Ethereum Is the Frontier of Financial Innovation
Innovation across various global industries seems to be moving at an accelerating pace. This makes sense because innovation in one sector ultimately makes innovation in other sectors cheaper. As innovation becomes cheaper, we can naturally expect it to increase in usage.
The advances we’ve seen in the world are all underpinned by silicon and computation. Whatever time-saving invention you’ve created is probably better with a chip in it, though finance is seemingly excluded from this hard and fast rule.
David Hoffman is the co-founder of Bankless, a content studio with a newsletter, podcast and YouTube channel focused on education on how to live a life without banks. He will lead a discussion, “Trade Secrets: The ‘Triple Point’ Bull Case for ETH,” at CoinDesk’s invest: ethereum economy on Oct. 14.
Regulatory red tape and walled gardens between financial institutions are potential culprits. But it’s not obvious that removing these obstacles would enable the level of innovation seen in industries that have successfully integrated chips and software.
The reason why innovation in the finance industry seems to move at a snail’s pace is the lack of a developer sandbox for experimentation. There are no startup studios where coders are able to attempt to turn an idea into a product and learn lessons along the way.
As research and development in finance moves into the developers’ domain, the costs of innovation drops, leading to an innovation explosion. Once the keys to the kingdom are given over to those who code, thousands of global developers will compete to find the best way to supplement an industry.
This is what Ethereum offers to the world: A place for financial experimentation to mature into consumer products. DeFi, or decentralized finance, is both the place where financial products are tested (often in production), and also refined, finalized and shipped to the 4.5 billion users available on the internet.
While the rest of the finance industry is devoid of experimental oxygen, DeFi simultaneously offers both the tools needed to produce products and the consumers ready to consume them.
Ethereum’s permissionlessness creates an environment for anyone willing to learn Solidity to be able to access thousands of potential users and potentially billions of dollars in interested capital, so long as their product is worthy. It also increases the attractiveness of Ethereum as a financial platform for the end user, who may come to understand Ethereum as the frontier of financial innovation.
Innovation occurs when the costs of iteration and experimentation reduce. As a platform, Ethereum enables a low-cost developer sandbox to emerge. The nature of open-source software platforms means anyone can add knowledge and software to the common library of knowledge of mechanisms available to developers. Ethereans call this “money legos.” When someone builds something important, every other developer in the sandbox is able to access this construction and leverage it in their own product.
We saw this specifically with the YAM system, which integrated components from Ampleforth’s rebasing mechanism, Compound’s governance module, Yearn’s treasury and Synthetix’s staking contract as well as general purpose “liquidity mining.” As a result, YAM was a product that emerged from the repurposing of labor from other protocols in order to create a novel product. And broadly, the crucial primitive of the ERC-20 token standard was leveraged by every protocol mentioned.
YAM isn’t likely to solve any meaningful financial problem, but it is an illustration of experimentation for experimentation’s sake, which will always be available to future builders in the DeFi space.
There is no shortage of opportunity that DeFi offers to developers who want to tinker with financial toys that come with an opportunity to be refined into a consumer product.
In an industry where development costs are not much greater than the time invested, I think we can expect a thousand experiments to bloom into dozens of world-changing products, with many runner-ups, honorable mentions and complete disasters.
One thing is certain: The experimentation will continue.