Throughout history, every innovation from the computer to the Internet receive some harsh criticisms. It’s understandable, it’s very hard to actually predict which innovation will be successful and which won’t and most of the time, it’s only a timing issue before a certain prediction turns true.
Blockchain receives the same amount of criticism than every prior innovation (maybe more due to its speculative aspect) and some of those are completely valid, others (like scalability, adoption and lack of use cases) might be fixed in a few years/months.
The more I look into Ethereum the clearer it becomes that it is on the verge of succeeding in its mission to become the decentralized operating system of the world. In this post, I will try to explain why I am so optimistic about Ethereum.
The Power of Network Effects
I view Ethereum as a sort of massive decentralized & open computer on which anyone can build whatever they want without requiring anyone’s authorization. Additionally, since most of the projects/contracts published on the Ethereum Blockchain are open-source, anyone can decide to build their own app on top of any of the apps previously published without having to ask the anyone’s permission. This creates a cycle of unstoppable and open innovation never seen before.
David Hoffman came up with the great “Money Legos” expression to describe the current state of DeFi apps building on top of each other and I think it fits what Ethereum is pretty well.
The DeFi (Decentralized Finance) movement is a great example of how fast this unstoppable innovation cycle can evolve.
The Unstoppable DeFi movement:
- MakerDAO created DAI, a new cryptocurrency pegged to the US Dollar (1 DAI = 1 USD).
- Compound then integrated DAI in their borrowing protocol and users can now earn +10% interest on their crypto dollars (DAI) by lending them on Compound.
- Leighton Cusack then came up with PoolTogether, a no-loss lottery built on Ethereum, Maker, and Compound on which anyone can buy a ticket for 20 DAI, the proceeds are locked on Compound to generate interests → one lucky winner earns all of the interest generated by the pool at the end of the cycle.
- Finally, Decentral.ee created rDAI, a new token built on Maker and Compound as well, allowing anyone to allocate interest earned with their capital to the third party of their choice. Which creates a new opportunity for Ethereum project to finance their development without risking the capital of their “investors”.
This tweet from Anthony Sassano sums it up pretty well.
All of those integrations happened in a few months and none of those developers had to ask anyone’s authorization to build and release those projects additionally, all of those projects are benefiting from those integrations instead of having one major entity like Google, Apple or Facebook owning all of the data and generating most of the revenue. This is how the Internet should look like and this massive Network Effect is one of the reasons why Ethereum will succeed.
The Removal of Intermediaries
Removing intermediaries is a subject that comes up a lot in Blockchain talks and that was at the heart of the ICO bubble in 2017. When you successfully remove unnecessary intermediaries you can generate more profit for the consumer. This is what we can see today with the different lending protocols created on Ethereum like Compound or dYdX that allow lenders to earn more than 10–15% interest by cutting the traditional banking intermediary. How much interest do you receive from your current bank?
This is what can happen when you successfully remove intermediaries, you avoid the creation of massive/monopolistic companies and give some power and wealth back to the people.
Smart People for Smart Contracts
“What the smartest people do on the weekend is what everyone else will do during the week in ten years”.
I am amazed by the intelligence and creativity of the people building on Ethereum and this is, in my opinion, one of the most encouraging reasons that it will succeed.
What are the Risks?
While I am very optimistic about Ethereum’s future, I am also concerned by some issues:
- The centralized Oracle solutions of MakerDAO and Compound: Most of the DeFi projects being built right now are using DAI from Maker and Compound’s lending protocols which are built on centralized Oracles to receive the current price of the assets concerned. This is an issue because it creates a single point of failure that shouldn’t exist in a trust-less decentralized environment. It will be very interesting to see how the Open Oracle System initiative evolves in the coming months.
- Smart-contracts risks: Since a lot of projects rely on the same building blocks (mainly Maker and Compound for now) it’s essential to make sure that all of those projects are audited and secure. It would be great to have a sort of Open Auditing System that would rank the robustness of any smart contract based on contributions from the Ethereum developers community.
I can’t wait to see what is going to be built on Ethereum in the next few months and years but personally, I found it to be the most exciting industry.
You can follow me on Twitter to learn more about the Ethereum projects I’m interested in!