World Investment: Ethereum's Outer Limits

February 5, 2021

Exploring the transformation of value in the digital age

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By Michael J. Casey

Chief Content Officer

DeFi, GameStop and WallStreetBets

Welcome to Money Reimagined.

A snowy week has left New Yorkers chilly. But ether investors must be feeling cosy. Ethereum's native token has risen more than 25% on the week to clock new record highs and far outpace bitcoin's gain, while Ethereum-centric decentralized finance (DeFi) data showed new records for total value locked in DeFi. The numbers speak volumes about the symbiotic relationship between DeFi and ether but also show how much pressure is on developers to execute on the Ethereum 2.0 upgrade. The congested network is grappling with sky-high transaction fees (as I discuss below).

From the vibrant trading in ETH, DeFi tokens and other crypto assets to another wild market story: the WallStreetBets/Gamestop episode that we (and pretty much every other media outlet in finance) has been obsessed with these past two weeks. The political, social, economic and technological fallout from that affair was the topic of conversation in this week's "Money Reimagined" podcast. In it, Sheila Warren and I engage in an edgy, far-ranging conversation with "Hidden Forces" pod host Demetri Kofinas that ties the WSB/GameStop phenomenon into everything from FDR to Occupy Wall Street to surveillance capitalism.

Don't miss it. Oh, but read the newsletter below, first.

Enterprise Blockchain Isn't Dead. It Just Needs Crypto

Illustration by Moe Na/CoinDesk

The headline for CoinDesk reporter Ian Allison's big story this week highlighted a major failure for the most influential enterprise IT company in history: "IBM Blockchain Is a Shell of Its Former Self After Revenue Misses, Job Cuts."

But there's a bigger issue here than Big Blue's struggle to turn blockchain advisory services into an engine for cloud service revenues. It's that this story will be viewed by Bitcoin maximalists and crypto skeptics alike as proof that "enterprise blockchain" is dead. There are no viable business applications for blockchain technology, these people will tell you, beyond supporting native cryptocurrencies for payments or as a store of value.

I think that's patently wrong. There's still plenty of innovation going on in blockchain-founded and blockchain-inspired multi-party computing solutions. Real progress is being made to overcome some of the sticking points that initially slowed the technology's real-world deployment – in trusted computing, in internet-of-things integrations and in digital identities.

Meanwhile, in supply-chain applications, in public health and in credentialing systems, blockchain technologies are already operating in the real world, though they are very much in the background as a low-key element inside otherwise multifaceted solutions. Worldwide, blockchain has been incorporated into a variety of active information management systems – for example, to trace diamonds and other products in mining supply chains, for private key management in digital identity systems and to enable the right mix of public data and privacy in COVID-19 contact tracing apps. Many of those use IBM technology. That there's no hyperbolic "blockchain fixes this" fanfare attached to these backend implementations doesn't make them less relevant.

The problem of "corporate adoption" revolves more around how businesses approach the technology, a flawed mindset that IBM has (perhaps unintentionally) promoted. It's not the technology's fault but one of a deep misunderstanding within C-suites of what it offers to their business environment.

The road to success first requires recognition that blockchain technology is not an internal tool but an external one. Its main purpose is to allow non-trusting entities within a particular business ecosystem to share information that's valuable to all participants without relying on a middleman.

That structure means the blockchain-based data-sharing system must be equally supported by a firm's competitors and business partners. It requires boldness: a willingness to cede control and to bear the cost of disruption that blockchain-based approaches will impose. Only then can it be used to unlock the rich, systemwide data needed to achieve efficiency around resource management and forge sustainable economic systems that serve both business and society.

'We Technology'

Big-name consultancies selling "blockchain-as-a-service" (BAAS) have fostered the misguided idea that "blockchain" is akin to a proprietary ERP software product that, once plugged into the IT system, will start boosting efficiency and increasing the bottom line.

But this is not plug-and-play technology. In fact, it's hard stuff.

To make a blockchain solution work across a supply chain or an electricity grid (for example) requires each player to contribute to the greater good, in code development, in computing resources, in sharing data. To quote a cheesy line I used in presentations during my own time consulting in a pre-CoinDesk life, "blockchain is a we technology, not a me technology." It only works when multiple, competing, non-trusting entities agree to use it and share in the gains and headaches.

By extension, a working blockchain involves sharing resources with competitors, including with startups developing disruptive innovations that challenge the incumbent's core business. It requires an open, collaborative, come-what-may approach to participation that's anathema to business models built around trade secrets and protecting competitive advantages. For many businessmen, eager to protect people's bonuses and jobs, it seems like a non-starter.

Yet, history tells us that doing nothing in the face of disruption can have even greater cost, including the collapse of entire firms. The reality is that first-mover companies bold enough to embrace disruptive technologies will gain a competitive advantage over those that can't take the leap. This innovator's dilemma is front-and-center for would-be blockchain participants and it's not properly acknowledged.

To be sure, enterprise blockchain advocates typically understand some aspect of the "me" versus "we" challenge. That's why there was a rush to form industry blockchain consortia between 2016 and 2018. But as Allison also reported early on in the formation of the TradeLens consortium founded by shipping giant Maersk, those groups are hard to manage precisely because competitors, as well as business partners, will mistrust the motives of the founding institution.

Also, partly because of companies' unwillingness to cede control, and partly because of regulatory and other constraints, these consortia almost always default to private blockchains with fixed membership. They create walled-garden, closed-loop environments that inevitably innovate less well than open-source communities where ideas from anyone are welcomed and shared.

Embracing the Radicals

The hard truth is that for blockchain business consortia to succeed they must accept outsiders, with all the disruptive threats they pose. They must embrace the notion of open-access permissionless innovation that's at the heart of public blockchain-based crypto communities.

There's even a role for Big Blue in all this. Leave IBM's consulting division and you find that open-minded approaches to blockchain still thrive. In those cases, the focus is about what can be built and developed on top of this open distributed ledger architecture, rather than on selling cloud services.

In IBM research, for example, Nitin Gaur, Director of the IBM WW Digital Assets Lab, is doing groundbreaking research into how banks and traditional financial participants might engage with the dynamic, open-source world of decentralized finance (DeFi), perhaps the epitome of freewheeling, public blockchain innovation. (Perhaps only EY blockchain lead Paul Brody is on par in the consulting world for embracing DeFi's potential.)

Meanwhile, the health sciences team has developed an IBM Digital Health Pass, which provides an innovative, privacy-preserving solution to managing shared COVID-19 health records. You wouldn't know from the app that it's powered by a blockchain, but it is.

While its sales pitch on blockchain may not have reflected it, IBM's history is one of (eventually) shifting with the times and addressing disruption. The reason it has survived, despite massive waste over the years, is that, when push comes to shove, it embraces change. You see it in Big Blue's journey from mainframe computers to PCs to software development to consultant services.

If it can get away from offering blockchain as some magical solution and instead incorporate it as a back-end element to useful new applications, IBM can help drive real change in business practices around this technology.

Bitcoin Slightly Less Dominant Vs Ethereum

Ethereum's ether has been on a tear this past week, hitting a new all-time high of $1,740 at the time of writing. Bitcoin also had a good week, just not as crazy good as ether. So it made sense to look at how the metric of "bitcoin dominance" is playing out in the crypto universe, particularly as it compares to the boom period for ether of January 2018.

Shuai Hao/CoinDesk

In this case, CoinDesk's Shuai Hao used the market cap measurements at the end of January for bitcoin, ether, and for the other 18 digital assets listed in the CoinDesk 20, as the foundation. Then he ran the numbers back to 2017. Sure enough, this is the second-highest proportion of total crypto market cap that ether represents after 2018.

Sustainable? Who knows? For answers, watch how DeFi and the new Ethereum 2.0 project play out.

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The Conversation: The Fees Are Too Damn High

Illustration by Moe Na/CoinDesk

One reason it was a big week for Ethereum was because it was another big week for decentralized finance (DeFi) applications built on top of it. The amount of total locked value in DeFi has continued to reach new all-time highs on a weekly basis, but its new record – at around $33.45 billion as of Friday morning – was impressive for the speed with which it jumped from $27.31 billion on Jan. 29.

Of course, with growth comes problems, especially because Ethereum hasn't yet migrated to what is supposed to be a more scalable Ethereum 2.0 blockchain. As such, the congestion of transaction orders pushed up fees paid to miners for clearing transactions. As of early Thursday morning, so-called Ethereum "gas" fees were at record highs.

This prompted Maya Zehavi to point out both the challenges and the opportunities for DeFi innovators, highlighting the gas fee sticker shock and the prospect for layer 2 DeFi solutions that don't require costly on-chain transaction processing, which would in theory lower transaction costs.

Meanwhile, someone with the Twitter handle @youngtilopa compared Google searches for "DeFi" and one equity stock that's been in the news recently.

So maybe a sober view is needed. DeFi still has a long road to travel. Whether layer 2 will help it scale and open opportunities for lower-cost transactions remains to be seen.

The price of ether has reached an all-time high less than two months since the Ethereum protocol's historic upgrade. Research analyst Christine Kim and tech reporter Will Foxley break down Ethereum 2.0 and its sweeping impacts on crypto markets, weekly.

Valid Points features original insights on what lies ahead for industry stakeholders and investors. Subscribe to the Valid Points newsletter.

Relevant Reads: Divergent Global Regulation

Approaches to cryptocurrency regulation and development continue to vary among the governments of the world. The one consistency is a wariness of crypto; the big difference is how proactively each government is itself acting to innovate with the technology.

Early in the week, we got news India would ban private cryptocurrencies under proposed legislation, fostering a firestorm of criticism for what many said would be the death knell for fintech innovation in the world's second most populous nation. CoinDesk's Omkar Godbole reports.
South Africa has a relatively vibrant crypto-using community. Now, as Tanzeel Akhtar reports, the South African Revenue Services is moving to make sure that growing user base doesn't get away with untaxed capital gains.
Meanwhile, China has been playing the long game. CoinDesk contributor Michael Kimani argues China's heavy investment and incentives to build out Africa's connectivity with Chinese mobile technology has positioned the country well to deploy a Chinese digital currency on the continent in a bid to boost its influence.

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