The fifth anniversary of Ethereum since the mainnet launched is just around the corner and marks an important milestone in the long history of the first smart contract platform to achieve significant adoption.
After the initial coin supply craze, today’s main narrative behind Ethereum is decentralized funding, an ecosystem that seeks to recreate the financial system from scratch on the blockchain.
Since Ethereum was founded, the application layer has been at the center of its value proposition. In a 2014 interview, Ethereum’s co-founder Vitalik Buterin illustrated that Ethereum is not just about the Ether currency and pointed out a variety of alternative tokens that could be used:
“You can use this currency that uses financial derivatives to perfectly keep track of the price of a US dollar. You can use basket currencies […] or now you can also have a contract that acts as a Bitcoin sidechain. “
In a somewhat prophetic statement, Buterin essentially described Dai (DAI), the decentralized token that uses a secured credit system to maintain a US dollar peg. It’s possible that Buterin spoke to Rune Christensen, who was already working on MakerDAO development at the time.
Centralized stablecoins like Tether (USDT) and USD Coin (USDC) can be viewed as basket currencies, while Bitcoin-on-Ethereum projects like WBTC, tBTC and Ren play the role of sidechains.
He went on to explain the key use cases he envisioned for the Ethereum blockchain:
“We talk about things like creating your own currencies, setting up other currencies, decentralized organizations, voting protocols, name registration, every type of financial contract, financial marketplaces.”
Many of these use cases can be found in Ethereum today.
Was DeFi destined to show up?
The early years of Ethereum can be described as the preparation and implementation of the first coin offering era.
Speaking about funding public goods in a December 2015 interview at Devcon 1, Buterin said:
“In general, there is this chronic problem of public goods underfunded almost everywhere, and pretty much no one has come up with a consistent solution, except just governments that go around and take 30% of people’s money.”
The DAO was the first attempt to solve this problem on the Ethereum blockchain. It was a “decentralized autonomous organization” in which the community pooled funds and decided on the basis of a decentralized system of governance which projects to invest in.
The idea quickly failed, mainly due to a smart contract bug that resulted in a significant portion of all of the ethers in circulation being stolen. But while the launch and the subsequent fall took place in the summer of 2016, the actual development of the DAO began around August 2015 – almost immediately after the launch of Ethereum on July 30th.
Decentralized funding in the form of ICOs then went through its own boom and bust cycle, but many of the existing DeFi projects have their roots at the height of this era.
MakerDAO was launched in December 2017. Compound Labs started in August 2017. ETHLend, the forerunner of today’s Aave, was born as an ICO in September 2017.
Speaking to Cointelegraph, Corey Petty, Status Chief Security Lead, said he believed “this move was inevitable for DeFi”.
However, setting up the infrastructure took time. “That’s only happened now because we didn’t have enough liquidity and stable coins to build on,” he added.
Synthetix founder Kain Warwick told Cointelegraph that he did not believe that finance was “the core focus of Ethereum” but “the whole point was that generalized smart contracts could open worlds of opportunity”.
“In retrospect,” he added, “it makes sense that decentralized financing is one of the first contract categories to really achieve product market viability.”
The world of DeFi is also reviving the concept of the DAO, as many projects rely on community governance with equity-like incentives. Warwick said:
“What changed between 2016 and 2020 is time. Everything new takes time. It takes time to make mistakes, to fail, to learn from one’s mistakes and the mistakes of others, and to use them to move forward. “
Nonetheless, he added that “the DAO renaissance is still in its infancy”.
What about non-financial uses?
One of the defining features of the ICO era was the idea that blockchain technology and smart contracts could be applied to almost any real-world industry. Since many of the promises were not kept, some became disaffected with the general concept of blockchain.
Petty believes “what you saw in 2017 was some kind of irrational exuberance of technology before it was really done.” In his opinion, the infrastructure for these projects to flourish was not yet in place. Because of this, Status decided to help build Eth 2.0, developer tools, and a decentralized messaging system for governance.
Warwick believes it was a matter of incentives, noting that “we only recently started demonstrating how to use native tokens to incentivize and boot early network effects”. However, he cited the ENS system as a current example of “incredible innovations” that are not of a financial nature.
The next five years
As we are currently seeing the growth in key use cases that was expected five years ago, one could argue that some of the ideas from 2017 will find their way back as well.
Petty noted that Status is committed to building the Ethereum infrastructure so that “these narratives, these use cases, these companies can come back and actually be useful”.
In his view, a decentralized and short-lived messaging system is a core component as it would enable decentralized organizations to coordinate themselves in a unified and integrated system.
Warwick, on the other hand, focused on DeFi growth:
“I think the next five years of Ethereum innovation are likely to be in finance, we have two decades of stagnant fintech” progress “to take and it will be very quick.”
But once people get used to trusting Ethereum for programmable money, he said, “it becomes a lot easier to trust Ethereum for everything else.”
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