Trigger Warning
The following post contains facts and discussions that may trigger those suffering from Moon-boy syndrome. If you feel the urge to automatically downvote or post negative comments with out reading or going through the hours of sources and resources based purely on a gut feeling. You may have Moon-boy syndrome. If you feel the urge to quickly comment FUD without providing a valid backed counter argument I suggest you take a dose of DYOR immediately
If that sentence has already made you have some sort of emotional response ask yourself why?
Introduction
Over the past week I have been on a journey into the crypto-verse; not the base level of price prediction. But the core of technology, psychology, governance and economics. My journey has resulted in many revelations but none more so important to the crypto-verse itself as that of Alt-coins and their relationship with BTC. As there are thousands of Alt-coins it would be unfeasible to do individual deep dives into each; however the majority of current Alt-coins are actually just one, ETH. As 40 of the top 100 coins by Market Capitalization are ERC20 or ETH complement projects
ETH itself now constituting nearly 18% of the total crypto market capitalization. It has by other metrics; active addresses, transaction volume and trading volume flipped BTC
It therefore can be assumed that if you are active in the crypto-verse you have interacted with ETH in some capacity
However while ETH has achieved great success it can be argued that ETH is in fact currently the largest threat to crypto as a concept. This will be the focus of this post and I wish by the end of it you either agree with me or have a strong counter argument based on reliable data and evidence
Table of Contents
1.1 The Birth of ETH
1.2 The Tradeoffs
2.1 DEFI isn't DEFI
2.2 Liquidity is key
3.0 Conclusion
1.1 The Birth of ETH
A general misconception is that ETH is a direct competitor to BTC. The reality is that BTC and ETH are trying to achieve completely different objectives. BTC was and is digital scarcity that uses a proof of work consensus mechanism. The biggest debate in BTC was that of being a store of value or currency, resulting in the Block Size Wars. Which ultimately resulted in BTC being updated via the Lightning Network and the forks; BCH, BSV etc... slowly fading away but not into obscurity
While ETH based on its two founding papers
- The White Paper
- The Yellow Paper ( EVM specifications)
Is a platform to build decentralized applications (Dapps) and smart contracts
It similar to BTC however had Internal arguments resulting in 4 competing projects; ETH , ETC, ADA and to an extent DOT
The 'ETH' that is the subject of this post is the one headed by Vitalik Buterin. It is to a large extent still in line with the original concept. But it itself is in the process of being upgraded to ETH 2.0. Ironically incorporating some of the very ideas that lead to the schisms between its developers. It is this fact that loops back into the block size wars and the very idea of ETH
The consensus mechanism on the block chain not only verifies transactions but to an extent flows into the meat space and limits the ambitions of individuals to those permitted by the group. BCH may not have over throne BTC but in a spiteful act of revenge solidified 2 ideas that are integral to ETH's parabolic rise
- BTC is old and outdated ( A Boomer Coin)
- BTC ultimately needs to be replaced by a better new coin
These 2 misconceptions added to the 1st resulted in the trifactor of the Flippening. While the reality is that BTC is not an unchanging monolith and was designed to gradually updated and improved upon. An eternal store of value that augments itself based on the consensus of the users
In regards to ETH, BTC itself is possibly opening the door to smart contracts through its November Taproot update
ETH was at one point the consensus of several like minded individuals that I suspect knew that their ideas would be rejected by the group. So developed a project outside the core project for different reasons. Unfortunately the same individualism that resulted in its creation resulted in its own schism. The ETH we have today encompassing all the good ideas but more importantly the bad ones that are festering with the possibility of cascading in to catastrophic failure
1.2 Tradeoffs
I highly suggest that you take an hour off and listen to this Discussion. The majority of this section is summary of the topics discussed
ETH to achieve what BTC couldn't at the time had to make sacrifices and these resulted in most notably the issues around Gas prices. With transaction costs and speeds becoming increasingly worse overtime. Gas is necessary and if not maintained may lead to attacks and hard forks. This has resulted in the previously mentioned move to ETH 2.0 and layer 2 solutions. Of which ironically some have features that mean that the system isn't decentralized. The most discussed that of centralized nodes
A less discussed aspect of ETH is that it had a potentially infinite supply; however similar to "Boomer BTC" has now possibly through EIP 1559 can become " deflationary". However in reality "EIP 1559 may strengthen a bitcoin-like narrative of limited supply to the investment case for ether. It is difficult, however, to predict exactly how much ether will be burnt over time given that the base fee dynamically adjusts according to network activity and demand for block space"
So ETH apart from semantics, still has an infinite supply and is and has not been competing with BTC in digital scarcity
So ETH as a store of long term value isn't in question, however it should never have been in question as stated it wasn't built to be a currency. This was trade off to facilitate its primary goal. A goal which however is in question. As things have been built on ETH, but some of them are in all honesty are bananas
2.1 DEFI isn't DEFI
There are so many issues currently in DEFI that we have dedicated websites to documenting them. While others are just focused on warning people about them. I highly suggest this Benjamin Cowen and Rug Doc discussion on the topic. Personally find the tale of Iron Finance to be a highlight in the insanity
Its gotten to the point that hearing of $600 Million or several billions of funds going missing is the norm not the exception. Why is it like this?
To answer that we have to go to the central thesis of DEFI, (DE)centralized (FI)nance
Or to more honestly (UN)regulated (FI)nance
Because the main components of DEFI aren't decentralized. The major stable coins USDT and USDC aren't decentralized. The exchanges shown by the recent events around Uniswap that they aren't decentralized. More importantly BSC doesn't even attempt to pretend that its decentralized similar to EOS or XTZ. With most projects now having "administrative" ability to augment contracts to prevent RUGS
It is with no hyperbole that it can be stated that DEFI just recreated traditional finance but worse
If fiat is backed by nothing then the stable coins are backed by 4% of nothing. With no deposit protection or legal frame work users are 100% at risk of complete capital loss in liquidity pools. So the question becomes why use DEFI? The answer is simple greed!
Because it is unregulated finance people have been able to use Yield farming to game the system to obtain 100% to 200% APY or more. The very banking practices such as flash loans that have for years been criticized by this very community are now advertised as a positive
DEFI isn't giving the unbanked lines of credit to build business but financial degenerates the opportunity to participate in the very practices crypto was created to hinder. Worse this tomfoolery has resulted in a ticking time bomb
2.1 Liquidity is key
The biggest open secret in crypto is that it is a highly illiquid market. However that was the point, as ever increasing stores of value crypto aren't supposed to be liquidated into fiat. This is the philosophy behind crypto's most popular meme, HODL
Why sell your crypto if it will only go up in value over time?
However as discussed ETH sacrificed this feature as did many crypto in the DEFI space. Because once again ETH isn't a store a value while most DEFI protocols are ultimately designed to be liquidated into stable coins/fiat or crypto that can be easily liquidated into stable coins/ fiat. As the main goal of DEFI is to farm as much value as fast as possible
This in itself is a problem as if prices start to fall and liquidity providers and users want to exit the market they will find a very small door. Currently the door is being maintained by stable coins but any sudden shock would collapse the system rapidly and violently. However if you can't escape through the door, you can always try the window. In this case the window being NFT's . Once again DEFI recreating a real world problem but worse. In this case the world of art and money laundering. While most are under the impression that the funds in NFT's are flowing from new comers into the space, most I suspect if flowing out of DEFI into NFTs
While the trading space has had issues with liquidity, most notably the May 19th 2021 crash; the major exchanges have moved away from high leverage and fortifying against such events. While in DEFI is just getting started
So we now have a combination of extremely volatile assets and illiquidity based on top of a system that has major issues who's recent update exposed exploits
3.0 Conclusion
I don't think anyone evolved in the original ETH had any idea of what it would become, highlighted by the fact the main three have all gone to build wildly different projects. Regardless it has become without a doubt the biggest thing in crypto
In my opinion primarily through misinformation, FOMO and hype
If making the most amount of money in the shortest time was the goal ETH has passed with flying colors and I assume it will pass the $5,000.00 - $7,000.00 price mark if the bull cycle continues. But if you have been paying attention ETH is fundamentally broken not only on a technical front but on an ideological one
ETH or should I say the main benefactors of ETH have created a problem only they can solve and this problem has become bigger and more complex over time. I don't think this was their intention but reality is reality. The average person will never even think about any of this and only wants to see the chart go up. Which similar to other cryptos it will
If you listened to the podcast from 1.2 you would know that most of the solutions ETH brings to the table in regards to finance and building apps can just be done off chain. In fact due to the most of DEFI not actually being DEFI you could just as well use traditional finance at a fraction of the cost with none of the risk. However you wouldn't be able to generate the insane returns
I do believe there are some good things built on ETH and hopefully ETH 2.0 in several years will address them fully. But ETH 2.0 has more in common with ADA and DOT than ETH
I'm reminded of this sketch when I think of the original base ETH these days
No comments:
Post a Comment