12 October 2020

Why Blockchains Matter

The second in a series from our engineering team focused on the intersection of money and technology.

Check out Part I from Diran on Messari's Uniswap integration here. Check out our open engineering roles here.

Bitcoin not Blockchain. Or Blockchain not Bitcoin?

It wasn't until the summer DeFi craze of 2020 that I finally, viscerally, understood the abstract use case for blockchains.

It occurred to me while nervously depositing money (in the form of a stablecoin) into a Yearn Finance vault. Suddenly, I felt the weight of moving my own "real" USD money into a black box. There is no recourse here, no real-world laws or courts to protect me. But the value of an open computing platform like Ethereum finally hit me. This wasn’t a black box. I could manually inspect the exact source code of the app I was interacting with. This means I didn't need to trust a company or a government to save me. If I was confident the code worked, then I could be confident that my money was safe. This is why blockchains matter. I don't need to trust a third- party human or organization. Instead I trust code that I can read. Blockchains aren’t magical; they’re trusted computing platforms. They’re a building block for the information age and should be evaluated as such.

Evaluating Blockchains

Once I saw Ethereum abstractly as a trusted computing platform, and Bitcoin as a limited (not turing complete) trusted computing platform, I felt comfortable acknowledging their strengths and weaknesses in search of a better blockchain. My mental focus shifted from “which chain is hot right now” to “which one has the desired properties and tradeoffs for a particular use case”. With this subtle mindset shift, blockchains felt like utility rather than magic, and all use cases in finance suddenly felt like software engineering problems.

But since we're examining things coldly and objectively, we must also distinguish user growth from the underlying technology trade-offs. For example, Bitcoin grew despite handicapping its transaction throughput in favor of decentralization. Ethereum grew despite an early fork that questioned their ability to maintain "code as law". Thus, Bitcoin and Ethereum's growth may be more attributed toward their community, narratives/stories, culture, and/or religious zeal. This means we shouldn't assume that their current technology attributes are desirable. Besides, if technology really mattered, Zcash would be beating Bitcoin in usage and marketcap. (editor's note, TBI did not write this).

This observation does not mean we should be satisfied with the status quo. It’s a warning that we need to correct our preference for hearing stories over picking the right technology. In the end we cannot compromise on having a cheap, fast, private, secure, decentralized trustable compute platform. All of those features will be necessary to survive the failure of the nation state.

So if you can evaluate blockchain technology objectively, then you can see it’s possible to engineer a blockchain network with whatever properties we need to replace legacy assets from first principles (see Ampleforth’s engineered supply for price stability). For example, should we create a synthetic gold instrument or should we engineer something with the exact properties we need to get the desired portfolio diversification (perhaps there’s something better than gold)?

The question is not: “is crypto asset $XYZ correlated with stocks?”.

The right question is “is crypto asset $XYZ engineered tobe correlated with stocks?”.

The difference is acknowledging that blockchains obviate laws, police, and courts and then embracing the potential of reimaging money and finance from first principles.

-J. Otto

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