The following is a guest post by John deVadoss, co-founder of InterWork Alliance.
Act 1: A new institution emerges from the crisis.
On July 30, 2008, the American Housing and Economic Recovery Act was officially signed into law to address the subprime mortgage crisis (which triggered the then-ongoing global financial crisis). Two weeks later, on Monday, August 18, 2008, the bitcoin.org domain was registered.
In November 2008, quantitative easing was implemented and the US Federal Reserve began purchasing mortgage-backed securities. In January 2009, the Bitcoin code was released as open source, and by March 2009, the Federal Reserve held close to US$2 trillion in bank debt, mortgage-backed securities, and Treasury bills.
Let’s say the goal is to beta test a digital currency on a large scale to disintermediate secondary and tertiary financial institutions by connecting citizens directly with central banks. If so, Bitcoin has achieved remarkable success and heralded the coming CBDC era. If the goal was to make the average person savvy about digital currencies and how to use them, Bitcoin would have been surprisingly successful.
A revolutionary breakthrough when it was launched, Bitcoin means many things to many people: a virtual currency, a new kind of currency, a store of value, and a promise of freedom. But above all, Bitcoin is the new monetary institution of the digital age. Bitcoin has proven that digital currency institutions are the future. It did its job by moving the goalposts from ‘why’ to ‘when’.
Some people see Bitcoin and its pseudonymous creator as a Robin Hood-like legend, a Zorro-like hero, a populist protagonist fighting against the system. It’s not my job to dismantle thematic illusions, but as the old saying goes, the truth will make you smile when it arrives.
Act 2: The emergence of the monolith and its discontents
Bitcoin gave rise to Ethereum, a 21st century application platform that can compete with Silicon Valley’s so-called enterprise-level, global-scale platforms. And the Ethereum team did it all publicly, with a team of mostly volunteer developers spanning time zones and political and geopolitical boundaries, long before working from home was a thing, thanks to the genius of its founders and core developers.
Why Ethereum? Contrary to popular perception, Bitcoin is more than just an application. It is more than a set of technical capabilities that make up a network, and it is certainly more than a token. It is an institution, an autonomous body. But it’s not a platform. When Bitcoin launched, it had some scripting extensibility, but it wasn’t yet ready for developers to build new instances on top of it.
With a vision to become the world’s computer, Ethereum set out to create the ultimate decentralized platform abstraction, a blockchain with built-in Turing-complete programming support that allows developers to write smart contracts and create decentralized protocols, services, and applications. And by all accounts, the Ethereum project has been incredibly successful.
Programmable currencies, fiat-backed stablecoins, and the digitization of real-world assets are just some of the ways Ethereum has reshaped the world of monetary policy. Lending/borrowing platforms, prediction markets, and insurance are some of the areas of finance where Ethereum has helped rewrite the rules for historically highly disintermediate products.
As a result of its incredible success, scalability has proven to be a critical issue for the Ethereum project. It is worth noting that scalability issues arise because the project prioritizes decentralization and security over scale. Improved scalability is expected to address network congestion and reduce transaction costs. Ethereum’s gas fee issue has been a recurring theme.
There are two main ways to scale the Ethereum network: on-chain and off-chain. On-chain means enhancements to the base layer and modifications to the network. Off-chain means using a separate network (the so-called layer 2) to process transactions. Layer 2 networks can leverage the strengths of the underlying network in these areas, choosing to emphasize scale over decentralization and security.
Now things get very interesting. So-called “on-chain” proponents appear reluctant to give up, while “off-chain” proponents appear eager to innovate. This is a classic story of a mature platform. How loosely coupled is there? How configurable is it? And on the other hand, how much protection do we need to have on-chain before it becomes a net detractor to innovation?
For obvious reasons, Ethereum does not want to be used primarily as a coordinating ledger for other layer 2 networks and roll-ups, but at the same time, a monolithic approach imposes limitations on the platform and ecosystem and impacts its ability to sustain itself. Expand your developer base. The problem arose when Ethereum performed a merge update from Proof-of-Work to Proof-of-Stake.
Trust is now an aspect of staking, not mining anymore. Are tokens and stakers worth more now? Or was it still in basic functionality? And for how long? Can I replace it with something newer and more innovative? And this leads to Act 3.
Act 3: Development of a new economic platform
Ethereum gave birth to its first economic platform, EigenLayer.
It may seem linear in retrospect, but it was genius, a first-class paradigm shift. The world may not change when the paradigm changes, but developers are now working in a different world, as they say, with a new mental model. We will look back and see a distinct change between decentralized applications in the Pre-EigenLayer era and decentralized applications in the Post-EigenLayer era.
And it was Merge, along with the move to PoS, that enabled EigenLayer to reshape its decentralized application model. While PoW does not have the concept of negative incentives, PoS allows validators to receive rewards but also have their stake slashed for misbehavior. With the advent of PoS, EigenLayer can programmatically bootstrap and extend Ethereum’s trust model to ensure economic security for a variety of new protocols and services.
Developers can secure their services without having to create validators or release tokens. Now the promise of loose coupling can be extended to economic abstractions by creating markets for distributed trust. There is no word yet on what the fourth act will be like, a fascinating three-act play so far.
John deVadoss is a co-founder of InterWork Alliance and serves on the Board of Directors of the Global Blockchain Business Council.