Why Ethereum Matters
I'm dropping everything to focus on web3
This newsletter is my attempt to capture and share some of what I'm learning as I dedicate more time to understanding the coming trends in technology. If you know someone nerdy enough to enjoy it, please forward it along.
I Got Crypto-Pilled...
If you asked me to explain web3 before this summer, I would have told you that it’s mostly about decentralization and non-inflationary currency.
These things really matter, but honestly, I find them hard to get excited about. It felt to me like we were just taking things we could already do, and figuring out how to do them without intermediaries. Important, but (for me), not inspiring.
But as I started to get more into it this summer, I realized that there’s a pretty stark divide between the (mostly BTC) folks who see decentralization and hard money as the ultimate goal and the (mostly ETH) folks who see those things as important, but see even more importance in the technologies that they allow us to build on top of them
Obviously, I found myself a lot more connected to the second group.
Imagine we were talking about the internet in the 90s, and I wanted to tell you about the invention of electricity, or the microchip, or HTTP protocols.
Those things matter — a lot! — and the internet can’t exist without them. But they aren’t the best place to start in understanding what possibilities the internet unlocks. You wouldn’t realize how fun and exciting the internet was if you were just focused on the tech that enables it.
So, if I can make the blasphemous move of taking the underlying technology of decentralized blockchains for granted, we can examine one specific blockchain (Ethereum) and explore what’s new about it, and what truly new possibilities it unlocks:
The Ethereum blockchain is a globally-shared, public database, that can perform computation and natively supports money.
Let’s go through those one by one.
A Globally-Shared, Public Database...
Every website you visit has its own database. Facebook holds its data in its own inaccessible warehouse, as does Twitter, Google, your uncle’s Pinterest page, etc.
The Ethereum blockchain is one, giant shared database. This is one of the core things that wouldn’t be possible without blockchain technology — we could never centralize all the world’s information in one place without the security of a distributed, trustless blockchain.
But you don’t need to think about (or understand) how the blockchain works to appreciate it.
As one example, if we all share one database, that means that database can record the ownership of any asset. This is what’s led to the boom of NFTs — the ability to record ownership for the types of assets that couldn’t previously be ownable.
In getting more comfortable with how the technology behind this ownership works, I built Swirl & Mint. It lets you upload two pictures and uses a Neural Style Transfer AI model to combine them into a creative, artistic mix. If you like it, you can mint it as an NFT in one click.
What does “minting it as an NFT” actually mean?
You’re deploying a contract on the Ethereum blockchain, which conforms to a specific standard that includes a database with the owners of all the images in your collection.
The “collection” in the contract is made to consist of just one image, yours.
Finally, it designates your Ethereum address as the owner of that image.
None of this code is complicated, but without a shared database, it simply isn’t possible. Owning JPGs sounds frivolous, but it actually goes pretty deep. This Twitter thread is a good place to start.
Beyond JPGs, you can also easily imagine this ability to easily establish shared ownership would open some cool doors:
Expensive things (like fancy art) that used to only be for rich people can easily have ownership fractionalized to make them more accessible.
Bureaucratic and expensive processes (like transferring home titles) can be made much more inexpensive and simpler (and might even save the hand pain of having to sign 6000 documents).
Communities can be co-owned by members and easily identify who the owners are so they can vote or help make decisions to guide the community.
You get the idea. This is just one of the benefits of a public, shared database, but it’s a big one.
...That Can Perform Computation...
What’s particularly cool about Ethereum is that the shared database isn’t just a database. It’s basically the backend of an app.
Imagine if every company not only had all their data publicly accessible, but also had the full backend of their service accessible too. This is literally the way it works in web3.
As a timely example, you know how Facebook went down this week? By contrast, if Uniswap (one of the biggest currency exchanges on Ethereum) went down, I would be able to build a new front end for it, plug right into their already existing backend, and it’d be up and running right away.
This composability between apps is one of the most exciting things about this ecosystem. It’s like every service is an open API, and they built one front end for it, but you can interact with it in any way you want — from the backend of your own app (like an API), from your own version of their app, or directly through the contract.
This has some fun consequences. In the last section, I mentioned that a shared database could let a group of people pool their money together to fractionalize ownership of something expensive. Well, let’s say we built the contract such that all those people would vote on whether they wanted to buy a given piece of art. Because all of these backends can connect, it can be built so that, if the vote passes, the art is automatically purchased, directly from the contract. Nobody has to tally the votes and make the next move — everything is automatically run straight from the contract.
This may not seem like a big deal for some friends buying art together, but for groups like VitaDAO, which I’m a part of, these votes are directing millions of dollars to research organizations. Many of the DeFi products have billions in TVL. As the stakes get bigger, it’s important that votes can be counted on to lead to the outcome that’s chosen.
...And Natively Supports Money
Of course, a lot of this wouldn’t be possible without money. Sharing ownership, buying things — a lot of web3 activity has money at its core.
If this were just about making payments, it would be convenient, but not world changing. We all have access to Stripe and PayPal. What makes this native money so important is makes it equally seamless for you to receive money, and to buy and sell ownership in assets. It’s about treating you as an owner, not just (as the current internet does) as a consumer.
Where this gets really amazing is when native money and ownership are combined with the ability to run code. One example is that many artists are coding a royalty on future sales of their work into their smart contracts. In the real world, once an artist has sold their piece, it belongs to the buyer, and they can’t really enforce any control of it. But with digital ownership and native money, it’s as easy as building it into the contract, and artists can be automatically paid any time their work is resold on the secondary market.
This is taken even further by the ability for anyone to create their own currency on the Ethereum network, using the ERC20 standard. People can get freaked out at the idea of anyone creating their own currency, but the simpler model to understand most of these currencies is as equity in a project. The difference is that this equity builds in some mindbending economics:
Companies like Chainlink require that you pay in their currency for their service. What does that mean for company valuations when users need to buy your equity to pay you?
Groups like Friends with Benefits require you to own a certain amount of their currency to get access to the community. How do masterminds and communities change when everyone is an owner?
Most currencies have at least some avenue to mint additional coins. How does it change incentives when founders can mint more equity (diluting everyone else) when the right opportunity comes to grow the pie?
My instinct on all these things is that they are complicated, and people will maliciously take advantage of that complexity to start. But in the end, these changes will lead to more aligned incentives, more opportunities for those without capital, stronger communities, and less free riders. When we figure them out, it will be a very good thing.
Going Forward
The ripples of innovation from any of these changes on their own would be profound, but it’s the simultaneous development of all three that is getting people so excited. I haven’t even had space here to touch on DeFi rebuilding the banking system, the impact DAOs can have on governance, the implications of shared ownership for the creative economy, and on and on and on.
It’s so obvious we’re just beginning to scratch the surface, and there are still so many big problems that need to be solved.
What does a world look like where everyone is an owner in the things they support?
What new forms of governance are needed for mission-driven communities to be most effective?
What tools are still needed to help creators go directly to consumers without any gatekeepers?
I’ve spent most of this year exploring tech, broadly and shallowly. I wasn’t sure what would be the trigger to narrow my focus. But, without a doubt, this is it. I’m definitively out of exploration mode and ready for focused building.
The decision was actually a lot easier than I expected. There wasn’t a lot of journaling or thinking or conversations. When I knew, I knew.
So… I’m not sure if I’ll continue with this newsletter, at least not in its current form. I don’t know where it’ll go, but it will definitely be web3 focused. I’ll also want to share some updates on a bigger project in the space I’m starting to work on (details next month).
If you aren’t interested in this stuff, feel free to unsubscribe — no hard feelings. But if you’re curious about what all these crazy changes mean for the world, I’ll be doing my best to try to make sense of it all, and will keep sharing the most interesting things I learn.
Until next month,
Zach