Why Ethereum is the Future of Trade/Wealth and How to Build a DApp.
I´m currently building my first DApp on the Ethereum network. I am seeing a technology that´s going to form the basis of trade, worldwide. Since the world´s economy is built on trade; ETH/USD>80k
Part 1: Understanding Ethereum and Tokenization. Tokenization = Internet of Value
Part 2: Ethereum is Coming for All of the World´s Exchanges. Tokenization leads to faster, cheaper and safer value transfer: more efficient trading.
Part 3: Ethereum Network Metrics and DeFi (decentralized finance)
Part 4: How to Build a DApp.
I am going to be posting about this as I work on it. I am focusing most of my efforts on finishing the DApp now.
Understanding Ethereum and Tokenization
Before getting on with Ethereum at the code level, I had read a far bit about it but I was never able to really understand what it does. As I´m building the DApp (Decentralized Application), I see clearly what this technology is all about and why it is so promising — it´s the foundation for Internet V2.0, which is going to be all about value. To understand what this tech means for the future of our economy, we need to take a quick step back.
If you look back a couple of decades and you inspect all of the big businesses that have been built on the internet, you will see that they exploit information arbitrages. AirBnB connects people that are looking for a place to stay, with people that have free space. Amazon connects people that want to buy stuff with people that want to sell stuff. Uber connects people that need a lift with drivers, that are looking for people to move around. This has happened because Internet V1.0 was / is all about moving information at a faster pace, lower cost and higher convenience levels.
I guess that if you looked at the nascent web technologies two decades ago, if you looked at it from an fundamental perspective, you would have seen tech that was going to allow information to move around much faster. If you look at Ethereum today, you can see that this time it´s about moving value around the place faster. Let me explain:
- Ethereum is a blockchain. A blockchain is a public registry, in which transactions are recorded. The transaction history is immutable — it can´t be changed. Ethereum is decentralized, meaning that it runs in many smaller computers, versus a few big ones. Since the network is decentralized, no single person can come along and change things.
- Example: if I buy a house on Ethereum, the transaction will be stored on the blockchain. The fact that I own this house will be an undeniable truth for other market participants. The house will be represented as a token on the network (a token is a virtual asset that, in this case, represents the house). They day I choose to sell it, a simple transaction can send the token to the owner in a very short time and at a very low cost, regardless of his location, time zone and other factors that today constrain the transfer of value. I will just be able to send the house like I send emails today and it will be totally safe for me and the buyer.
As people build out applications, we are going to see a second internet flourishing in which value is moved around effortlessly. It will be based on the tokenization of assets and enabled by the blockchain technology, which basically will make it safe to transact with these assets online. The internet you know of today simply consists of information moving around the place. If you look at the impact this has had in our lives and economies, then you can begin to image what impact the next version of the internet will have, in which trillions of dollars of tokenized assets will move around the place.
Ethereum is Coming for All of the World´s Exchanges: ETH/USD>80k
Have you ever taken a bird´s eye view of global wealth? You can do so here. I recommend clicking on the link and taking a quick browse before reading on. If you look at the information that is presented, you will see that global wealth is sustained by counterparties sitting around a deal, enforced by precarious methods such as hand written signatures- people simply agreeing on something and then honoring the agreement.
To lessen the abstraction, consider derivatives. I once spent a summer in London only thinking/reading/talking about derivatives and now I feel fortunate that this post will add some meaning to that experience. Derivatives have a gross market value of 11.6tr USD — notional values are higher by orders of magnitude. What´s a derivative? A contract between two or more parties that derives its value from the performance of an underlying asset. For instance, if I buy a call option with strike price 9$ for $GPRO, it means that at some point in time I can buy a certain number of $GPRO shares from the counterpart at 9$. If the price at the time of execution is above 9$ I make money, otherwise I won´t.
We have 11.6tr USD flowing around as a result of people engaging in derivative agreements as the one described above. These agreements rely heavily on trust between counterparties, as do pretty much the other types of agreements that encompass the world´s wealth. Global Real Estate accounts for 280.6tr USD. Real Estate is people basically trusting each other and agreeing to exchange bricks, plots of land and so forth. Debt is people lending money to other people, hoping they will pay the money back. Worldwide debt accounts for 253tr USD.
In all agreements that encompass the world´s wealth, trust is key. To date, however, we had no technology that enabled us to go beyond this reliance on trust. This leads to undesired consequences of all sorts, such as fraud, high transactions costs and not sleeping well at night. The Ethereum network enables trustless trade to happen, due to the its underlying blockchain technology. You don´t need to trust people because the transactions recorded on the blockchain represent truth — mathematical truth. As such, the need for intermediaries fades, transaction costs and times lower and suddenly, moving value around is far easier.
What I have explained so far actually may apply to any similar network, that enables the tokenization of assets from a technical perspective. However, if we are looking at this from an investment perspective, both in terms of buying ETH and/or investing in the network by developing Ethereum skills, we need to go beyond the technical dimension and look out for factors that have made enterprises succesful in the virtual world previously.
Ethereum has a turing complete language (which means that you can build pretty much anything on the network), has a big community behind it and has achieved dominance in its vertical, much like Bitcoin (read why this is important in this post, in detail). In the past enterprises that have achieved dominance in its vertical in the virtual space have done quite well. Doing so is a combination of many factors and is in fact so hard to do, that we can often afford to just take in that data point. See Uber, Amazon, Google, now my dear Spotify and more. It is the way the internet works.
If Ethereum takes over a fraction of the world´s exchanges (including supply chains), for instance below 0.5% of the total money involved in them, then we are looking at ETH/USD > 80.000. Why would it? Naturally counterparties in exchanges prefer methods of exchange that are more convenient — cheaper and faster. Today, the case may have well been made for less dependence on centralized authorities as well. The Ethereum network can provide these benefits and due its dominance in its vertical, it is likely to be the go-to.
The first version of the internet has allowed us to move information around at a lower cost and at far higher levels of convenience. Consider an email versus a messenger pigeon, which not too long ago was the spearhead of communication. If someone told you 30 years ago that moving information around in this improved way was going to create vast wealth, you would have pretty much ignored the remark. The second and incoming internet is going to allow us to move / exchange value at a lower cost and far higher levels of convenience. This is going to dwarf what we have seen so far, because now we are not just going to have information moving around, but tokenized value worth trillions of USD, seamlessly moved around at near maximum efficiency levels.
Ethereum Network Metrics and DeFi (decentralized finance)
I am getting the data from this source. As with any network, the value is a function of the number of network participants and of their levels of activity. In the post I wrote about Bitcoin, I looked at some simple network metrics that clearly show that Bitcoin adoption is growing and is far from its total potential. Even though Ethereum and Bitcoin are quite different (the first is a platform / technology that enables getting rid of intermediaries in pretty much any exchange of value, the second is largely faith based — although I´m definitely a believer in it), the way to look at the networks is very much the same. How many unique addresses are there? How many transactions? Etc.
The network seems to be growing, however, fees have skyrocketed.
I´m working on understanding the above, but currently Ethereum runs PoW (Proof of Work), which means miners run a lot of costly computations to add blocks. Transaction fees go to miners: transactions get put into blocks, blocks get put into the blockchain by miners. Now, Ethereum 2.0 is transitioning to PoS (Proof of Stake), which no longer requires mining. With PoW, one unit of computational power serves as one vote in the network — in the case of PoS, it´s one ETH one vote.
Right now, miners have to sell a lot of the ETH to pay the bills. Once Ethereum switches to PoS (in about 2 years), that selling pressure will be gone and benefits will likely accrue to ETH holders. Before that, EIP-1559 (an update to the network) is intended to keep fees lower and reduce the supply of ETH by burning some every transaction.
Ethereum has some technical challenges to solve, as does any other nascent technology. The interesting bit is how much value is locked in DeFi (decentralized finance). Above, I argue that Ethereum is a new platform for trade. Of course, the underlying discipline in trade is finance. Therefore, we can look at the value locked up in DeFi as a metric of how Ethereum is capturing value in general. You may appreciate a very fast growth rate, in this sense.
I personally think that Whatsapp has no right to be what it is today. I think the app is far worse than iMessage or Telegram and I don´t like having Mark Zuckerberg censoring me. However, Whatsapp is a story of how the best product doesn´t always win and a story of how, again, vertical dominance in the virtual space is a very strong force. Ethereum, as it pertains to moving value around, is going to be something of the sort. As long as it is top of mind, it will continue to attract the best developers and as long as it does so, it will continue to attract the capital — much like Bitcoin.
40bn–60bn USD is a little drop in the ocean, in the context of the wealth exchanges outlined earlier on in the post.
DApp code walk through.
Work in progress. Will be updating the above as my understanding of Ethereum progresses.