Why ETH is irreplaceable: From the perspective of Ethereum economic bandwidth classification
Editor's Note: This article comes fromBlue Fox Notes (ID: lanhubiji), reprinted by Odaily with authorization.
Editor's Note: This article comes from
Blue Fox Notes (ID: lanhubiji)
Blue Fox Notes (ID: lanhubiji)
Foreword: This paper argues that not all economic bandwidth is of equal importance from the perspective of open finance development. Among them, ETH and BTC are completely trustless economic bandwidth, they have trustless issuance and trustless settlement. According to the two dimensions of issuance and trust, assets in three different quadrants can also be distinguished: bearer assets that must be trusted, legal trust assets, and national trust assets. But, in the end, the best match for open finance is a completely trustless asset, which is why ETH is irreplaceable. The authors of this article are Ryan Sean Adams and Lucas Campbell, translated by "An" from the "Blue Fox Notes" community.
Economic bandwidth is the fuel that enables open, decentralized financial applications. In ETH2, economic bandwidth is also used to secure Ethereum as a global settlement layer. The more economic bandwidth on the network, the greater the capacity of its financial applications, and the higher the security of its network.
To power a decentralized, permissionless financial economy, Ethereum will require trillions of dollars of economic bandwidth. But where does it come from?
Yes, economic bandwidth comes from the total value of network assets. However, we need more specific granularity...because not all economic bandwidth is created equal.
secondary title
Trustless Economic Bandwidth
Importantly, ETH provides the most valuable form of bandwidth - trustless economic bandwidth. ETH is trustless value that provides economic bandwidth for Ethereum's permissionless currency protocol. In order to build a trustless economy, trustless value is needed. Imagine for a moment that USDC is the primary reserve asset for Ethereum. The whole system will be limited by what Coinbase, Silvergate, and the Federal Reserve think. Not decentralized enough, the same as the existing system.
Only encrypted native assets settled on a completely decentralized chain (such as BTC and ETH without centralized support) can realize value without trust.
But can Ethereum tokens also be a source of trustless economic bandwidth?
example:
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Tokenized Assets as Economic Bandwidth
Although tokenized assets on Ethereum provide economic bandwidth, it is not necessarily trustless economic bandwidth.
example:
Synthetix is a synthetic asset issuance protocol, which is built on Ethereum, and it has a value accrual asset SNX. Although Synthetix introduced ETH-based collateral, a move that will greatly increase the economic bandwidth of synthetic assets, today, its synthetic assets are basically completely dependent on the economic bandwidth provided by SNX.
Yes, but they have to trust Synthetix.
Even though SNX has proven itself as a form of economic bandwidth within the Synthetix ecosystem, it lacks the most important characteristic when it comes to economic bandwidth in the broader permissionless economy: it is not trustless. When SNX is settled on-chain, the Synthetix team has sufficient control to supplement its issuance.
SNX has trustless settlement as it is on Ethereum, but its token issuance is not trustless as its supply has the potential to be manipulated by selfish third parties. SNX is not as trustless as ETH.
There seems to be a variable range of trust between the axes of issuance and settlement. Can we apply this to a broader asset class?
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trust quadrant
Let's define the level of trust associated with an asset in two parts: trustless issuance and trustless settlement.
Trustless issuance means that the asset's issuance policy does not depend on and cannot be manipulated by a selfish third party.
Trustless settlement means that the finality of asset transactions is not dependent on and cannot be manipulated by a selfish third party.
Assets with both trustless issuance and trustless settlement are the best form of economic bandwidth for a decentralized system. Zero-trust assets (assets that do not require trust at all) are assets in the upper right quadrant.
Zero Trust Assets (T0): Trustless Issuance & Trustless Settlement
Bearer Trusted Assets (T1): Trusted Issuance & Trustless Settlement
Legal trust assets (T2): trustless issuance & trustworthy settlement
National Trust Assets (T3): Credible Issuance & Credible Settlement
In today’s world, ETH, BTC, and gold are the three most trustless forms of economic bandwidth. Unfortunately, since gold's trustlessness is limited to its physical form, it has less available bandwidth in a digitally native economy.
Here's how we map these assets:
Let's look at the inference process:
The first fully trustless asset:
BTC: A Completely Trustless Asset Settled on the Bitcoin Network
ETH: Similar to BTC, but its issuance & settlement is slightly less trust-free than BTC
DAI: backed by ETH, but its oracle & governance make it less trustworthy than ETH
DAI (future): If trustworthy assets are added to DAI's collateral type, then DAI will shift to the left
A bearer trust is about owning:
Cash fiat currency: settlement through ownership, but its issuance must trust the US government
A legal trust asset is usually a neutral issue asset wrapped in a legal security:
Tokenized Gold: There is no way to manipulate the issuance of gold - but if the gold in the vaults backing PAXG disappears, what you can do is go through the legal system to recover it
wBTC: Bitcoin certificates hosted by a legal entity, settled by the legal system
National Trust assets contain almost everything else in our traditional financial system:
Stocks: Shareholders vote for additional issuance, settled through the company law
USDC: It is not actually settled on Ethereum, but settled in dollars in the banking system
Treasury Bills, Derivatives, Bonds, CDs (Blue Fox Note: Large Negotiable Certificates of Deposit): All of these are National Trust assets.
Maybe you'll change the position of some of these assets in the diagram, but do you see how the model works? Assets in the lower left quadrant require military and government support. Things in the upper right quadrant do not need the support of these coercive forces.
Why is gold bullion completely trustless? The issuance of gold is determined by physics. Increasing the supply of gold on the surface is costly (unless gold mining in oceans or asteroids makes a technological leap). The settlement of gold is also trustless, and finality is only achieved when a unit of gold is transferred from one person's physical possession to another person's physical possession. Ownership is final.
ETH and BTC are the only two multi-billion-dollar digital assets in the completely trustless quadrant. DAI, tBTC can become trustless assets only because of ETH and BTC. This is why cryptocurrencies are so important.
But Bitcoin also has problems.
Because Bitcoin is subject to its network capabilities, it acts more as a peer-to-peer value transfer network than a programmable currency network. Most of Bitcoin's currency verbs rely on trusted crypto banks.
This is why ETH is so important. The performance of Ethereum means that we can create a complete monetary system in the zero trust quadrant.
This is why ETH is not fungible.
(Above: Have you heard of Gartner’s Magic Quadrant? Top right is the Magic Quadrant for the crypto world.)
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Economic Bandwidth Types for Ethereum
Do the math. How much economic bandwidth is available with Zero Trust (T0) compared to other forms of Ethereum?
T1 economic bandwidth forms a total available bandwidth of $5.4 billion as it includes most token projects like LINK, SNX, BAT, etc. These liquid assets have trustless settlement, but their issuance is trustworthy. distributions that must be trusted, as their respective teams have sufficient control over the protocol to change the distribution.
That is, if these T1 tokens can minimize the influence of individual entities and institutions in the ecosystem, it is entirely possible for them to become trustless economic bandwidth in the future. BTC has also stayed in the T1 quadrant!
T2 and T3 provide over $1 billion and $3.2 billion in economic bandwidth, respectively. Recall that T2 assets have trustless issuance but trustful forms of settlement - wTBC and tokenized gold are examples.
T3 assets include USDC, TUSD, and USDT, which are fiat-backed stablecoins with trusted settlement and issuance, which makes them largely dependent on the legal financial system for success. USDT provides the highest amount of T3 economic bandwidth, with more than $2.7 billion, of which $4.3 billion is tokenized circulating supply on Ethereum.
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We also measure the economic bandwidth consumed by DeFi protocols. Today, DeFi on Ethereum consumes more than 3.27% of T0 available economic bandwidth. This is the most decentralized DeFi activity on Ethereum.
But, of course, DeFi protocols (such as Compound, Uniswap, Maker) are not strictly limited to trustless economic bandwidth. Compound, for example, has a permissionless lending marketplace for a range of Ethereum-based assets, including USDC.
Even though USDC has a relatively high usage rate in DeFi, overall T3 economic bandwidth consumption is still low. This is due to the lack of adoption of Tether in DeFi, and USDT is the largest provider of T3 bandwidth in our dataset.
In the end, it can be seen that Ethereum's currency protocol does not only consume trustless economic bandwidth. It also makes it possible for liquid, non-trustless assets to act as economic bandwidth for the wider ecosystem.
While DeFi protocols can leverage trust-based forms of economic bandwidth to improve financial products, it is critical that we remain focused on the mission of open finance: trust minimization.
epilogue
Trustless economic bandwidth is the trust-minimizing fuel of an open economy. Combine this with a permissionless currency protocol, and it's an unstoppable force for money and finance.
Unless our goal is simply to refactor the same old financial system, we need trustless economic bandwidth. This is the most important thing we need to remember as we pioneer this financial revolution.
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epilogue
The purpose of this paper is to propose a taxonomy for economical bandwidth. By analyzing assets in the trust quadrant, we construct a framework for understanding the importance of trustless assets for decentralized finance.
