(Any views expressed in the below are the personal views of the author and should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.)
What is Ethereum?
Before jumping into Ethereum, let's talk vending machines. A vending machine is an analog contract. The user agrees to deposit cash under the implicit promise that the vending machine will deliver the selected good and dispense the change from the purchase, if necessary. The vending machine is a contract with bearer: anybody with coins can participate in an exchange with the vendor. Vending machines are "dumb" contracts. The Ethereum blockchain is a digital protocol that executes "smart" contracts. Smart contracts on the Ethereum platform enable developers to build and deploy decentralized applications. A smart contract is computer code comprised of rules and conditions under which a good or a service should be transferred, similar to a vending machine. For example, on the Ethereum blockchain I can use computer code to programmatically send you $5 ETH (the Ethereum blockchain currency, similar to BTC on the Bitcoin blockchain) if the date is November 28th, 2021 and your balance is less than $10 ETH. The contract will only execute if the two outlined conditions are met. This is innovative in that it completely bypasses the intermediary. Without Ethereum we need an intermediary (bank, venmo, paypal) and we are unable to program conditions for the automatic execution of our agreement. This example may seem trivial; however, the market for digital financial services, or decentralized finance is an 80bn+ market. The amount of value being locked into deFi would place the Ethereum blockchain as the 20th largest bank in the world by market cap. The numbers don't lie, most of the time
The Ethereum blockchain, similar to the Bitcoin blockchain, is decentralized and broadly speaking, self-governed by its computer code / smart contracts, instead of by people. (if you forgot what a blockchain is see here) Ethereum has given rise to thousands of applications that are trying to disrupt industries that historically have depended on the need to trust third-party intermediaries. The three most common categories of applications are: decentralized finance ("defi"), non-fungible tokens ("NFTs") (see here), and decentralized computing power / storage. Over the coming months I'll dig into all three
What are the origins of Ethereum?
Ethereum was founded in 2015 by Vitalik Buterin and a team of programmers. Vatalik built the Ethereum blockchain due to the limitations of the Bitcoin blockchain. Relative to Ethereum, the Bitcoin blockchain is very simple - its sole purpose by design is the immutable tracking of bitcoin ownership. Ethereum is the exact opposite. If Bitcoin is a calculator (i.e. can do a few simple operations), Ethereum is a computer in that users can easily build on top of it. Creativity and innovation are the limiting factors of what can be built on the Ethereum blockchain
Unlike Bitcoin, which has a fixed supply of 21 million, Ethereum does not have a max supply or any real monetary policy. However, recent upgrades to the system are looking to change this (too nuanced for this space, if interested look into EIP-1559)
Why should you care:
The Ethereum blockchain is growing at a pace faster than Bitcoin in terms of active developers. Since Q3 of 2019, the blockchain has averaged 300+ devs a month. The ecosystem is undeniably attracting some of the world's best innovators. Where the talent goes, so does the value creation and value capture
In addition, Ethereum has demonstrated similar, if not strong virality than bitcoin
My “hot take”:
The greatest challenge in understanding the blockchain ecosystem is creating mental models that categorize the value proposition and potential value creation of the various projects. This is challenging because a) the space is changing rapidly, b) there are low barriers to entry, which results in a lot of copycats and can make it hard to distinguish what is "real", and c) it is unprecedented - we have never had computers that can make commitments. Traditional computers are ultimately controlled by people, either directly in the case of personal computers or indirectly through organizations. Blockchains invert this power relationship, putting the code in charge
Blockchain technology has led to two separate revolutions. One is a monetary revolution and the other is a technology revolution. The monetary revolution is bitcoin and the disruption of the fiat monetary system. As discussed last month, I think this revolution is likely to be winner take all, as the history of money is zero sum
The technology revolution has spawned thousands of non-Bitcoin blockchains / crypto assets. The technology revolution has thousands of small teams of entrepreneurs and operators working relentlessly to innovate in various industries. The technology revolution will not be winner-take all. It will be more akin to Venture Capital investing - ie there will be thousands of "losers", hundreds of "decent" projects, and a handful of exceptional technological innovations that withstand the test of time. The beauty of technological revolutions is the incredible positive feedback loop that sucks in the brightest minds to create things that you and I cannot fathom today. I admittedly have no idea how much staying power the Ethereum blockchain has; however, it's hard to ignore the developer activity and the massive growth of the various applications that have been created on the blockchain. Most of the applications will fail; however, the uncovering of what is possible will continue to inspire more developers and entrepreneurs to make new things. The innovation occurring on the Ethereum blockchain (and others) will impact all our lives in some capacity in the not too distance future
The distinction of the two revolutions that we are living through is important because it allows you to approach each with an open and clear mind. The Bitcoin blockchain is solving a very different problem than the Ethereum blockchain. Maximalism is appropriate in currencies. Maximalism is inappropriate in technology
Who did what this month?
Asset management firm Neuberger Berman has given its $164 million commodities-focused mutual fund the go-ahead to invest indirectly in bitcoin and ether for the first time.Read more.
Wells Fargo Launches Passive Bitcoin Fund for Wealthy Clients: Wells Fargo registered a private bitcoin fund with U.S. regulators, becoming the latest mega-bank with an indirect crypto investment vehicle for its wealthiest clients.Read more.
Coinbase to Add Over $500M in Crypto to Current Holdings: Coinbase will be purchasing more than $500 million in cryptocurrency to add to its balance sheet. Coinbase intends to invest 10% "of all profit going forward in crypto.Read more.
Something else I’ve been thinking a lot about - the denominator matters: all time highs, may not actually be “all-time highs”
The S&P 500 hit four all-time highs this week - how much of it is due to value creation in SPY vs the depreciation of the US dollar? I'll let you draw your own conclusions from these three charts. Particularly interesting in the context of how we think about the valuation of assets we investing in. (source: https://inflationchart.com/spx-in-m3)
