Bitwise letter to investors: Why Ethereum has great potential?

When we wrote this letter on July 8, Bitcoin has risen 32% since the beginning of the year, surpassing stocks (down 1%), bonds (up 6%) and gold (up 18%). Its outstanding performance is more and more sought after by investors with the “Crypto gold” investment theory.

However, what many investors do not know is that as the second largest Ethereum in Bitwise’s top 10 cryptocurrency index, this year’s rate of return is almost three times that of Bitcoin, up nearly 95%. The strong performance of Ethereum helped Bitwise 10 rise nearly 37% this year.

In last month’s letter, we wrote about the long-term investment case of Bitcoin (Why Bitcoin is valuable-debunking the “big fool” theory.) Given the strong performance of Ethereum, in this letter, we will use several The length of the page gives you an in-depth look at it.

One of the biggest market opportunities in the field of Ether & Cryptocurrency

Many people who are new to crypto technology believe that in the long run, there is only one important cryptocurrency asset, and the challenge for investors is to choose the “best” one.

We disagree with this view.

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

For example, Microsoft and Salesforce are both software companies, but they are targeting different markets-one side won does not exclude the other side. Uber and Instagram are both apps, but they also have different features and use cases-so both parties can win.

Similarly, different cryptocurrency assets may rely on the same core core of blockchain technology, but they focus on different use cases, so there can be multiple winners.

As we often discuss, the advantages of the Bitcoin blockchain are security and tamper resistance, which makes it perfectly suitable for the use cases of Crypto gold. Another type of blockchain focuses on becoming a payment tool, so priority is given to features such as speed, privacy, or price stability, such as XRP, USDC, Zcash, and Monero.

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

Let’s explore it.

The rise of programmable currencies: one of the key fundamental breakthroughs in cryptocurrencies

“Programmable currency” (or assets) is a new technical term. In short, crypto assets can be traded in a way that physical assets cannot.

what does this mean? Most people think that crypto asset trading is a simple cash-based payment method; similar to “Alice sends crypto asset X to Bob to pay him.”

With a programmable currency blockchain like Ethereum, the more complex form of crypto asset transactions becomes simple; like “Alice sends crypto asset X to Bob, but only after Carol also agrees to the transaction Effective”.

This may sound like a custody transaction when you hear it, which is often used when an individual makes a house purchase or a company executes a merger transaction. The difference and breakthrough is that cryptocurrency technology allows you to do it without a custodian company, without a lawyer, without a bank… so there is no need to pay them any fees, there is no delay in waiting for them to open and respond to you, There is no prejudice.

The above transaction is just an example. It is also easy to add another complexity, for example, “Alice sends the crypto asset X to Bob, but it cannot be older than 5 years, and can only take effect after Carol agrees”-this looks more like a trust-or ” If Carol wins the game, Alice sends the crypto asset X to Bob. If Carol does not win the game, Bob sends the crypto asset Y to Alice”-this looks more like a contract.

The ability to execute more complex transactions than direct payment is the definition of the concept of “programmable currency”. Many cryptocurrency assets (including Bitcoin) can handle the simplest form of these transactions, but the Ethereum blockchain is designed to support full customizability and complexity.

Ethereum’s core value proposition today is such a question: if we can apply “programmable trading” capabilities to rethink almost all types of services provided by the financial industry, from simple custodian accounts and trust entities to such things as capital raising and mortgage loans , Product design, loans, margin trading and other complex ideas, what will happen?

What if we could replace a large number of rent-seeking, bad behavior history, and solvency risk financial systems with software-based financial systems that are easy to audit, do not rely on human judgment, and have solvency risks?

Ethereum’s recent explosive growth in usage: stablecoin and lending business surged to billions

The crypto community has proposed a term to describe this category. “Decentralized Finance”, referred to as “DeFi”.

The initial reaction of most investors when they heard “DeFi” is that it sounds good, but it is also a bit like science fiction; people think that real-world applications must be many years in the future.

However, although it has not received much attention in the mass media, the application of DeFi in the real world has exploded in recent months. In fact, in the first half of 2020 alone, we saw the development of two multi-billion dollar use cases: one was around stablecoins, and the other was the extremely successful decentralized lending market Compound.

• stablecoin

Stablecoins are cryptocurrency assets linked to fiat currencies (mainly US dollars). Today, they are mainly used to make fiat currencies available in the cryptocurrency world-just as ADR makes foreign stocks tradeable on the US market-and are one of the fastest growing corner corners in the cryptocurrency market.

Stablecoin achieves many real-world uses. They are used by crypto investors who want to save money in less volatile U.S. dollars without withdrawing from cryptocurrency exchanges; by those who want to create Crypto contracts settled in U.S. dollars (as described in the examples above by Alice, Bob, etc.) Personal use; used by individuals in capital-controlled countries to store funds outside the local currency system. Recently, stablecoin has become a basic asset for many decentralized financial applications.

What does this have to do with Ethereum? Ethereum has established itself as the preferred platform for issuing stablecoins, which is accomplished through the programming of Ethereum’s flexible Crypto contract capabilities described above.

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


• Borrowing

Developers have tried to use Ethereum’s Crypto contracts to create a market for borrowing other cryptocurrencies programmatically. One of the most successful examples recently is Compound. Compound is essentially a decentralized crypto asset currency market, and its supporters include famous investors such as Andreessen Horowitz (a16z) and Bain Capital.

Compound provides the functions you might expect from a bank. Depositors can deposit crypto assets and earn interest, while borrowers can obtain mortgages on the platform. As discussed, there is no trusted third party between the user of the loan and the user of the loan, all this is done by decentralized software programs and related tokens.

Compound was launched early this year, and its value is now close to $700 million. Other similar agreements have also accumulated a large amount of assets, as shown in the figure below. These platforms now control more than $2 billion in assets.


Although this is not a “replacement of the banking system”, it is not a trivial matter for the new technology, and the growth is explosive. A year ago, this field basically did not exist.

How sustainable is DeFi and how much can it grow?

One interesting thing about the development of the decentralized financial ecosystem is that these programs run on the Ethereum network and can be combined in different ways to provide new solutions.

A common analogy is that the construction of a decentralized financial market is like building a castle with Lego. Each program (stablecoin, loan, exchange, etc.) is like a general Lego building block, which can be combined in different ways. Achieve more and more complicated things.

The more these LEGO blocks, the more new product combinations, the stronger the practicality, and the more Ethereum can establish its leading position in this field.

As a new technological development, decentralized finance is of course accompanied by considerable risks, limited historical records and difficulty in use. Just as Bitcoin cannot guarantee Crypto gold, Ethereum does not guarantee that it will find a large market for Crypto financial contracts.

However, we believe that it is right for many investors to participate more in this opportunity, because the opportunity is huge… after all, a good investment is not to find that it is not risk, but to find the risk with the corresponding return potential .

In this case, the current market value of Ethereum is only a small part (about 10%) of the fines paid by US banks since the 2008 global financial crisis. If Ethereum becomes the basic layer of a new alternative financial service system, the upside is huge.

It is also needed.

Despite the emergence of all fintech companies and banking applications in the past few decades, most of the financial services industry is still clearly technologically backward and charged high fees. It is estimated that 80% of financial transactions are still processed using COBOL, a programming language developed in 1959, when most programmers were still using punch cards.

Perhaps the next wave of innovation requires not a smooth mobile application or background machine learning model, but a subversion of this model. Getting rid of the middleman—as expected from the breakthrough of blockchain software—can eliminate fees, end delays caused by business hours and outdated systems, prevent bankruptcy by increasing transparency, and allow anyone in the world to create contracts of any size. These are powerful features that will bring about disruptive changes.

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