with ZK-Rollup, they are combined into a single transaction. Since fewer data has to be transferred over Ethereum’s primary blockchain, transactions may be completed more quickly and at a lower cost.
According to Ethereum founder Vitalik Buterin, “ZK-rollups would be Ethereum’s go-to scaling strategy for the near and mid-term future”. Buterin also published a roadmap called Endgame, in which ZK rollups have a key role to play.
ZK rollups are making a strong statement and could very much have the ability to become the key protagonists of the current development phase of Ethereum scaling solutions.
Many notable companies like Aztec, Polygon, ZK-Sync, and Polygon Hermez, to name a few, are working on scaling solutions for the Ethereum blockchain. In the following three to six months, these networks may begin to compete with each other. As they do, they will become even stronger and better, increasing the opportunity for developers and users.
Conclusion
With large unbanked populations, significant banking risks, and lower bank and credit-card penetration in aggregate, the deployment of cryptocurrency can be advantageous in developing markets. But while the idea of Ethereum and DeFi, on principle and by design, is meant to be universally accessible to all, high costs on the network have become the biggest technical problem facing the industry today.
One of the key solutions to Ethereum’s woes is Zk rollups designed to have superior speeds at lower costs and have the potential to play a prominent role in Ethereum scaling solutions.
The advent of technology like this will be especially important if the growth of Ethereum should continue in major emerging markets where high costs can be a major hurdle for entry.
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