The fifth anniversary of Ethereum after the start of the mainnet is just around the corner and marks an important milestone in the long history of the first intelligent contract platform to achieve significant acceptance.
After the initial coin offering, 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 heart of its value proposition. In a 2014 interview, the co-founder of Ethereum, Vitalik Buterin, showed that Ethereum is not just about the ether currency, but also about 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 enter into 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 developing MakerDAO 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 then explained the most important use cases he had envisioned for the Ethereum blockchain:
“We’re talking about things like creating your own currencies, creating other currencies, decentralized organizations, voting protocols, name registration, any 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 characterized as preparing and executing the first era of the coin offering.
Speaking about funding public goods in a December 2015 interview at Devcon 1, Buterin said:
“In general, there is the chronic problem of public goods underfunded almost everywhere, and almost no one has come up with a consistent solution, except just governments that go around taking 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 municipality pooled funds and decided on the basis of a decentralized governance system in which projects to invest.
The idea quickly stalled, largely due to a smart contract bug that resulted in a significant portion of all of the ethers in circulation being stolen. While the launch and the following autumn took place in the summer of 2016, the actual development of the DAO began for some time in 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, Chief Security Lead at Status, said he believes “this move was inevitable for DeFi”.
However, setting up the infrastructure took time. “It 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 doesn’t believe that finance is “the core focus of Ethereum” but “the whole point is that generalized smart contracts could open worlds of opportunity”.
“In retrospect,” he added, “it makes sense that decentralized financing should be one of the first types of contract to really get to market.”
The world of DeFi is also reviving the concept of the DAO, as many projects are based on community governance with equal 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 your mistakes and the mistakes of others, and to use them to move forward. “
Still, 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 just about any real-world industry. With many of the promises not being kept, some became disillusioned 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.” According to him, the infrastructure for these projects was not yet in place, which is why Status has decided to help build Eth 2.0, developer tools and a decentralized messaging system for governance.
Warwick believes these are incentives, noting that “we have only recently begun demonstrating how native tokens can be used to properly promote and boot early network effects.” He referred to the ENS System, however, as a current example of “incredible innovations” that are not of a financial nature.
The next five years
As we are currently watching the growth of the key use cases that were expected five years ago, it could happen that some of the ideas from 2017 will find their way back as well.
Petty noted that Status is trying to build 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 of this, 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 will likely be focused on finance. We have to override the ‘advancement’ of fintech technology for two decades and it will be very fast.”
But once people get comfortable trusting Ethereum for programmable money, he said, “It’ll be a lot easier to trust Ethereum for everything else.”