Bitwise Letter to Investors: Why is Ethereum Valuable?

Editor's Note: This article comes fromBlock Record (ID: BlockchainInsights), published with permission.

Editor's Note: This article comes from

, published with permission."digital gold"Why is Ethereum valuable? The reason is the rise of decentralized finance and the opportunity of programmable money.

As we write this letter on July 8, Bitcoin is up 32% year-to-date, outperforming stocks (down 1%), bonds (up 6%) and gold (up 18%). Its excellent performance is accompanied by

digital gold"The investment thesis has been sought after by more and more investors."In last month's letter, we wrote about the long-term investment case for Bitcoin (Why Bitcoin is Valuable - Debunked

big fool

theory. ) In view of the strong performance of Ethereum, in this letter, we will use a few pages to give you an in-depth look at it."secondary title"One of the biggest market opportunities in Ethereum & Cryptocurrencies

Many people new to crypto assume that there is only one crypto asset that matters in the long run and that the challenge as an investor is to choose

most

kind of.

We disagree with this view.

Why do you say that? Because different cryptoassets (and their associated blockchains) focus on different use cases.

As we have often discussed, the Bitcoin blockchain has the advantage of being secure and tamper-resistant, which makes it perfectly suited for the use case of digital gold. Another class of blockchains is focused on being a payment tool and therefore prioritizes features like speed, privacy, or price stability, such as XRP, USDC, Zcash, and Monero.

Let's explore that.

The difference is that Ethereum was the first, and today the largest, blockchain optimized for programmability (or digital contracts). Importantly, this may be one of the most exciting applications of blockchain technology.

"Let's explore that."secondary title

The Rise of Programmable Money: One of Cryptocurrency's Crucial Fundamental Breakthroughs"programmable money"。

(or assets) is the new tech term that simply means that encrypted assets can be traded in ways that physical assets cannot."what does that mean? Most people think of crypto asset trading as a simple cash-based payment method; similar to"。

Alice sends cryptoasset X to Bob to pay him

With programmable currency blockchains like Ethereum, more complex forms of crypto asset transactions are made simple; as"Alice sends encrypted asset X to Bob, but it must not take effect until Carol also agrees to the transaction"This may sound a lot like an escrow transaction to you, which is often used when individuals are buying a home or when a company is executing an M&A transaction. The difference and the breakthrough is that cryptography allows you to do it without escrow companies, without lawyers, without banks...so no need to pay them anything, no delay waiting for them to open and respond to you, No bias either."The transaction above is just an example. It's also easy to add another level of complexity, like,"Alice sends encrypted asset X to Bob, but not earlier than 5 years, and only after Carol agrees

- which looks more like a trust - or"If Carol wins the game, Alice sends crypto asset X to Bob, if Carol doesn't win the game, Bob sends crypto asset Y to Alice"- This looks more like a contract.

The ability to perform more complex transactions than direct payments is"programmable currency"Concept definition. Many cryptocurrency assets (including Bitcoin) can handle the simplest form of these transactions, but the Ethereum blockchain was designed to support full customizability and complexity.

Programmable transactions

How about the ability to rethink nearly every type of service the financial industry offers, from simple custodial accounts and trust entities to complex ideas like capital raising, mortgage lending, product design, lending, margin trading, and more?

secondary title"decentralized finance"Ethereum's recent explosive growth in usage: stablecoins, lending services have surged to billions"DeFi"。

The crypto community has come up with a term to describe this category."DeFi "decentralized finance

Most investors are hearing

• stable currency

The initial reaction at the time was that it sounded good, but also a bit like science fiction; people thought that real-world applications must be many years in the future.

But while it doesn’t get much attention in the popular press, real-world adoption of DeFi has exploded in recent months. In fact, in the first half of 2020 alone, we’ve seen the development of two multibillion-dollar use cases: one around stablecoins and the launch of the wildly successful decentralized lending marketplace Compound.

stable currency

Stablecoins enable many real-world uses. They are used by crypto investors who want to deposit money in less volatile USD without withdrawing from cryptocurrency exchanges; by those who want to create digital contracts settled in USD (as in the Alice, Bob, etc. Personal use; used by individuals in countries with capital controls to store funds outside the local currency system. More recently, stablecoins have become the underlying asset for many decentralized finance applications.

• borrow money

What does this have to do with Ethereum? Ethereum has established itself as the platform of choice for issuing stablecoins, through the programming of Ethereum's flexible digital contract capabilities as described above.

The two most important stablecoins, Tether and USDC, have seen explosive growth over the past year, with total assets on the Ethereum network rising from less than $1 billion 12 months ago to over $7 billion today . This growth shows no sign of slowing down.

borrow money

Developers have tried using ethereum’s digital contracts to create marketplaces for programmatically lending and lending other cryptocurrencies. One of the most successful recent examples is Compound. Compound is essentially a decentralized cryptocurrency marketplace for crypto assets, and its backers include prominent investors such as Andreessen Horowitz (a16z) and Bain Capital."Compound provides the functionality you might expect from a bank. Savers can deposit crypto assets and earn interest, while borrowers can obtain mortgage loans on the platform. As discussed, there is no trusted third party between the borrowing user and the borrowing user, it's all done by a decentralized software program and associated token."Although this is not

replace the banking system

, but that’s no small feat for brand new technology, and the growth is explosive, in a space that largely didn’t exist a year ago.

secondary title

How sustainable is DeFi and how much can it grow?

One of the interesting things about the way the decentralized finance ecosystem is developing is that these programs all run on top of the Ethereum network and can be combined in different ways to provide new solutions.

A common metaphor is that building a decentralized financial market is like building a castle out of Lego, where each program (stablecoin, lending, exchange, etc.) is like a generic Lego building block that can be combined in different ways. Implement increasingly complex things.

The more of these Lego blocks, the more combinations of new products, the more practical, and the more Ethereum can establish itself as the leader in this field.

As a nascent technological development, decentralized finance is of course accompanied by considerable risks, limited history and difficulty of use. Just as Bitcoin is not guaranteed to become digital gold, Ethereum is by no means guaranteed to find a large market for digital financial contracts.

However, we believe that many investors are right to be more involved with this opportunity because the opportunity is huge... After all, a good investment is not found to be risk-free, but to find risk with commensurate return potential .

In this case, the market value of ether today is only a small fraction (about 10%) of the fines paid by US banks since the global financial crisis in 2008. If Ethereum becomes the base layer for a new system of alternative financial services, the upside is huge.