Ethereum, The World Computer
I started buying and selling Ether, the Ethereum networks’ native cryptocurrency, around the same time I got into Bitcoin in late 2017. At the time I couldn’t comprehend the simple “tokenomics” behind Bitcoin, and I had literally no idea what was going on with Ethereum. Bitcoin is simple, the value behind it is based solely on the properties of supply and demand, there is a finite number of bitcoins available that will never change, that is what gives it value. It took me months to figure out what drove the value behind Eth and what the real-world applications might be, but that all changed when I started using the network and the many different decentralized applications on it.
Ethereum all started with a big brain teenage kid — literally. His name is Vitalik Buterin. He believed that he could create a more programmable version of Bitcoin that was easier for developers to build applications on top of. Obviously, there were others involved in the creation of Ethereum, but the founding team of the extensive Ethereum network was just 8 people. Today Vitalik is heavily involved with the Ethereum Foundation based in Zug, Switzerland. The Foundation is a nonprofit organization focused on the development and funding of different projects working on the web3 network.
Ethereum has huge amounts of potential surrounding the use cases pertaining to uncensorable money and protocols, and the value accrual happens in different ways than in Bitcoin. There are two sides of Ethereum as a whole; the network Ethereum, and the native token, Eth. Eth is used as a “gas” to power transactions on the Ethereum network, the more people that use the network for decentralized applications, the more demand there is for gas to complete whatever transactions are happening. This is unique in the fact that when the Ethereum founding team first launched Eth, the token, in an “ICO” or “initial coin offering”, it was able to skirt regulation from the SEC because of the fact that the token was claimed to be a commodity or a “utility token”, much like beef, natural gas, oil, etc. It makes sense, Eth is like a gas used to power transactions on the network, therefore it doesn’t have to register as a security (a speculative investment) with the SEC. As we see rapid growth in the space and an increase in desire for decentralized applications, we also see the demand for Eth rising. The Ethereum network supports thousands of protocols and tokens and is the biggest decentralized platform in terms of utility.
I personally have a few favorite protocols that I believe will change the way we look at traditional finance and borderless payments, and I am betting that they will eat up large chunks of these sectors.
1. The first that comes to mind for anyone involved in DeFi (decentralized finance) is Uniswap, a fully decentralized exchange where you can trade for any token that is supported on the Ethereum network and add to liquidity pools for lending to earn rewards. Users that provide liquidity to Uniswap are paid out in the platforms native token, UNI, which is a token you can use to vote on changes on the platform, this is called a “governance token”. This is a unique benefit to using a decentralized platform, it isn’t owned by anyone, and no one can singlehandedly make changes to the protocol without passing a community vote. Of course, there are risks for centralization if one entity controls the supply of voting tokens, but it’s a far better alternative than the opaque traditional finance space. Uniswap is only paying out rewards in UNI for 60 days after the launch of the token, and that time is coming to an end.
2. Yearn Finance is another juggernaut in DeFi, thought up by one of the most sought after developers in the space, Andre Cronje. Earlier this year, DeFi was growing at an insane rate, mostly due to the craze known as “yield farming”. This is the process of moving your money around between different lending protocols to find liquidity pools with the highest rates, to make the most of your money. There was HUGE risk involved with some lending contracts as they were unaudited but had giant APY returns (I personally saw some upwards of 2,000 percent APY). Yearn is best known for creating an automated yield farming contract where people would just put their Eth into a “vault” and the protocol would do the rest. Different vaults have different strategies and the user can choose between a range of them to maximize or minimize risk. Yearn would also minimize risk by only using well-known lending protocols with professional teams and audited contracts behind them. When the Yearn governance token released (called YFI), it skyrocketed in value from a few hundred dollars to $44,000 per token at one point. It became the craze of Defi as it is limited to only 35,000 tokens, and many people wanted the chance to vote on changes on what will be one of the most revolutionary protocols built on the Ethereum network.
3. The final project, and one of my favorites just based on utility, is called Chainlink. Every protocol needs a real-time data feed relating to different things, whether it be the price of something, the weather, outcomes of sporting events, and so on. Chainlink provides just that through their decentralized oracles, this is a necessity for every single smart contract (digitally enforced contract with certain terms for payment/transfer of assets, etc.) on Ethereum. Chainlink provides these contracts with the data that will trigger the payment or transfer to start. For example, if you are using a betting platform and you enter into a bet that says you believe the Dodgers will win the World Series at certain odds, that data will come from a Chainlink oracle and automatically trigger your winnings payout if the Dodgers win. The LINK token, Chanlink’s native token, is used to pay Chainlink oracle operators for changing real-world data into blockchain readable data.
Ethereum is the driver behind all of the innovation in decentralized protocols. Without Ethereum, there wouldn’t be such giant growth in markets that are aiming to dismantle companies and sectors that are traditionally run by the rich and greedy. I believe that the future holds a transfer of power from banks to individuals. There is a clear path from the system we use now, which is secretive and complicated, to a far more transparent version that is governed by different communities. We are in the early days of this paradigm shift and DeFi is difficult to use, it has subpar user interfaces, and is somewhat technical. I believe once this community grows and the everyday person learns they can get a loan in 25 seconds based on their Eth balance, the traditional finance space will be forever altered. We see companies like JP Morgan already betting on this and building out their own digital currency and blockchain on Ethereum, and it is only a matter of time until the rest realize they need to adapt or be left in the early 2000s.
If you are interested in learning more about DeFi or want someone to chat about it with, follow me on Twitter @mellonelliott.