In a recent interview with DrWealth, I highlighted a problem I had with the term “cryptocurrencies”. I think that by painting all cryptocurrencies as coins, there was no way for traditional investors to understand the idea that cryptography could be valued. It has become such a deep idea in the minds of traditional investors that they discard cryptography without further research.
I hope to slowly eliminate this bias by talking about cryptographic assets that outperform simple currencies / store value. This means not talking much about Bitcoin and focusing on programmable blockchains, i.e. Ethereum. Programmable blockchains such as Ethereum constitute the underlying basic infrastructure that enables decentralized applications (DApps). The most successful DApp to date is decentralized financing (DeFi).
Before we can talk about DApps like DeFi, investors must first understand, at least conceptually, what Ethereum really is.
This article tries not to focus on the underlying blockchain and Ethereum technologies, as it can be quite technical. Feel free to do more research to convince yourself of how Bitcoin and Ethereum work and how the underlying technologies secure the network.
Disclaimer: I invest and use some of the protocols mentioned in this article. Mentioning these protocols does not constitute my approval of the protocol or financial advice. Please always do your own due diligence, especially in a very speculative field like crypto and DeFi.
What is Ethereum?
To understand Ethereum, let’s talk a little bit about Bitcoin.
Bitcoin is essentially a distributed network of computers running in tandem to maintain a distributed ledger (blockchain). A set of technologies and cryptography allows all parties involved to trust the ledger. The ledger only records BTC transactions and movements from one address to another, with no additional functionality.
As such, Bitcoin can only function as a currency or storage of value, as all you can do is transfer it from portfolio A to B.
Expanding the design of Bitcoin
Ethereum is based on this concept, as it allows people to write code and create smart contracts / DApps. This extends Ethereum’s native ether, ETH, beyond what BTC can be used for.
- You can use it to pay other people like BTC
- You can use it to pay for the use of digital services provided by DApps. This comes in the form of transaction fees, also known as gas fees on Ethereum.
- You can invest in digital assets by changing ETH for them.
Don’t you understand? Perhaps the following analogy helps.
Imagine Ethereum as a giant iPhone the size of Earth. The Ethereum network provides all the components and infrastructure for this giant iPhone to work. DApps add features to this giant iPhone, such as the App Store apps. Anyone can create a DApp in Ethereum, just as anyone can create an app in the App Store. ETH pays to use or invest in these DApps instead of cash.
That’s why Ethereum is sometimes called a “world computer”. A global network that provides the infrastructure and computing power to run DApps.
Ethereum allows for new economies
The result is that Ethereum is its own market and global economy of digital assets and services. This economy has its own monetary policy with ETH as its base currency. Each DApp can also have its own microeconomy that connects to the general economy of Ethereum.
Why each DApp creates its own microeconomics is because, in a decentralized world, it must be assumed that participants are rational and will not provide anything for free. The worksheets are useful for measuring the usefulness of the DApp and encouraging participants.
Each DApp can have its own native testimony. In Ethereum, they are usually standard ERC-20 tokens.
Depending on the token design of each DApp (also known as tokenomics), the native token provides some form of utility or measure of value to the microeconomics. Tokenomics is also how you encourage participants to act in a way that is favorable to the DApp, while at the same time punishing bad behavior. This is also what drives the value to the native witness.
Tokenomics is a giant topic in itself and deserves to be discussed in future articles.
Interesting applications in Ethereum
Decentralized Finance (DeFi)
DeFi is probably the most important Ethereum application, with most of the Ethereum network transaction volume coming from DeFi DApps. I have been giving readers a taste of what is possible in DeFi in my interview with DrWealth and in previous articles. Some of the features I’ve shared in the past are:
While these applications seem fairly common compared to traditional finance, the reality is that the sky is the limit of the type of DeFi applications we can potentially see in the next decade. Blockchain technology allows for unprecedented transparency, access, and interoperability in the financial ecosystem, something that traditional finance has never solved / wanted to solve.
A recent example of this inefficiency in traditional finance is how Gamestop shorts were allowed to be short over 100% of GME’s float. If everyone were aware of how short the GME float was for sale at any given time, brokers would have banned trading. The use of Blockchain technology would have prevented this.
At the very least, I expect DeFi to be much more efficient and transparent than traditional finance. For the more imaginative, it can allow for financial applications that we haven’t seen or experienced before.
Future articles will discuss more about DeFi.
Games and collecting (NFT)
Something worth mentioning is the presence of the ERC-721 symbolic standard. Allows trading of non-fungible tokens (NFTs) on Ethereum. Each individual NFT is unique (therefore non-fungible), allowing for tokenization and trading of unique assets.
Examples of assets that are “NFT-like” in the real world include art, collectibles such as Pokémon cards, and even real estate, assuming each property is unique. Imagine symbolizing these assets digitally in the blockchain and trading them freely.
Currently, the adoption and implementation of NFT has been quite incipient, with implementations related mainly to digital art and collectibles.
The only NFT application that has significant development is found in games, where digital gaming assets are symbolized as NFT to be exchanged by players. 2 examples of cryptographic gaming applications include:
- Axie Infinity: A Pokémon-inspired pet battle game.
- Enjin: a platform to create games based on cryptography. A notable partnership is with Microsoft, which is trying to bring encryption games to Minecraft, a popular global build game.
Personally, I think the current implementations of NFT still need work. Still, it is an area with a large design space and potential for proper application.
Future development (ETH 2.0)
The last thing I think investors should consider is the ETH 2.0 roadmap. Ethereum is currently in the process of migrating from Ethereum 1.0 to Ethereum 2.0. In my opinion, the reason for the transition is mainly due to two things:
- Transition of the Work Test (PoW) consensus towards energy to a greener Game Test (PoS) consensus. Just know that PoS uses less energy and tries to address environmental criticisms about the carbon footprint of cryptographic mining.
- Address scalability issues in Ethereum. Ethereum 2.0 improves the performance of Ethereum (number of transactions per second) among other things.
The launch phase has 3 to 4 phases and will take about 18 months. The transition process began in November 2020 with the launch of the Beacon chain (phase 0).
In a previous portfolio update, I mentioned that you can bet on your ETH on the Beacon chain and get returns with your ETH. Here is a guide on how to do it.
For more information on ETH 2.0, check out the official Ethereum and Eth2 Launch Pad website.
Programmable blockchains like Ethereum create and enable digital markets and new economies. This market allows the creation of applications known as DApps, which provide various digital services and resources to use and invest. Currently, the main DApps for Ethereum belong to the DeFi sector, with other interesting applications such as games and NFTs yet to be fully explored. .
I hope this article helps you understand that the native resources of programmable blockchains like Ethereum are not mere value / currency stores. While they serve as the base currency of the new digital economies, they also serve as a gateway to digital services and assets.
Assets that can generate cash flows and, as a result, can be valued.
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