jakiro
Original title:Low-risk DeFi is to Ethereum just like search to Google
Author: Vitalik, founder of Ethereum; compiled by: Bitchain Vision
For a long time, an important contradiction in the Ethereum community is: (i) whether applications can bring enough revenue to maintain the economy of the ecosystem, whether this means maintaining the value of ETH or supporting individual projects; (ii) whether applications can meet the fundamental goal of attracting people to join Ethereum.
Historically, these two categories are very disconnected: the former is some combination of NFT, Meme coins and a DeFi supported by temporary or recursive forces: people pursue incentives provided by the protocol through borrowing or forming a circular argument: “ETH is valuable because people use Ethereum chain to buy and sell ETH and trade leverage.”at the same time,Non-financial and semi-financial applications (e.g. Lens, Farcaster, ENS, Polymarket, Seer, Privacy Agreement) have also existed, and they are fascinating, but they are either low-usage or they pay too little fees (or other forms of economic activity) to maintain a $500 billion economy.
This disconnect creates a great disharmony in the community, and a large part of the motivation of the community comes from the theoretical hope that an application can meet both conditions at the same time.In this article, I will argue that as of this year,Ethereum already has such an application.”Low-risk DeFi”, it is to Ethereum just as searching to Google.Low-risk DeFi, the goal is to achieve global democratized access to payments and savings for valuable asset classes (e.g., major currencies, stocks, bonds with competitive interest rates).
Deposit rates for major stablecoins on Aave
Low-risk DeFi is like search for Google.Google has made many interesting and valuable contributions to the world: Chromium series browsers, Pixel phones, artificial intelligence works including open source Gemini models, Go languages, and more.But in terms of revenue generation, these are insignificant, even negative.Instead, the biggest sources of revenue are search and advertising.Low-risk DeFi can play a similar role for Ethereum.Other applications, including non-financial and more experimental ones, are crucial to Ethereum’s place in the world and its culture, but they don’t have to be seen as revenue-generating tools.
In fact, I hope Ethereum can do better than Google.Google is often criticized for being disoriented and becoming like the antisocial, profit-maximizing companies it is trying to replace.Ethereum embeds decentralization at a deeper technical and social level, and I think low-risk DeFi use cases create a great consistency between “doing well” and “doing good things” that doesn’t exist in advertising.
Why is low-risk DeFi?
What I mean by “low risk DeFi” includes both the basic functions of payment and savings, as well as easy-to-understand tools such as synthetic assets and fully mortgage loans, as well as the ability to exchange between these assets.
There are two core parts to pay attention to these applications:
1. These applications provide irreplaceable value to Ethereum and its users.
2. These applications are culturally consistent with the goals of the Ethereum community, both for the application layer and for the technical attributes of L1.
Why is DeFi very valuable now?
Historically, I have doubted DeFi because it doesn’t seem to offer (1); instead, the main “selling point” seems to be making money by trading highly speculative tokens (Ethereum’s highest-cost one-day fee comes from a poorly designed digital monkey sale), or 10-30% gain from liquidity mining incentives.
One of the reasons for this is regulatory barriers.Gary Gensler and others should be severely condemned because they create a regulatory environment where the more useless your application is, the safer you are; the more transparent your behavior, the clearer the assurances you provide to investors, the more likely you are to be considered a “securities.”
Another reason is that in the early stages, the risk (Protocol code error risk, oracle risk, general unknown-unknown risk – risk that is completely unforeseen and beyond the scope of existing knowledge or experience) Too high, making it difficult to achieve more sustainable use cases.If the risk is high, the only applications worth investing are those with higher returns, and therefore can only come from unsustainable subsidies or speculation.
But over time, the protocols became safer and the risks were reduced.
Ethereum Layer1 DeFi loss.Source: AI Research
DeFi hacking and losses still exist.But they are gradually being pushed to the edge of the ecosystem, where users are more experimental and speculative.A stable application core is being formed and proved to be very robust.The tail risks that cannot be ruled out remain, but there is also this tail risks in traditional finance (Tradfi) – for many people around the world, the tail risks of traditional finance are now greater than the tail risks of DeFi, given the intensified global political instability.In the long run, the transparency and automated execution of a mature DeFi ecosystem will make it more stable than traditional finance.
Which “non-Oritosnake” users think it all makes sense?Basically, it is individuals and businesses who want to enter the global market to buy, hold and trade mainstream assets but lack reliable traditional financial channels to acquire them.Cryptocurrencies don’t have a magical secret to continuously create higher returns.But it does have magical secrets that allow existing economic opportunities around the world to be available without permission.
Why is low-risk DeFi culturally consistent with the goals of the Ethereum community?
Low-risk DeFi has several advantages that make it an ideal choice:
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It contributes economically to Ethereum and ETH by using a large amount of ETH as collateral assets and paying high transaction fees
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It serves a clear, valuable and glorious purpose: to achieve global access to well-known economic interactions and wealth accumulation without permission.
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It does not bring undue incentives to Ethereum L1 (for example, over-centralization is over-centered in pursuit of HFT-friendly efficiency, which is more suitable for L2)
This is a very good set of properties!
Going back to Google’s analogy, one of the main flaws of its incentives is that advertising revenue motivates companies to get as much data as possible from users and keep it confidential.This goes against the spirit of open source and positive-sum game upheld by its more idealistic efforts in history.This inconsistency is more expensive for Ethereum, because Ethereum is a decentralized ecosystem, so no activity in Ethereum can be a behind-the-scenes decision for a few people, but must be able to become a viable cultural cohesion point.
The revenue stream is not necessarily the most revolutionary or exciting app for Ethereum.But it needs to be something that is not morally unethical or embarrassing.If the largest single application of the Ethereum ecosystem is the political Meme coin, then you can’t say seriously that you are excited about it, and what people are excited about is what is actively changing the world.Low-risk DeFi is designed to enable permissionless payments and optimal savings opportunities worldwide, and it is a form of finance that is actively changing the world., many people in many poor areas in the world can prove this.
What can low-risk DeFi evolve into?
Another important feature of low-risk DeFi is that it can naturally synergize with many more interesting future applications, or can develop into these applications.To give a few examples:
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Once we have a mature ecosystem of on-chain financial and non-financial activity (see: Balaji’s ledger concept), it makes sense to explore reputation-based low-collateralized lending, which has the potential to become a stronger engine of financial inclusion.The low-risk DeFi we build today, as well as the non-financial magic we build today, such as zero-knowledge proofs, all help achieve this.
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If the forecast market becomes more mature, we may start to see them being used for hedging.If you hold stocks and you believe that a global event may cause a rise in stock prices on average, and the forecast market is highly liquid and efficient, betting on the event is a reasonable statistical hedging strategy.Predictive markets and “traditional” decentralized finance (defi) run on the same platform will make such strategies easier to implement.
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Nowadays, low-risk DeFi is often to get US dollars more easily.But most of us are not entering the cryptocurrency space to promote the popularity of the US dollar.Therefore, over time, we can begin to push the ecosystem toward other stable forms of value: a basket of currencies, “flatcoin” directly based on consumer price indexes, “personal tokens”, and so on.The low-risk DeFi we build today, as well as more experimental projects like Circles and various “flatcoin” projects, are all to make this result more likely to be achieved.
To sum up, I think that paying more attention to low-risk DeFi compared to Google’s search and advertising will allow us to better maintain the ecosystem economically while maintaining the consistency of culture and values.Low-risk DeFi is already supporting the Ethereum economy, and it has made the world a better place even today and has synergies with many of the experimental applications being built on Ethereum.This is a project that we all deserve to be proud of.
