The following is a guest post from John deVadoss, the Co-founder of InterWork Alliance.
Act One: From a Crisis, A New Institution Emerges
On July 30, 2008, the United States Housing and Economic Recovery Act, intended to address the subprime mortgage crisis (which had precipitated the then ongoing Global Financial Crisis), was formally signed. Two weeks later, on Monday, August 18, 2008, the domain bitcoin.org was registered.
By November 2008, Quantitative Easing was in action, and the United States Federal Reserve had started buying mortgage-backed securities. In January 2009, the code for Bitcoin was released as open-source, and by March 2009, the Federal Reserve held close to two trillion US dollars of bank debt, mortgage-backed securities, and Treasury notes.
Suppose the goal was to beta-test digital currency at scale towards disintermediating secondary and tertiary financial institutions by directly linking citizens and a central bank. In that case, Bitcoin has been a spectacular success, heralding the upcoming era of CBDCs. If the goal were to make the common man conversant with digital currencies and their usage, Bitcoin would have succeeded remarkably.
A revolutionary breakthrough when it was released, Bitcoin is many things to many people: a virtual currency, a new kind of money, a store of value, and the promise of freedom. But, more than anything, Bitcoin is a new monetary institution for the digital age. Bitcoin has demonstrated that digital monetary institutions are the future; it has done its job by moving the goalposts from why to when.
Some see in Bitcoin and its pseudonymous creator(s), a Robin Hood-type legend, a Zorro-like hero, or a populist protagonist standing up against the system. It is not for me to deconstruct the thematic illusions, but as the old adage goes, the truth is bound to make you smile when it arrives.
Act Two: The Rise of a Monolith and its Discontents
Bitcoin begat Ethereum, a 21st-century application platform to rival any of Silicon Valley’s so-called enterprise-grade, global-scale platforms. And the Ethereum team did it all in the open, on with a crew of mostly volunteer developers spanning time zones and political and geo-political boundaries, long before working from home was a thing, shepherded by the genius of their founders and core developers.
Why Ethereum? Contrary to popular perception, Bitcoin is more than an application; it is more than the collection of technical capabilities that comprise the network and certainly more than a token. It is an institution, a self-governing institution. But it is not a platform. Bitcoin, when it was released, had a level of scripting extensibility, but it was not yet ready to enable developers to build new instances on top of it.
Ethereum, with its vision of being the world’s computer, set out to create the definitive decentralized platform abstraction, a blockchain with built-in Turing-complete programming support, allowing developers to write smart contracts and to create decentralized protocols, services, and applications. And by any measure, the Ethereum project has been stunningly successful.
Programmable money, fiat-backed stablecoins, and the digitization of real-world assets are but some of how Ethereum has reshaped the world of monetary policy. Lending/borrowing platforms, prediction markets, and insurance are some of the financial domains in which Ethereum has helped rewrite the rules for historically highly intermediated products.
As a result of its extraordinary success, scaling has turned out to be a critical issue for the Ethereum project; it is worth noting that its scalability issues result from the project’s prioritization of decentralization and security over scale. Scaling enhancements are anticipated to address network congestion and reduce transaction costs; Ethereum’s gas fee problem has been a recurring theme.
There are two primary ways to scale the Ethereum network: on-chain and off-chain. On-chain refers to enhancements to the base layer and modifications to the network. Off-chain refers to the use of a separate network(s) (so-called Layer 2) to process transactions; Layer 2 networks may choose to emphasize scale over decentralization and security as they can benefit from the base network’s strengths in these areas.
Now, here is where things became very interesting. The so-called “on-chain” proponents appear to be reluctant to let go, while the “off-chain” exponents appear to be eager to innovate. This is the classic saga of a maturing platform: how much loose coupling? How much composability? And on the other side, how much to enshrine on-chain before it becomes a net detractor for innovation?
For obvious reasons, Ethereum does not want to end up primarily as a reconciliation ledger for other Layer 2 networks and roll-ups, but at the same time, a monolithic approach imposes limits on a platform and its ecosystem and impacts a platform’s ability to continue to grow its developer base. Things came to a head when Ethereum did its Merge update to Proof of Stake from Proof of Work.
Trust is now a facet of staking and not mining anymore; was the value now more in the tokens and with the stakers? Or did it still lie in the underlying capabilities? And for how long? Could they be swapped out with newer, more innovative capabilities? And this leads to Act Three.
Act Three: A New Economic Platform Advances
Ethereum begets EigenLayer, a first-of-a-kind economic platform.
In retrospect, it may appear linear, but it was genius, a first-class paradigm shift. The world may not be different with a change of paradigm, but the developer now works in a different world as they say, with a new mental model. We will look back and see a distinct transformation between decentralized applications in the Pre-EigenLayer era and those in the Post-EigenLayer era.
And it was the Merge, with the shift to PoS that enabled EigenLayer to reframe the decentralized application model; PoW has no notion of negative incentives, but with PoS, while validators may earn rewards, their stake may also be slashed for misbehavior. With the advent of PoS, EigenLayer is able to programmatically bootstrap and scale Ethereum’s trust model to guarantee economic security for a host of new protocols and services.
Developers can secure their services without the need to create their validators, or to launch tokens, etc. The promise of loose coupling can now be extended to economic abstractions by creating markets for decentralized trust. A fascinating three-act play thus far, it remains to be seen what act four portends.
John deVadoss is a co-founder of the InterWork Alliance, and he serves as on the Governing Board of the Global Blockchain Business Council.