¶ Internet Native Settlement
¶ The World Computer
Ethereum is the World Computer - a credibly neutral, globally shared utility that exists between a network of thousands of untrusted computers (called nodes).
Imagine a virtual computer that exists on the internet, where every user has equal access and status.
Crypto's innovation is the ability to operate the computer trustlessly and securely while guaranteeing open access.
¶ Internet-Native Property Rights
Deep Dive: Internet-Native Property Rights
Ethereum achieves this by coordinating around the asset ETH; economic rewards and penalties incentivize actors to behave properly without explicit trust.
Consensus is predicated on the ability to distribute (and for PoS, the ability to confiscate) ETH. The asset ETH is the lifeblood of Ethereum; one cannot survive without the other.
The result: property rights are built into The World Computer from day 0.
Ethereum is a decentralized virtual computer that exists on the internet. It's fundamental properties include:
- open, un-censorable access to anyone with an internet connection
- transparent, auditable record keeping
- exists in perpetuity
and native property rights!
¶ Internet-Native Settlement
With internet-native property rights, for the first time since its creation, we have internet-native settlement.
¶ Centralized Settlement
First, let's discuss how settlement (the final step of the transfer of ownership, involving the exchange of assets and payments) works in the real world.
Most financial assets are held in trust at a handful of centralized institutions; "ownership" exists in the records of those institutions
Eg, you buy a stock from a broker. The broker simply processes the deal between you and the seller. In order to actually transfer ownership and settle the transaction, they send a message to the centralized institution and tell them to update the accounts you have there (more or less).
¶ Non-Financial Assets
Non-financial assets aren't necessarily held centrally but still require a centralized actor to facilitate.
Let's say you want to sell a camera. Even if you can set up a sale without a marketplace like eBay, you still (probably) need a payment processor like PayPal.
¶ The Decentralized Solution
Ethereum supports 21st-century commerce with settlement built directly into the core systems; a new paradigm - decentralized settlement.
Settling on Ethereum doesn't require permission or special access. It's available to all, for any reason, at any time.
¶ Liquidity
Just like a car requires motor oil to function efficiently and safely, settlement requires liquidity.
Liquidity refers to the efficiency or ease with which an asset can be converted into the settlement asset (cash / $ETH) without affecting its market price.
Imagine a system with $1MM of liquidity:
- Trading ~$500, no problem.
- Trading ~$250k, the system begins to degrade.
- Trading $2MM, impossible.
The more liquidity available to a system, the more activity (number of trades, size of trade, etc) that system can support.
This presents a chicken-and-egg problem: does liquidity create trading activity or is liquidity just an effect of it?
Let’s leave that for the academics.
The reality is that liquidity is like gravity; the more it concentrates the stronger it attracts more liquidity.
¶ The Power Law
In fact, liquidity’s behavior follows a power law: a relationship in which activity densely clusters around a relatively small amount of outcomes.
Liquidity will always pool in a few deep, concentrated pools.
Monies/currencies/assets that attract enough liquidity become critical to the functioning of modern global finance.
Consider transactions done at the scale of nation states; sovereigns must ensure they trade in markets liquid enough to support their magnitude.
¶ Reserve Currency
Once a currency/asset has reached a large enough scale, nations, central banks and other large institutions will begin stockpiling it to ensure orderly access to finance and to the market.
At this point, we consider the currency/asset a Reserve Currency/Asset.
Today, there are just a handful of reserve currencies. The US dollar reigns supreme, with the Euro, the Japanese Yen and UK pound providing secondary capacity.
Countries/banks/corporations build treasuries of these currencies for both offensive and defensive purposes.
Whether it’s Goldman Sachs or Aunt Tayna, all entities in the modern economy need access to goods and services that they can’t produce themselves.Holding dollars/euros/yen/pounds the insurance that they will be able to access the market when they need to.
¶ Implications of Centralization
(Until crypto) systems that could support the scale of liquidity required for global commerce need:
- an issuing body (government)
- the full faith and credit of its equity holders (citizens)
- centralized control (the Fed)
- implicit force (military and justice system)
Using centralized systems, humanity has built the modern world… for better or worse.
In the 21st century, we are beginning to realize that centralization also leads to instability, corruption and zero-sum mentalities.
Bottom line, centralized systems always boil down to one question: which individuals are in control of the system.
By its very nature, crypto rejects this idea.
¶ Inevitable Ethereum
Look at the internet… for all the fancy bells and whistles we have today, it’s still an infant.
Before crypto, the internet was just a way to post and distribute information. Commerce was possible, but was routed through non-internet systems.
Post crypto, we have another option. One that isn’t controlled by a single entity, that can’t exclude or prejudice any party on earth.
Politics, revenge, back-room deals will always matter… but on Ethereum they will NEVER result in censorship, exclusion, or confiscation
Liquidity is like gravity: it’s going to hold itself together.
It takes an extremely compelling reason for an entity, let alone a system, to make a change.
Ethereum’s pitch:
“We can offer something never before seen in centralized systems.
We can offer fairness.”
¶ Resources
Source Material - Twitter Link
Source Material - PDF