Why you should buy ETH even if you do not completely understand crypto

TLDR:

1. A country becomes rich if it is has enough people and they can transact with each other without fear or favor.
2. Bitcoin will never truly become the settlement layer because there are no meaningful applications built on top of it.
3. Ethereum will become the settlement layer because of the applications built on top of it. Replacing Ethereum will become incredibly hard because of this.
4. CBDCs pose a unique challenge
5. A new cold war which will likely be much shorter than the last one between CBDCs and Defi will see Defi eventually win out
6. Because Ethereum will be the backbone of all Defi, buying and holding it will be a no brainer
7. ETH is hard money

Part 1: The Wealth of Nations

My mom is a bit old fashioned when it comes to economics. Sometimes we speak about the differences between the various countries and why some countries are wealthier than others. She often asks me the question, “But what does this country or city produce? Coal, Gold, fisheries?

The Saudis have oil and fewer people, so each person has a larger claim to the country’s wealth. Hence they are rich.

India has fewer minerals and other resources, and far more people. So the country is poor.

Most people in India agree to this elegant Malthusian explanation.

But that does not explain the rise of countries that have no meaningful natural resources to speak of such as Israel. Even Japan, the first Asian country to power through modernization does not have massive oil reserves or any other natural resources to boast off.

And it is well over a century since the gold rush happened in Victoria. Melbourne continues to thrive well after the diggers moved on.

The question that needs to be asked is where does wealth come from? Is a person living by himself on an island full of gold rich?

There is some truth to the adage that gold and diamonds dont make us rich, our relationships do. As trite it may sound it is based in sound economic theory.

Coming back to our island example, one person stuck on an island with a big bag of gold coins cannot do much with them. He still has to clean up after himself and make his own food and so on. Life is pretty rough for him.

But suppose word somehow gets out that on this island is a man with a lot of gold. Say he put a message in a bottle which was discovered on the next island. In that message he offers to give anyone gold who comes and works for him, does his cooking, laundry etc.

Others start travelling to this island to earn some gold. Life has become a bit better for the gold man now. The more people that come to the island the more of his needs are taken care of. Some of the people who come work for him, settle down and now have their own needs which in turn necessitates the arrival of more people.

Each transaction that happens between the 2 parties is a win win. You get the gold, I get some comfort and so on. Each party is a willing participant in the exchange of value. Both parties are materially better off post the transaction. The gold earned can be used by the other party to pay for their own needs.

As the number of people on the island increases, the number of possible transactions also increases. Which means the number of wealth creating opportunities also increases.

The above representative image is intentionally not perfect, but what it does demonstrate is not only do the number of potential transactions increase as the number of people increases, but that increase increases exponentially.

A town of 10 people not just has twice as many opportunities as a town of 5 people, but probably 4 or 5 times more.

Which means India with a population of almost 4 or 5 times should be 10 to times richer than the US in pure monetary terms!

But the reality as everyone is acutely aware of is that India is not only not richer, but actually significantly poorer than the US and also several other smaller countries.

What gives?

Let us go back to the previous example of the island. I am calling it the goldman island now (because it has the man with all the gold). Note that the opportunities and wealth creation would have still happened even if there was no initial person with all the gold in the world. People would have simply swapped other things of value to each other. Berries in return of meat, chicken in return of tables etc (till they invent money to make the exchange of value fungible and their lives simpler and better).

People would have exchanged value in return of value and prospered.

But suppose there was a bully on the island, who took services and products but did not offer equal or no value in return. In that case the incentive to produce would rapidly diminish. Each potential transaction now effectively creates lesser wealth because there is a chance that some of them don’t produce anything. The number of potential transactions also drops off because people do not have the right incentives and are demoralized.

No one wants to work and get nothing or less in return.

The island steadily grows poorer.

The people of the island realize what is happening. They gather together and come up with a set of rules that govern transactions. Gang up on the bully and throw him out into the sea.

Now the number of transactions that can happen and the potential wealth that can be generated from them rises back. Because people can transact with each other without fear or favor, exchange value in return of value and prosper.

So in order to become wealthy a country needs a lot of people and it needs a system of governance that is fair and enforced uniformly. The people in there need not be especially smart in a specific domain. They will themselves observe the needs of others and work towards creating solutions that solve the problems and enrich themselves, while making life better for everyone at large in the process.

In a country with a lot of people with rules that are either not fair or enforced uniformly, the number of value creating transactions that could take place will never reach the optimal levels. In the above island analogy, there is also a possibility that people learn to live with the bully and just try to get by.

May be they are too cowed down by the threat of violence. May be they subscribe to a school of thought that glorifies obedience without question. May be they were fed such a steady diet of how their culture and tradition of respect is superior to others, that they are blind to the facts of life and get defensive when someone highlights it to them.

In the absence of fair rules, people will opt not to do transactions because they are not sure they will get a fair return on their efforts and investment.

This effectively means a small well governed country can have more transactions and more value creation and hence wealthier than a large country with poor governance. However nothing beats a large country with good governance, and this explains the dominance of the US in financial markets.

People + fair rules that are enforced uniformly = wealthy country

You do need to have a ton of oil or gold, just getting the basics right suffices.

I will leave it to you to decide which ingredient India has missing. Note that dictatorships are not the answer because India’s economic history has shown demonstrably poorer outcomes under strongmen and women.

The reason is quite simple, even well meaning Dictators often make stupid decisions with stupid rules without consideration for second order consequences and there is no one to tell them that they are wrong. All Dictators think they are chosen by God to deliver the nation from its suffering, they usually end up aggravating matters simply because of the lack of a working feedback mechanism.

Most developed countries of the world are free market democracies with rule of law. Rich petro states exist, but all of them face potential economic oblivion as the world moves away from oil. Congo which is rich in mineral resources is one of the poorest because it does not have rule of law.

Are such rich countries such as the US, UK, Europe perfect? Ofcourse not, they indulge in horrors internally or externally all the time. But relatively speaking the environments they offer lead to more transactions happening and hence a greater wealth creation.

Can Communist China beat the west at its own game? The jury is out on this one, it has the weight of the population on its side but the rule of law is missing. China will do extremely well over an extended period but its inefficiencies will catch up with it over time.

Part 2: Bitcoin is not Gold

In the late nineteenth century and early twentieth century the world was actually far more economically integrated than it is today. Most currencies of the world were backed by Gold, which means interest rates were quite straightforward. Francs, Pounds, Dollars or Marks all represented fractions of gold. Capital movement worldwide was hence quite fast and simple, interest rates were quite low and the world had explosive economic growth. With radical technological progress such as the advent of electricity, gasoline powered vehicles, the capture and transport of sound and image via the gramophone and early video devices the world was rapidly modernizing.

And then the great depression came. The fixed supply of money meant a government intervention to jolt the economy alive was difficult. Commodity backed currencies worked till they did not.

Today most currencies are fiat, which means their true value is the full faith and credit of the governments that issue them. Which effectively means money from well governed countries is respected and accepted better. It also reflects in the fact that responsibly governed countries are able to borrow in their own currency.

On the other hand poorly governed countries have to borrow in dollar denominated loans, which means they are not in full control of their monetary policy. They complain that the world is not being fair, but only have themselves to blame.

The ability to borrow in your own currency however has led to a belief in the rich world that they have a “Get out of jail” card. Every time there is an economic crisis they try to print their way out of it.

Gold bugs warn of dire consequences and how the dollar will become worthless. But the outcomes on the ground tend to prove them wrong, inflation is non-existent in the rich world. Milk, Eggs and Bread have not become more expensive since years. And we tend to get better TVs and phones and computers for almost the same price each year. As much as people don’t like to admit, life is actually getting better and easier for most people. Salaries may have stagnated but most people in the rich world have access to better technology and services each year for the same amount of money that makes their lives progressively better.

The reality is that the dollar will continue to command value till the rule of law continues to exist in the United States. Till a system of fair and uniformly enforced rules continues, the country is generally ok. This is what made Donald Trump so dangerous, he strikes at the fundamental bedrock of what makes America prosperous.

Being the largest well run democracy in the world, the United States will continue to have the pre-eminent position in the world financially.

But can they print endlessly? Each dollar they print is a check which is being cashed against the future promise of America. And surely the pot will eventually get exhausted.

This danger is what has been driving interest in Bitcoin and other crypto in the second crypto summer.

Bitcoin is held out as Digital gold (after its spectacular failure as a currency). A settlement layer of sorts. Just like all currencies were convertible to the gold settlement layer in the olden days, the new utopia will have Digital gold in the form of Bitcoin.

This is patent nonsense, forget the fact that gold as a settlement layer did not work. Bitcoin itself is not gold or gold like.

It is probably close to the boorish MLM schemes which we all like to avoid. The only way you make money is by roping three others.

Let me explain why it is not even remotely close to gold.

First, where does the value of gold come from? I do not really subscribe to the theory that it is valuable because all of us accept it. Because that does not really explain why all of us accept it.

It was not airdropped onto us one magic day by Gods with the command to accept it as divine provenance. I also do not agree that it is valuable because it is one of the most widely traded and liquid commodities. Again active trading of a commodity only comes when it has acceptance beyond the trading market.

Oil is traded widely because eventually it finds active use. A barrel of oil eventually finds conversion into energy which can be put to productive use that can be clearly measured in terms of its utility.

Coffee beans are traded widely because eventually someone will want to take ownership of them and consume them. Yes, I live in Melbourne, and I love coffee.

Unlike oil and coffee, gold is not destroyed as part of its consumption though. But given that it is hard to mine and supply is limited it is argued that it is valuable because it is scarce.

But that is not a good point either, there are a lot of things that are really hard to do and lead to production of items that are truly scarce. For eg: It is truly hard to convince my 2 year old to draw something that resembles a real drawing. And when he does create something it is quite scarce, each of his drawings is unique but it is only valuable to me. I am reasonably sure for others they are just dabs of crayon on paper.

Gold’s value comes from something far more simpler and primitive.

It is shiny!

We as humans love shiny objects, but it cannot be just shiny for even shards of glass are, it has to be durable and stand the test of nature and time.

Gold is one of the least reactive metals. It will withstand corrosion even if it is left for thousands of years in salt water. Gold jewellery is attractive to people all over the world (and especially India) is because it is shiny and will preserve itself against the elements.

For someone in a 3rd world country trying to preserve their wealth against inflation and corrupt government, it is common sense to buy gold. When everything around you is changing and decaying, gold withstands the test of time.

That is the real source of gold’s value. That in turn makes it readily acceptable by everyone, you can take a bar of gold to any country in the world and chances are you will find a taker who will swap something of equal value in return.

It makes an excellent store of value for one more primitive reason. Gold can be scrubbed of its history. You can in theory take stolen gold jewellery and melt it down to ingots and bars and sell it to someone else and no one would be able to trace its origins.

That is not a bug, it is a feature.

Even with cash, notes have numbers which could theoretically be traced. Gold once melted is basically reborn, but it still commands the same value. For anyone looking to dodge the long arm of the law (just or otherwise) this is the killer app of gold.

Gold evokes in us something primeval. I live an hours drive to Ballarat which is an old mining country, miners here talk about how finding gold and holding it in their hands is like having a jolt of electricity.

Gold has been around for thousands of years as part of human civilization and will be around and accepted as a store of value till civilization survives. Chances are even if we hit an apocalyptic event and civilization collapses, men will still accept gold as a store of value and barter it for other goods.

It is shiny! and survives the elements.

It does not need electricity or the internet or any of the affordances of modern civilization. Even as cavemen we will be able to accept gold.

Heck even after Musk gets us to Mars, or better still we build and move to near earth O’Neill Cylinders, Gold will be accepted in these societies separated to earth even if we lost direct contact with earth. Humans anywhere in the universe will still want it.

Lets recap then some of the key reasons why we love and accept gold

1. Shiny, is attractive visually

2. Preserves itself physically against the elements

3. Can be untraceable source of bearer value

4. Can survive and be usable after the Zombie apocalypse

5. Can be used in O’Neill cylinders even if they have no direct contact to earth (we are not really going to settle on Mars, sorry Musk fans but Bezos has the better idea).

There are a lot of other reasons which have been widely discussed and debated by others. They in my opinion miss some of the more primal things and gloss over it by simply saying because it is accepted by everyone it is accepted by everyone. That is circular logic and meaningless.

Now let’s get to the real point of this article. Is Bitcoin similar or comparable to gold? Lets benchmark it;

1. It is not shiny, bummer! There is no visual sensory aspect.

2. Activity in it is very transparent and traceable. Believe it or not, this works against it. Although there are ways to cover your tracks, a determined entity can trace the movements given the transparent public ledger.

3. Zero chance it survives the zombie apocalypse, no internet no electricity, no bitcoin.

4. I am not sure how meaningful decentralized consensus can be achieved across networks that are not going to be in contact with each other. One society on an O’Neill cylinder can resort to use a Bitcoin clone within their own closed environment but makes no sense to use the original Bitcoin from earth. Which means if you carried a cold wallet with Bitcoins to an O’Neill cylinder and it goes past Pluto your Bitcoin is basically a meaningless worthless number.

Bitcoins proponents often argue how it is the biggest, oldest most decentralized network with millions of users and the network effects will always keep it on top. I do not really buy that argument nor do I fully trust the numbers, they are widely manipulated by the exchanges.

However even if we take that at face value, using that logic we should have all still be on mySpace.

It is devastatingly simple for any self respecting social network to airdrop their own coin to their hundreds of millions of users and achieve larger distribution and network effects. Telegram, Facebook are doing exactly that.

Bitcoins code is neither unique nor unreplicable. Heck its open source nature lends itselves perfectly to replication if so desired.

I am not trying to throw shade at bitcoin, quite to the contrary I am a big fan of what it represents technologically. It is after all the first and the most successful to date decentralized form of money. But it has several structural issues which make it meaningless as a medium of exchange and as a form of money.

Once that became obvious Bitcoin shillers have been trying to pass it as some form of settlement layer or digital gold and often compare it favorably to gold itself.

I find these arguments really hard to comprehend.

Bitcoin is not gold, it is not even comparable or close to being anything like gold. Nor will it ever be. It has some other non gold like attributes that are attractive but they are not defensible in the long run.

It has some value as the first successful implementation of decentralized money and it might be attractive in the long run in a manner similar to how certain baseball cards are but that is about it.

Think of it as model T or one of the earliest versions of the motor car. They were great but eventually better cars came along.

Part 3: The Settlement Layer

Bitcoin is held out to be a unique asset because it has limited supply. Mathematically predefined monetary policy. It is held out as some sort of a greater truth against the fallibility of mere mortals acting as governors of various federal reserves.

The theory Bitcoiners have is that the dollar is bound to become worthless due to excessive printing and the world will eventually gravitate towards hard assets. A corollary is anyone who is an early Bitcoin adopter will become a Billionaire. Another corollary is Bitcoin doubters like Buffet will come to rue their positions, lose their invites to Davos and a new world order will take over.

If the arguments sound like a cults exhortation, then you are in good company.

However it must be agreed that we are in completely unchartered territory. Money is being printed like never before. However we are not going to end up in a Weimar republic scenario. Money as explained earlier is a claim against the governance of the country. If sound governance exists, the dollar will continue to command value. Assets will go up in value (real estate, shares etc). However the day to day impact to the average person is unlikely to be massive. Milk, Bread, Eggs are not getting more expensive and you will likely continue to get better phones and computers for less.

In fact radical technologies are around the corner. 5G will bring the world even closer. Self driving cars will lead to some of the biggest advancements in transportation in over a century. Space is truly opening up. A big leap forward is coming.

All of it is going to be powered by the regular frameworks of capitalism which are the share markets, early and late stage funds and so on.

Crypto is held out as the next evolution of finance, but is someone really going to wait at the checkout counter for 10 minutes for their transaction to confirm and pay $5 in gas fees for buying $3 worth of milk?

So how exactly will crypto take over the world? Will it even ever take over the world? And what is likely to happen?

Let us investigate.

Personally I do not believe that we are heading to a breakdown of law and order. There is not going to be a Weimar redux or a Spanish civil war 2.0.

However there are forces that are tugging at the seams. Polarization in western democracies is real and amplified in a social media centric world. The rise of China is an unstoppable juggernaut and threatens to permanently alter the domination of the western rules based order in both finance and realpolitik. China has 4 to 5 times the people as that of the US, it is bound to have a larger economy and stronger influence. A similar but weaker logic applies to the rise of India (which tends to overpromise and underdeliver).

They are already working on building a new infrastructure for global finance via the CBDC that threatens to eliminate the role of SWIFT. Part of the push for CBDC is by governments that fear what DEFI represents, a mortal challenge to the authority of the state to establish monetary and fiscal policy.

Ethereum and Bitcoin are similar but have a fundamental difference. Ethereum makes it possible to build complex, unstoppable applications on top of it.

The DEFI boom has seen value locked grow from < 1 Billion to close to 30 Billion in a space of less than a year. There are a range of financial products in this mix, money markets, exchanges, synthetic derivatives, options, futures and so on.

A lot of it currently is largely centered around speculation. The network often gets clogged due to high gas fees but there almost all the meaningful activity in crypto space is on Ethereum based DEFI.

Ethereum is the backbone infrastructure of DEFI and over the coming years DEFI will continue to grow at an exponential rate. As more applications are built on ethereum, it becomes more attractive due to network effects. A large city continues to grow at a faster rate than a smaller city because there is more opportunity there. More people flock to it, leading to more potential transactions which in turn increases the amount of opportunities. A virtuous cycle is established. Displacing the big city becomes a mammoth challenge.

NY and London will continue to remain the heartbeat of finance for decades to come due to the network effects that are associated with them.

Ethereum is essentially NY London of the crypto world.

On the other Bitcoin remains nothing more than an idea after over 10 years since it was established. It is easily forkable and the user base it commands has no inherent stickiness. Some die hards will remain with BTC but the reality is from a technology perspective it is easy to replace BTC with something else. The same is not true in case of Ethereum because a fork does not mean that the developers who have built everything on top of Ethereum will migrate their operations to the new chain.

The development and success of DEFI has made it impossible for any one else including BTC to catch up with and replace Ethereum.

There are challenges of course.

The network has gas issues, think of an old city with old train lines and narrow alleys. Building a new transport infrastructure to improve traffic while not disrupting current operations is terrifically difficult. That is where other contenders like Polka, Cosmos etc are coming up to supplant Ethereum’s dominant position.

However with the largest developer base, Ethereum is likely to solve its network congestion issues using solutions such as ETH 2, Rollups etc. Also remember that other chains solve speed at the cost of decentralization, which defeat the purpose of having a blockchain.

However the reality is any solutions are going to only prove to be temporary. The influx into DEFI will probably necessitate the need for newer solutions within a matter of fewer years. And soon enough DEFI will attract the attention of main street users. At that point the question of speed, cost, and ease of use will become more relevant. No one wants to lose their life savings because they forgot their passcode and misplaced their seed phrase. In the real world help desks, reversibility of transactions play an important role in contesting things you did not do or agree to.

This is where the DEFI will develop into a layered system, a federated ledger system of sorts.

At the very core there will be the regular old direct interactions with the main Ethereum chain. A layer surrounding it will have rollups and side chains. Beyond that there will be a main street layer which has institutions creating cefi like systems that are built on top of the DEFI layer.

The CEFI layer will present a user friendly interface that most people are familiar with. It is quite possible that this will include banks and most regular financial institutions.

The main constant asset here is the underlying infrastructure on top of which all of this is built. And that is the Ethereum network. And while ETH has a theoretically unlimited supply, the rate of increase of supply steadily diminishes.

Given the unbelievable utility provided here it should be evident why Ethereum is the long term asset to buy and hold.

As money becomes progressively cheap, stocks, real estate etc all will face inflation. But this will (and largely already has) led to a lot of duds flying upwards. Eventually gravity will catch up with them. Gold will likely continue to play a role due to its physical attractiveness. However a new financial system centered around Ethereum will progressively mean that Ethereum becomes the equivalent of a hard asset that will hold its value over time.

Part 4: The very real Danger from CBDCs

CBDC stands for central bank digital currencies. A number of central banks from across the world have been looking at blockchain technology with interest. However they have correctly come to the conclusion that they probably do not need a distributed ledger or distributed consensus, which is only needed if there is a need for decentralization. State actors have no desire of their own to give up the control they have. Most western nations including Australia have only made limited moves on state issued digital currencies.

Reserve Bank of Australia came to the conclusion that the Australian Dollar was already largely digital because of the high penetration of online banking. This suggests a lack of understanding of what digital currencies actually do.

A digital currency is generally (but not always)

1. Permissionless, which means anyone can create a wallet instantaneously and start transacting with anyone they want without restriction
2. Composable and programmable, all data is open by default, unrestricted and uniform interfaces allow new tools that can be built on top which can interact with each other

Current banking digital infrastructure does not mean either of the above requirements. CBDCs are unlikely to be permissionless. But they might meet the #2 criteria.

China has made the greatest strides on this front and already the Digital Yuan has been trialled. India is also reported to be making moves.

A CBDC is however not decentralized, which means if you criticize the government, there is a good chance that your balance will get slashed. Every transaction you make will be monitored and reported on. It will usher in a dystopian future with ultra high surveillance.

It also explains why the countries that are jumping the gun on this are also of the authoritarian bent.

But CBDCs will happen and they will have captive populations with no other options.

They will be extremely fast and transaction costs will be extremely low. They will be highly regulated, KYC will be default and none of the wild west things that happen in defi will happen in this domain.

CBDCs will be faster than Visa and Mastercard transactions and with even lower or nil transaction fees. In fact governments might incentivize people to use them by providing a reward fee for using the service.

There is a chance that western governments buoyed by the success of India and China in this regards will step in and issue their own CBDC. Especially as DEFI becomes massively popular, there will be pressure from regulators to disconnect offramps and force people to use the “approved” crypto or CBDCs only.

The danger here is that DEFI will be forced to skulk around dark corners and face the fate of monero and Zcash.

As DEFI enters mass consciousness, the regulatory backlash will come. The Empire will strike back.

It will be disguised as AML/CTF or securities law pushbacks. Every attempt will be made to snuff out DEFI for good. However DEFI will survive, thrive and eventually take over the world and eventually pushing out CBDCs out of the picture.

Here is how.

Part 5: How DEFI will take over the world

The total value locked in DEFI has been steadily moving upwards, with an almost 30X increase in the first year itself. This rate of growth is likely to continue for years to come and I will not be surprised to see a Trillion in TVL within a few years time.

Note that this might end up meaning not much in terms of the impact on day to day life for the common man. Defi is likely to be a hunting ground for speculators for years to come. And quite frankly that is ok at this stage.

The killer app of DEFI remains the so called ICO. Fundraising for ventures in trad fi is orders of magnitude more difficult than it is in the DEFI space. Someone sitting in a basement can raise millions and turn out a working product in a matter of days.

The second coming of the ICO in the second crypto summer has seen projects with working products and actual users, real revenues. Sure scams still exist, rug pulls and hacks happen with alarming frequency. But getting in on a project early can turn a thousand dollars in to a million pretty fast. That level of potential return has seen a massive influx of those willing to gamble with their money.

It has led to the creation of a global pool of investors, unrestricted by national borders and trading round the clock. Capital has been made hyper fluid. Efforts to tamp this down via CBDCs will not work because the attraction of the returns will be so strong that people will find ways to bypass regulatory and tech barriers.

A wider pool of investors and inherent liquidity will mean lower cost of capital. This will lead to more offchain activities come on chain because they can tap into this capital pool. We at opendao.io are engaged in a similar effort.

A second unstoppable force is working in favor of DEFI which not a lot of people are recognizing.

At the close of Apartheid era, South Africa became the first (and only) country till date to willingly and unilaterally give up its nuclear program.

It did not do so out of some starry eyed desire for world peace. They did so because power was changing hands and the current power did not trust the new guys to exercise it responsibly.

A similar move is happening in the Western world in a slow but unstoppable way. The racial makeup of America is changing, and a reaction to that is reflected in the Trump movement. However the reaction is not limited to breaching the Capitol alone.

The US Dollar and financial system whose levers are controlled by the US government are the biggest asset the US has. It is stronger than any nuclear weapons that there are out there.

The US demographic change is a undeniable and unstoppable reality. The status quo powers have come to the realization is the only way to stem the damage is to reduce the growth of government and they do so by blocking government spending. While those who are on the ascendant want a larger share of the spoils.

This phenomenon is seen again at the highest levels where Republican appointed regulators such as former Acting Comptroller of the Currency Brian P. Brooks and CFTC Chairman Heath Tarbert who are some of the most crypto friendly voices out there. It is not to suggest that the actions of specific regulators are coming from a position of fear of racial change. A lot of it also comes from a libertarian bent where the law is held supreme and not left to individual discretion regardless of the color of their skin.

One way or another a reaction to the endless money printer, and a fear that the others are getting more benefits at the cost of the natives has been a hankering among groups for a financial framework that removes majority control and replaces it with a system of fair and unstoppable laws.

These voices and movements will only grow stronger over time and will prevent the rise of CBDCs in the western world. And over time the Defi movement will become proxy for a new cold war between authoritarian powers led by China and India vs the freedom loving west. I cannot tell if this cold war will be long but my gut feel tells me it will be a much shorter than the last one due to the speed at which events happen in an environment where everyone is hyperconnected.

This war is unlikely to be get hot, but it will cleave the world of finance. This time there will be no physical Berlin wall. But there will be virtual firewalls, systems of finance that do not easily interconnect and a load of state propaganda that tries to paint the conflict in racial and colonial storylines.

However there will be a steady diffusion of people stuck in CBDCs to DEFI due to several reasons

A lot of people will see their CBDC wallet balances get slashed or frozen because they fall afoul of their governments. This will mean that no one who has the ability to move their funds will keep them in a CBDC environment.

This phenomenon is already reflected in the migration of Chinese capital to safe harbour countries like Australia, and will likely accelerate.

Attraction of higher returns from presales will lead people to jump across the walls to make a quick buck.

Capital markets will continue play around the outer cefi layer, they have no need for DLT systems themselves, but the core of the finance which is the settlement layer will be swapped out.

There will be no one killer app, nor do I think that people on main street are going to start paying for milk and groceries with USDC or USDT anytime soon. On the contrary there will be a steady osmosis behind the scenes which will see Ethereum centric DeFi quietly place itself at the center of global finance without most people realizing this has happened.

Ethereum represents a trans national, unstoppable framework. A set of minimal and fair rules that are always enforced without fear or favor. Such a framework creates a virtuous feedback loop which promises to make all of us wealthier. Being the backbone of this framework Ethereum is already irreplaceable and will get progressively more and more valuable.

As the number of transactions that happen directly or indirectly on Ethereum increase, the value derived from it will increase by orders of magnitude. This in turn puts its price on a long term upward trajectory.

And that is why you should buy ETH even if you do not completely understand crypto.

Part 6: Eth is hard money

When mankind switched from barter to money, we chose things such as gold which were held up as universally valuable. Instead of trying to find people who will swap your chickens for chairs, you could sell your chickens to someone who gave you gold and then swap that gold with someone who had chairs.

Money was meant to be a medium for transactions, but it could only be so if the intermediate step represented something that was held up as valuable universally.

Gold is not a suitable fit for the modern economy as money (And neither is Bitcoin). But there is merit to the school of thought which worries about the endless money printer that is the modern monetary theory.

A few decades ago you could get away with keeping money in the bank and retire. Your money would not have eroded in value and earned a healthy interest.

Now you need to be actively managing your money to have any chance of wealth preservation. Life used to be much simpler earlier. There is no fire and forget simple approach.

A torrent of money printing in the west threatens to put it in the same bucket as that of high inflation emerging economies.

If you believe that your dollar is going to buy less tomorrow, it spurs you to spend it as soon as possible. This potentially revvs ups the economy, but more often than not it leads to a flight to safety which is represented in the form of higher stock and real estate prices.

Gold bugs (And bitcoin maxis) incorrectly believe that the fact that their asset is held up as universally valuable makes it a good candidate for money.

Being universally valuable is important but not the only criteria for something to be useful as money in the modern economy. The Mona Lisa is held up as universally valuable, but it is not a good form of money.

Even a fractionalized Mona lisa would not work (in fact shreds of Mona Lisa would probably make the whole thing worthless).

Eth is universally valuable not due to any sentimental reasons such as “Shiny”. Eth commands value because it is a necessary ingredient for every single transaction that happens in most defi.

Gas fees are measured in ETH and that means ETH is already the unit of account in the Defi economy.

Figuring out how much you spent on the transaction is best done in gwei and not dollars.

In a sense Eth has already displaced the dollar in the economy of tommorow.

And buying Eth and doing nothing with it will generally mean preservation or a steady improvement of your wealth.

As the Defi space grows, the number of Eth based transactions will only expand. And just like in the olden days you could buy Eth and largely forget about it for several years and decades and find that you have still done quite well for your retirement.