Why Ethereum, Why Now
Four and a half years ago, my friend introduced me to something called NFTs. NFT stands for Non-Fungible Token. NFTs are a way to verify ownership and authenticity of an item (be it in the digital or physical world) using a blockchain. At that time, most of the buying and selling was happening on a blockchain network named Ethereum created by Vitalik Buterin, who used to be the Editor in Chief of Bitcoin Magazine. Vitalik thought Bitcoin’s technology could be used for a lot more than just peer-to-peer payments, which is what Bitcoin’s primary use case is.
Bitcoin is special not only because it is the very first cryptocurrency, but for what it birthed: blockchain technology. Prior to Bitcoin there was not a way for two computers to send value between each other in a trustless way. Trustless means without a trusted 3rd party. The trusted third party would typically be a bank, or banks. It’s important to note here Bitcoin was created in response to the self-immolation of the banking system in 2008. I suppose trust becomes less important when it isn’t dependable.
Vitalik built Ethereum to be a platform that could handle any transaction, not just an exchange of money, between two parties. People can build products, games, new cryptocurrencies, launch a stablecoin, create a decentralized crypto exchange, and probably anything else you can think of. Ethereum is positioned to serve as the de facto settlement layer for the internet and the coming wave of innovation in financial services headlined by something called tokenization.
Tokenization is a way to use smart contracts to fractionalize ownership of any real-world asset you can think of. Tokenization makes it incredibly cheap, accessible, and fast. Cheap because it eliminates middlemen. Accessible since you can buy $50 of high quality investment grade assets such as a rare piece of art or high-rise apartment building. Fast because settlement time is nearly instant, instead of a couple days or much longer. Tokenization is possible because of the blockchain and more specifically the blockchain technology of smart contract platforms. Most of the real-world asset tokenization is happening on Ethereum.
The head of Robinhood recently said everything is going to be tokenized. Luckily, Ethereum was built to handle the volume of transactions expected to occur due to the movement of the financial services industry onto a blockchain. This is because of its unique architecture and the design choices that were made by Vitalik and the early builders of Ethereum, which attracted developers to build on the network.
Ethereum was started in 2015 and made the decision to approach its blockchain architecture in a specific way. Blockchains face what those of us in crypto call the “Blockchain Trilemma.” The theory goes Blockchains can only optimize for 2 of the 3 following features: decentralization, security, and scalability.
Ethereum made the decision to optimize first for decentralization and security first. This was important because decentralization protects the network from being controlled by any single entity, or nation-state (fancy name for country). If Ethereum were controlled by a single entity, there is the always lingering possibility that the entity could take the network offline with no explanation. Security is important because Ethereum is dealing with people’s money and ETH, which is essentially their money since it’s denominated in USD. People have to be confident the network they are transacting on is safe and secure. This is the area I know the least about, but lots of people are building what are called layer-2s on top of Ethereum’s layer-1, which leads me to believe they feel pretty good about Ethereum’s security if what they are building is due in large part to the security guarantees they are getting from it.
The Layer-2s are serving as an execution layer for transactions and then they are settled in batches to the layer-1. Ethereum, the layer-1, serves as the settlement layer, and more importantly provides those previously mentioned security guarantees for the transactions, which take place on the layer-2s. Ethereum scales via layer-2s. Layer-2s get security via Ethereum. Symbiosis at work.
Scalability was not initially prioritized by the builders of Ethereum. It was a good decision. Back in 2015 way fewer people knew about cryptocurrency making it highly unlikely there would be a problem with the Ethereum network getting congested. So if you think in the future the entire world is going to use Ethereum to transact, it makes sense to optimize for the most important and difficult to architect areas first.
There are many other layer-1 blockchains. Solana, Monad, Sui, Avalanche, Cardano, and many others. None of them optimized in the order Ethereum did (so they are lacking in some areas that are mostly around security and decentralization), and they do not have the number of developers building on their blockchains that Ethereum does, or the liquidity in the form of users who’ve voted with their dollars by choosing to interact on Ethereum and its numerous layer-2s because they believe in the ethos of Ethereum. Ethereum enjoys first mover advantage as the first turing-complete smart contract platform. Turing-complete means the contract is capable of performing any functionality a programmer can create using Ethereum’s native language, Solidity. Bitcoin offers smart-contract functionality, but it is severely limited.
Which brings me to today. It is thought we are on the brink of a large upswing in the price of Ethereum. I believe that to be the case as well. However, understanding when that upswing takes place is difficult to pinpoint. One of the reasons why is the difference between Ethereum, the network, and ETH, the token, used to pay for computation (i.e. anything you want to happen on the network.) Owning ETH, the token, does not provide you ownership in Ethereum the network. It’s easier to think of Ethereum, the network, like the internet, or roads, or highways. Its function is to move value from one entity to another via instruction from a smart contract. The more capacity the network has to execute transactions, the less it will cost to execute those transactions. Since the NFT craze of 2021, instances where the network was congested have been few and far between.
Now that we are on the precipice of major adoption by the public via a number of different avenues, the expected amount of traffic through the network is expected to spike. However, because the builders of Ethereum have worked hard to increase the network’s capacity, as adoption continues to increase, the price of ETH will rise, with more people needing ETH to pay for transactions on Ethereum and layer-2s, but the cost of those transactions will be much lower because Ethereum, the network, has successfully scaled via numerous network upgrades since 2021, including the latest one on December 3rd. Vitalik has said he believes no transaction on the network should cost more than five cents. People are starting to understand why Ethereum is such a powerful idea. It is transforming global public financial services by allowing anyone with a cell phone to access banking, capital, global payments and much more at a much lower cost and more safely (at least once you know how to use a digital wallet. The Ethereum UI needs a slight uplift, but we’re getting there).
With a stablecoin on Ethereum, I can send money anywhere in the world and it is virtually free and settles almost instantly. Using a lending protocol (two popular ones on Ethereum are Aave and Compound) loans are actually safer because they are over-collateralized.If the ETH you put up as collateral for the loan dips below a certain price the lending protocol will automatically sell your ETH to cover the loan. Yes, it is a small catch, but I will take the tradeoff if it means we can move past the always-has-the-potential-to-light-the-world-on-fire fractional reserve banking system in place now.
While cryptocurrency has had a bad reputation in the past, and even in part to this day, the sole reason blockchain via Bitcoin was birthed is as a response to the financial crisis of 2008 as an alternative to the current banking and financial system which is controlled by a few powerful people. Due to its unstable architecture (did I mention fractional reserve banking?), the whole thing is on the verge of blowing up every so often. The promise of crypto is we can choose a different way forward empowering people and democratizing finance and banking making the financial system truly inclusive.
(Do you think Trump would shut down crypto if he realized it was partially doing the I part of DEI?)
My hope is that it turns out to be true.