A Perspective on Ethereum

Today I want to explore my perspective on Ethereum and the ETH coin. This is a problem that goes around in circles in my mind over and over again as I try to distill whether Ethereum is in fact a competitor in this industry, or the center of gravity of severe malinvestment. This is by no means my final position as it is always evolving but I hope this article will be of some use  in understanding the benefits and pitfalls I see with this network.

Take note – this is a LONG term 10+ years projection. In the short to mid-term, I think Ethereum has a lot of room to grow and does have a strong potential to create something extremely valuable to society. It is a  constantly evolving project and Ethereum 2.0 is planned for 2021 may resolve some of the challenges it faces…if they are able to deliver on such a mammoth task successfully that is.

A quick trigger warning, I have some controversial opinions about Ethereum although feel they are adequately justified. This is my honest opinion on the matter and I am most keen to hear your opinions in response in our discord chat room to hash these ideas out further.

Ethereum the Network

I will start by saying that Ethereum, the decentralised network, is nothing short of an incredible feat of software engineering. It spawned from the desire to push cryptographic networks further, faster and harder than the Bitcoin development (correctly) allows for. It was the genesis of an immense wave of capital, ideas, projects and talent flowing into the crypto industry and one of the prime drivers behind the 2017 peak.

It has attracted developers and intelligent minds from around the world with many pulling out of positions in the Googles, Amazons and Apples of the world to shift to a new and completely uncertain industry. It is one strategy to follow the money, but the real value comes when you follow a migration of minds and we must give Ethereum credit for this magnetic effect. Bitcoin and Ethereum have some of the smartest people on earth working on them, something no other project can hold a candle to right now as far as I am aware.

Now the scale of opportunities open to Ethereum are immense but do have significant challenges associated with them so I will discuss my thoughts on each one. The overarching problems that I have with Ethereum are three-fold:

Inconsistent narrative around what the ETH coin is supposed to be. The narrative has pivoted many times and the need for a new Ethereum 2.0 architecture, which is a completely new blockchain, shows that the original concept was not planned well enough in advance.

Savage competition and use-case specific DLTs are here to eat Ethereum’s lunch. Ethereum is a general purpose blockchain and I fear that is a strength today that may become its weakness tomorrow.

Complexity in the base layer. Bitcoin is powerful because it achieves sound money with absolute simplicity. Ethereum has a very complex and high functioning base layer which whilst useful, heavily increases the attack surface for bugs, back-doors and malfunctions and makes protocol upgrades increasingly difficult. For the world to adopt DLT as the financial backbone, this risk is just not reasonable.

Evolution of Ethereum Narratives

Now the Ethereum narrative around how ETH will grow in value has pivoted a few times. Overall, there is a heavy reliance on value add from dAPPS that are intended to provide ETH value and justify the commodity money argument. This is often referred to as the ‘Fat Protocol Theory’ where the more applications (smart contracts, DeFi etc) that are built on a protocol, the more value accrues at the protocol layer (ETH).

World Computer

This was the original design intent for Ethereum which is important to remember. ETH was intended to be the gas that enables users to access permission-less and distributed computational power and pay for it appropriately. Ethereum introduced smart contracts and code that could automate any manner of functions on-chain. The first major use case for this functionality was token issuance following the update to protocol to support the Ethereum Request for Comment #20 (ERC-20) standard.

Now the world computer use case is one I believe has true merit. There will be markets for distributed computing in all manner of industries in the future, one of them being the machine and data economy and its application in AI. ETH will likely persist as a useful gas token and it will probably retain value as a commodity of the internet. Companies and individuals can purchase ETH as and when they need it, just like they purchase petrol or electricity for their car, home and business operations.

Where I see one pitfall here is that the machine economy will be reliant on micropayments. Ethereum’s fee structure and computation layer is designed for humans and the fees on-chain make this application difficult, expensive and thus unlikely. I personally see feeless networks like Nano, IOTA or Radix consuming this market as that is what they were purpose built for from day one.

Token issuance

This fueled the ICO boom where, anybody could contribute ‘money’ in the form of ETH to a crowd sale and receive a token in return, proving their participation. This shook the world and in particular, shook Wall Street. For the first time in history, the ability for entrepreneurs to raise capital directly from investors without an investment bank underwriter taking a fee. This is one of the most profitable industries in the world and there is no question that asset issuance and capital formation will migrate to distributed ledger technology as a result of this event.

The problem here is that tokens issued on Ethereum have no underwriter and thus don’t actually represent a real asset or guarantee. Token holders in the ICO boom have zero underlying value to their tokens. The only people who benefited from the ICO boom at the end of the day, were token founders, pre-sale investors who dumped tokens on the market and scammers.

The digital securities industry was born of the ICO boom and will be an enormous market and investment opportunity moving forwards. However in my opinion Ethereum is very unlikely to be the platform of choice to carry this industry long-term. Unfortunately, simple functions like Multi-signature, which is imperative to custody solutions for securities, require massive and complex smart contracts. Sending a genuine STO today costs around $9-20 in gas fees alone due to the heavy computation. This just doesn’t work.

I do believe that a digital securities specific blockchain system will eat this market and will probably be a semi-centralised system like Ownera (or similar) which is being built on Hyperledger Fabric. There are a few reasons for this:

1. Hyperledger is backed by IBM who already have the trust of the large institutions and much of their back-end is already IBM mainframes.
2. Ethereum at the base layer is complex and the attack surface for bugs and zero-days is just too high of a risk for the traditional industry to build this trust.
3. Digital securities still require underwriters, custodians and centralized institutions to ensure there is actual value and assurances behind the asset. There is no easy or appropriate way for these parties to interact on Ethereum. Functions like Multi-sig are essential to avoid theft, fraud and enable appropriate custodianship.
4. The digital securities industry is ok to be semi-centralised and just leverage DLT technology to improve transactions and efficiency. It’s a software upgrade, not a revolution. We may see the role of institutions evolve and automate over time, but we are decades away from the decentralised utopia people dream of.
5. A DLT platform built specifically for digital securities will always…always…always outperform a general purpose platform. This is the reality we see play out in most industries.

On the IEO front, Binance chain, in all its unholy glory is already eating Ethereum’s lunch. Just another example of a use case specific blockchain being favorable to the general purpose solution.

Decentralised Autonomous Organisations

Ethereum’s smart-contracting capabilities enabled new systems of organization of people, money and systems to be built. Once deployed live, these DAOs can function without continued development so long as people interact with them. It may be that AI and automation have an increasing role in the DAO but certainly this Is a very interesting use case. Personally, this is one of Ethereum’s strongest selling point for smart contracts and it will be increasingly important for Ethereum’s survival.

Projects like MakerDAO and MolochDAO are centerpieces of Ethereum in providing functionality, usefulness and most importantly – funding support for further development. It is no secret that Ethereum is running out of money. In all honesty, if Maker shut down or bugs out, or Moloch proves ineffective at supporting development funding, I believe it very likely Ethereum follows them to the grave soon after.

DAO’s are not entirely exclusive to Ethereum although it certainly hosts many of the dominant ones. Whilst not directly competing, Decred is an example project which is very close to Bitcoin in it’s design, yet has a fully functioning DAO that manages the treasury, proposals and voting system. I argue that Decred is the most advanced DAO that exists today and is a great example of a DAO managing sustainable funding and development without the need for additional tokens, dAPPS or third parties to provide value.

Developer Capital and the youth market

There is no question that Ethereum is a magnet for developers. The opportunities to take a Silicon Valley approach of moving fast and breaking things to bring about ‘Web 3.0’ are extremely compelling. As a result, there has been a massive flow of skills and ideas into Ethereum which is very healthy for it and DLT technologies. There are no other projects with the same level of developer capital as Ethereum.

This is hugely important, particularly since a only very small and extremely proficient number of developers are qualified and able to work on Bitcoin. Ethereum opens a much larger door for developers to build modules on top of Ethereum and contribute to the system. In particular, this is a draw card for the youth market who will be inspired by the opportunities Ethereum opens up. I see ETH as having a strong buy support from the younger generation for the short to mid-term (3-5yrs). However in the same breath, these folks are also extremely likely to see other projects in the same light and thus, the potential demand support here may well be more distributed across competitors.

Open FInance

This leads us to the final and current argument propping up ETH’s value proposition – DeFi or open finance. Ethereum has a stellar lead in this regard and there is an extraordinary amount of work that competitors need to do to properly compete and attract developer capital and users.

This is where Maker and Dai are absolutely essential infrastructure. In order to replicate the monetary system created by Bitcoin, Ethereum requires three tokens:

ETH = the volatile capital asset used as collateral by locking it up

MKR = the central bank governance with fixed deflationary supply

DAI = the stablecoin, transfer of value and medium of exchange

This is extremely useful…however is also notably complex and not fairly distributed. Some research recently showed that there are only 8000 users of DeFi globally and my own research has shown that 80%+ of the value in CDPs is held by the top 100 users. This system is currently servicing the ETH rich, most of who participated in the 70% pre-mine ICO. That means the same people who benefit from DeFi are those who got in early and are likely going to be the main validators in the PoS security system and there are only a few thousand of them.

Personally, I take a serious issue with this as everyone who does not have 32 ETH will be forever diluted by inflation. Why is this different than the current Centillion effect of central banking? I do think MakerDAO is fascinating technology, creating a stable-coin by locking up a volatile asset. Don’t get me wrong, the technology is empowering, important and good for the ecosystem… I just look forward to the day the primary use case for ETH is not to go leveraged long on ETH.

…but what happens when the fiat system tokenises their dollars, pounds and yen and banks provide similar DeFi services by copying the Ethereum Github? What about locking up actual stablecoins in DeFi rather than ETH? What happens if BTC continues on its upwards trajectory and indeed becomes the favorable store of value? What happens when people can then lock up their BTC in smart contracts and earn the same interest from secured debt markets?

Closing thoughts

The Ethereum community are very aware that the world computer, token issuance and digital securities industries are not going to sustain the network long term. I fear that Ethereum is banking on the fiat money system collapsing. I’m not convinced this is where the world is going. Personally, I think BTC will be the cryptocurrency SoV of choice in the long term and a few use-case specific ledgers will service their use case very well. The fiat money system will most likely just upgrade over time and proceed business as usual. The difference will be that when central banks play silly-buggers and enact poor monetary policy, people have the Bitcoin economy to flee to and provide safe harbor acting as the check-and-balance the fiat system desperately needs.

Ethereum still doesn’t know what it wants to be when it grows up. The multiple iterations of what the use case for ETH is shows me that they did not plan ahead nor build something with a long term vision. Bitcoin is built for a specific use and it does that extremely well. Bitcoin built an impenetrable foundation and is only now growing into complexity and financialization with Lightning Network, Liquid and privacy technologies. Ethereum built complexity into the base layer (which now needs to be replaced…) under the guise of general purpose solution in an attempt to solve everything. Ethereum is the Jack of all trades and master of none and the projects with a specific problem to solve are here to eat it’s lunch.

A term that is floating around Crypto Twitter right now is “money Legos” where Ethereum is building a modular economy that supports the commodity money argument. The problem I have with Ethereum’s version of Lego is they forgot to secure the most important part…