Ethereum offers low-cost, easy access to value exchange, but adoption has been slow. Despite having been relatively stable since the hacking of the DAO way back in June 2016, launches of viable products and services have been somewhat rare. Those launched haven’t gained the kind of traction their ideas might have promised.
Scalability. The Ethereum blockchain processes up to about 15 transactions per second, which is very low on a global scale (the Visa network can go up to 64,000).
Volatility. With Ether around five times more volatile than the US dollar, holding the former is risky, to say the least.
Bad investments. The unregulated investment landscape of 2017-18 burned many investors, with so much no-strings cash heaped onto startups that building companies was no longer necessary.
Bad UX. On-ramps to Ethereum for non-tech users are complex. One needs an account with an Exchange to buy Ethereum, then to transfer it to a self-created crypto wallet (security of the data is entirely your responsibility). Then it gets complicated: you’ll need to implement a solution to allow you to generate transactions when interacting with Ethereum web services.
That all sounds terrifying.
With all these barriers to doing business,
it’s little wonder that neither businesses nor consumers have gone wild for
using Ethereum. In 2019, however, things got brighter with the rise of DeFi.
DeFi refers to decentralised finance services delivered via blockchain. There are other blockchains doing finance, of course, but conventionally DeFi means smart contract protocols on Ethereum. In 2019, DeFi exploded. In January 2020, the equivalent of USD 700 million is present in the DeFi economy on Ethereum.
The native token of Ethereum,Ether, was not the currency of choice for these transactions. Much of DeFi is currently the exchange of Ether for stablecoins or tokens pegged to the USD which are much less volatile. Low volatility makes lending and borrowing assets on Ethereum much more predictable, stimulating activity.
Necessity is the mother of invention; the rise of DeFi will accelerate the adoption of Ethereum as a place for other business.
A Way Forward
The increase in on-chain activity is putting Ethereum developers under greater pressure to realise the improvements promised in Ethereum 2.0. As opposed to Bitcoin, where development seems geared towards helping speculators buy and sell more effectively, DeFi products and services represent genuine, accessible alternatives to the conventional banking system.
While this abstract social purpose has always been there, the money now locked in DeFi provides a baser, but more effective motivation. The financial reward motivation also works for Dapp developers, too. There is a genuine sense of competition in the DeFi marketplace. Furthermore, increased Dapp activity feeds back positively to the activities of Ethereum developers, creating a loop of ever-increasing capability for the blockhain.
As a network of financial services, DeFi eases the passage of other forms of on-chain commerce. Interacting with off-chain, old-world financial institutions as sources of financing is difficult. Financiers’ understanding of blockchain is limited, and financial institutions themselves are single points of contact (and failure).
Under DeFi, access to funding is more transparent and diffuse, with borrowing simply a matter of correctly collateralising your position. DeFi is constructing true capital markets like those currently in operation in the traditional financial services economy, where institutions and large companies regularly lend and borrow to maintain cashflow.
(There remains the problem of getting your funds off-chain so you can pay your suppliers, then back on so you can pay your lenders. Let’s call that the price of being a pioneer.)
What is next?
Despite the growth in DeFi in 2019, a fully functioning financial sector is still under construction. Some key components are still missing.
The decentralised autonomous organisation (DAO) is making a comeback. As has passed into Ethereum lore, the first-ever DAO was hacked to the tune of USD 70 million in 2016, leading to a schism in the Ethereum blockchain itself. Four years later and DAOs are resurgent, supported by infrastructural protocols providing support (e.g. Aragon for DAO setup, Kleros for dispute resolution).
Perhaps the most imminent use case of DAOs is as investment vehicles, permitting democratic decision on the investment of funds, further reinforcing the financial ecosystem of Ethereum. They might even be the first real demonstration of the power of blockchain. Spin up a DAO and have people invest – with all necessary due diligence – in a matter of minutes.
Selection by the wisdom of the crowd could act as financial advice, removing the need for the ordinary investor to understand and interact with underlying protocols and services which form the basis of investments.
That last premise, the idea of investors moving seamlessly between investment vehicles is predicated on something that doesn’t exist yet: real-world identity. Providing a robust, reliable on-chain version of off-chain identity has been the holy grail for several startups in the space.
For the moment, it’s missing, but it is very much en route and will solve a key problem in adoption. With a legally enforceable link to real-world identity comes a more streamlined Know Your Customer (KYC) process for any organisation offering investment opportunities. Identity would exist on-chain, accessible to third parties at all times. No more taking your Photo ID with you every time you go to the bank! Imagine!
Likewise, credit scoring and reputation become possible with an established real-world identity. Credit-scoring will lower further the barriers to entering into commercial agreements with future settlement dates because less collateral will be required. If the borrower has a proven track record, and there is legal recourse offline if things go bad, your counterparty risk diminishes.
What is the most important element of all?
Visibility. Ask a person in the street – even one currently working in
information technology – what Ethereum is and you’ll get a blank stare. This
space is badly in need of a narrative that allows ordinary people to grasp the
value proposition. Knowing about Ethereum is as important as knowing about
TCP/IP protocols (i.e. not at all). Knowing that you can invest money reliably
in seconds, and at low cost? Now that’s a winner.