Digital Finance
On July 30 2015, Vitalik Buterin launched a new entity onto the world: ETHEREUM.
This is something unlike anything the world has ever seen; this new creation is, in essence, a decentralized global computer. Inspired by Bitcoin but with grander ambitions, Ethereum has opened up a world of new markets made of smart contracts, Web3 and NFTs. But how is Ethereum able to do this? And how can you participate in this exciting new financial world?
On April 14, 2009 a fateful event occurred in the online game World of Warcraft. There was a big upgrade planned for that day and Blizzard, the creators of the game, had decided to remove the damage effect from a spell on the Warlock class. Vitalik Buterin, an avid player of the game, was very distressed at the removal of his beloved character’s damage ability. He has since said about the event: “I cried myself to sleep, and on that day I realized what horrors centralized services can bring. I soon decided to quit.” He was 15 at the time and in a fit of teen angst took his first steps down the path of decentralization.
Bitcoin was released later that year in December of 2009 and showed the world a new asset class through which we can all transact in a trusted, decentralized, borderless, frictionless way over the internet. Bitcoin does one thing and it does it very well: allows the sending and receiving of tokens. While this is powerful, it’s also somewhat limited to just handling a transaction between two people and not much more. But it also gave Vitalik the final piece of the puzzle he needed for his vision.
Vitalik took his dismay of centralized control and his knowledge of computer programming and in 2013 he set out to create something new: a decentralized global computer secured by a Proof of Work algorithm similar to Bitcoin’s. The owners and operators of the hardware used to secure the activity on Ethereum are rewarded in Eth, like Bitcoin miners are rewarded in Bitcoin. Eth is then used as the token that triggers all activity on the Ethereum network.
Anyone can learn Ethereum’s coding language, called Solidity, and can upload executable code onto the network, these are called Smart Contracts. They execute when they receive payment for the task they are coded to perform, payments are made with Eth. A user of a smart contract can send the smart contract some Eth and it will execute its commands based on the amount sent.
Initially this gave way to ICO’s in 2016 and 2017. Much like IPO’s, Initial Coin Offerings were smart contracts written to issue a new type of virtual token at a set exchange rate against Eth. Users would receive new tokens that could be stored in their Ethereum wallets and the issuing company would receive the Eth as funding for its projects.
There was an explosion of ICO’s in 2017 & 2018, the largest and most famous was Telegram, a widely used chat app. In March of 2018, they decided to launch a new token called TON (Telegram Open Network) and were able to raise a whopping $1.7 billion dollars in Eth. Unfortunately this wasn’t entirely legal and in 2020 the SEC fined Telegram $18.5 million in damages and forced them to refund all $1.7bn to investors as they were found guilty of securities fraud by not registering the token sale with the SEC.
There were also a large number of scam ICO’s launched during that time. These projects would write some code on Ethereum and publish a website and a white paper as a proposal. The general public would then fund the project and shortly after the offering closed the creators would take the eth, shut down the project and disappear. In fact these scams were roughly 78% of all ICO projects launched in 2018 worth approximately $1.3bn. In recent years ICO’s have dropped in popularity and scammers have moved onto other methods.
Not all ICO’s ended this way however and today there are approximately 5000 successful ICOs operating in the crypto market space. Some of these have gone on to achieve their goals of creating a new type of platform and building wealth for the initial investors.
One such successful project is Decentraland (decentraland.org). Launched in 2017, they endeavored to create a virtual world; If you’ve ever seen the movie Ready Player One or read Neal Stephenson’s Snow Crash then you have an idea of the virtual world they are looking to build. Access to the world can be done through a simple web browser; however, users can become even more immersed in it by using virtual reality goggles.
Parcels of virtual land were represented on the ethereum network as tokens, known as NFTs (Non-Fungible Token) and its virtual economy was funded with a coin called MANA. MANA is created using a smart contract on Ethereum and when the project launched they funded their goals with an ICO. This one was successful, however, because the token had utility and has gone on to create wealth for early investors. At launch the token was worth $0.02 and today it is worth $1.73. Similarly, the land sold initially was at a value of $20 per parcel, but today some parcels go for hundreds of thousands of dollars. This increase in value comes from the impressive 3,300% increase in users the platform has seen in the past year. Decentraland is an excellent example of Web3; the idea that online services can move away from the centralized nature of web 1.0 and 2.0 (i.e. Google, Facebook, Amazon) and into a decentralized structure where networks, instead of servers, underpin the services offered to users.
This idea is well represented when we look at Twitter as a bad actor in the world of free speech. The platform has centralized control over which accounts get cancelled and which are allowed to stay on. In a web3 environment, no single person or small group of people would have the ability to cancel anyone else’s account. Instead the network would vote collectively on a single set of rules that would apply to everyone equally. If anyone violates these rules, they would automatically be penalized in accordance with these collectively agreed upon rules.
Many believe that Web3 will bring the promise of freedom that was originally envisioned when the internet first started to take hold in the 90’s. In fact we are starting to see examples of that appearing in different corners of the world. In 2021, an Australian engineer decided to use a smart contract-based lending platform to mortgage his own home using the eth he had as collateral. By going through the smart contract, he was able to bypass the banking and credit score system and was able to fund his house purchase at midnight on a Saturday without seeking approval from anyone. This is the type of freedom web3 is offering.
Another successful area that Ethereum has been able to shine is in the art world. There have been a number of successful digital artistic projects that have launched on Ethereum since 2020. These are commonly known as NFTs and they tie a piece of digital art to a token and send that token to the owners wallet. The holder of that token is granted copyright rights to that art connected to the token.
OpenSea (opensea.io) is the most successful online marketplace for these artistic NFTs and artists now have a decentralized platform on which to sell their artistic ability in the digital world. This platform has grown pretty big, in the last month their trading volume was 2.03 million NFTs valued at $2.9bn.
Other projects are also starting to adopt artistic NFTs, such as Decentraland and Twitter where users can display their NFTs in a virtual house or virtual art gallery, or in their profile details.
Ethereum isn’t the only player in this space, it’s just the first. Since the success of the Ethereum platform there have been quite a few copycats that have emerged onto the internet. Some more successful than others, but my top picks beyond Ethereum would be Binance Smart Chain (BNB), Solana (SOL) and Lightning Network (BTC). The first two operate very similarly to Ethereum as their own independent networks, where coders can upload their own smart contracts and in fact a number of projects have already launched on these platforms.
The last one is slightly different, however. Lightning has been built on top of the Bitcoin network to give it the ability to handle a larger number of transactions at a cheaper rate over its innate capabilities, while still taking advantage of the massive security provided by Bitcoin. This initial capability of lightning has allowed for one of the largest use cases of Bitcoin to take off in the country of El Salvador. In 2020, the president of El Salvador declared that Bitcoin was now national tender and could be used to buy goods and services without any taxation. The country released a wallet app built on lightning to allow for a very large number of transactions to occur at very cheap rates (fractions of a penny per transaction) and the country has now fully embraced it as a medium of exchange. The IMF (International Monetary Fund) has decried the move and urged the President to cancel his Bitcoin plans but it has fallen on deaf ears. In a similar move, the Central African Republic, which is made up of Cameroon, Chad, Republic of Congo, Gabon and Equatorial Guinea, has recently adopted Bitcoin as a means of transacting within the group, in addition to its current CFA currency backed by France.
Decentralization is starting to take hold in the world and as an interested investor there are a few ways you can get in on the action.
The first thing you need is some Eth and an Ethereum wallet. To get some Eth you’ll need to use an onramp service where you can buy Eth for dollars. I recommend Coinbase (coinbase.com), once you connect your bank account to your newly created coinbase account, you’ll be able to purchase some Eth. From there you’ll need a browser-based wallet, I recommend metamask (metamask.io). This will install an extension onto your browser that will give you an eth address where you can send your newly acquired Eth from Coinbase into Metamask.
Now that you have some eth, go take a look at some of the services I have mentioned in this article. I would also recommend looking at sushiswap (sushi.com). Born from a previous service known as Uniswap, Sushiswap came about in 2020 and is a collection of smart contracts that allow users to earn yields on tokens they stake on the network. Lending, borrowing and trading services between the supported tokens are also offered through sushiswap and it is emerging as the most successful decentralized banking network on Ethereum.
Born from teen angst, Ethereum seems to have disrupted the world financial system and its philosophy of decentralized finance (DeFi) is slowly taking hold from large countries all the way to individual investors; From Celebrities such as Justin Bieber who paid $1.3 million for an NFT to El Salvadorian merchants using it to trade daily goods. As with many innovations Defi will take hold of the financial world slowly at first and then all at once.