Ethereum is a protocol basin, DeFi is a river-like global public goods
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This article first appeared in Bankless, an English paid e-magazine focusing on open finance. Bankless and Lianwen jointly released the Chinese version of this article. The subscription address of Bankless is: bankless.substack.com
protocol sinking
Ethereum is a global public goods platform in the field of money and finance.
protocol sinking
Lianwen Note:
《Protocol sinking theory provides a model for how cryptographic systems behave as they mature.》
The theory states that the more trustless, permissionless, and credibly neutral a protocol is, the more it can scale to a global platform and thus absorb more capital. Protocols that provide platforms to build on can become "dense" and fall to the bottom of the protocol sink due to the collective weight of the people and companies building on top of them.
Protocol sinking: DeFi protocols will eventually replace cryptocurrency exchanges
utility
Two key properties predict a protocol's place in protocol sinking: utility and attack surface.
attack surface
The utility of the protocol refers to the value that the protocol brings to users, as well as the motivation to adopt and utilize the protocol. The utility of a protocol lies in the incentive it generates to deposit funds or assets into its contracts. The total value of assets deposited into the application (think "value locked in DeFi"). For protocols with tokens, utility can be measured by the token market cap or the total value deposited into its contract.
Protocol Density
attack surface
The attack surface of a protocol is the weakness or resistance of the protocol to capture, coerce, subvert, and exploit. If a protocol has a large attack surface, it may be captured, coerced, or exploited to benefit some and cause losses to others, thereby invalidating the trusted neutrality of the protocol. Elimination of the attack surface reduces the potential for a protocol to favor a certain set of individuals over everyone else. If a protocol has the smallest attack surface, then the protocol is trustless, license-free, and trustworthy and neutral. These qualities enable it to scale to the largest number of users. This increases the likelihood that the protocol will receive more deposits from a wider user base, thereby affecting its weight.
Protocol Density
To discover the projected density of a protocol or application on Ethereum, simply divide the utility of the protocol (how useful it is) by its attack surface (how easy it is to capture it). Those that are very useful and cannot be captured will be placed at the bottom of the protocol sink. Dense protocols sink to the bottom.
Density Limits in Web2
We have seen early signs of protocol sinking from large Web2 platforms such as YouTube, Twitter, and Facebook, where almost all companies and businesses have established their homepages.
Furthermore, platforms like the iOS App Store and Android Play Store are located at a deeper layer of protocol sinking, because many companies develop their products on these platforms. Web 2 giants like Google, Amazon, Apple, Facebook or Twitter are all protocol sinkers.
The reason these companies command such high valuations is because they build platforms for other companies. Businesses, individuals, non-profit organizations, and social organizations can all register and use their services for free, and the Web2 platform becomes a global infrastructure used by everyone. These companies have created a global platform and succeeded at scale with a large number of useful products, while also taking a relatively hands-off attitude towards what users can or cannot do on their platforms.
The movement of Web2 illustrates the existence of the same outcome predicted by protocol sinking theory. Global, non-competitive, non-exclusive platforms like Instagram, Facebook, Twitter, YouTube, and Medium that both amass a strong density from free user-generated content while possessing the ability to scale to the widest possible audience , so there has been incredible adoption and growth. However, as the product of a for-profit company, the scale of these platforms is ultimately limited by national regulators. The company needs to obtain revenue from advertisers, and it also needs to squeeze revenue from users as much as possible, which leads to an inherent dislocation between the three parties, and at the same time faces limitations in scale.
The Web2 movement is built on the highly dense protocols of the Web1 layer: TCP/IP, HTTP, and FTP are the most dense protocols built/discovered in the world, and they represent the lowest layer of protocol sinking. We rarely talk about these because we rarely see them, and unlike the Web3 protocol, they are not something to invest in or profit from. They have a completely believable neutrality.
The Web3 protocol, an application built on Ethereum, should strive to achieve the same level of trusted neutrality as the Web1 protocol.
Twitter, Facebook, Youtube are all free global services that provide a lot of value to the world, but at the end of the day they are all private property of one company. These products benefit certain groups of people over everyone else and subject users to influence and coercion. As these platforms matured, people started talking about their monopoly and their biased nature. It turns out that the content of these platforms requires humans to monitor, and human subjectivity limits their neutrality and prevents them from being an unbiased agreement. Furthermore, as centralized corporations, they must be subject to the rules and regulations of nation-state governments.
These platforms are free to sign up and enter, and provide some value, which makes these platforms very useful, but the existence of a centralized, for-profit company limits the scope of these platforms, or the freedom they have.
No matter how much utility these companies provide, it will not be enough to sink them to the bottom of the protocol sink. If you want to go deep into the sinking of the protocol, you cannot be satisfied with being a profitable company that obeys government regulation and human subjective wishes. Prejudice, trust, and permission on these platforms are the Achilles' heels that can leave operators in the crosshairs. In order to go deeper into protocol sinking, you can only be a self-adjusting global protocol that does not require a central operator to maintain the system. Protocols must be autonomous.
Predictions of Protocol Sinking Theory
The core prediction of protocol sinking theory is that, in order to provide better services to users, centralized enterprises and companies will be free to build on top of trustless, permission-free, and unbiased protocols.
Therefore, in protocol sinking, encrypted economic protocols are destined to fall under centralized companies. Simple game theory suggests that centralized companies like cryptocurrency banks (like Coinbase and Gemini) will leverage the power of their underlying decentralized protocols in order to increase their value to customers.
Any crypto bank can improve its products and services by enabling users to earn the Dai Savings Rate (DSR). Customers with DAI in their accounts can obtain the annual interest rate (APR) provided by DSR with one click. Although crypto banks are competing internally, no bank has competed with DSR, and no bank has suffered any losses from using DSR. While Coinbase and Gemini are competitors, Using DSR is not. This allows DSR to be extended to any financial institution or individual who chooses to use it. You can repeat this same pattern for any protocol or application on Ethereum, such as Maker, Compound, PoolTogether, Augur, etc.
Global public goods (GPGs) are what are found at the bottom of the protocol sink.
Ethereum provides a platform for global currency and financial public goods.
Sinking forces separate, chaotic things to converge into a single ordered pattern of reliable, predictable outcomes.
sink, attractor, basin
Sinking forces separate, chaotic things to converge into a single ordered pattern of reliable, predictable outcomes.
In mathematics, an attractor (sink) is a condition or set of conditions on which a system tends to evolve, for various initial conditions of the system. If the system value is close enough to the attractor value, it will stay close even if disturbed. Over time, things converge to a stable condition regardless of the initial conditions. The place where things come together (the attractor itself) is not actually a "thing", but a emergent location where many separate things come together. In fact, there is no central factor that attracts them, but collective forces emerging from the universe that push them into a common order.
Another word to describe sinking is basin. Below is a map of river basins in the United States. Most notably, the pink Mississippi Basin is one of the largest in the world. Any water drop that falls anywhere within the pink zone is sure to eventually find its own meeting point: where the Mississippi River meets the Atlantic Ocean.
image description
The Mississippi River Basin is sinking. Gravity is the force that produces energy, which creates aggregation at the bottom.
Ethereum is a basin. The application of Ethereum is the rivers and lakes in between. Monetary assets and capital are water flowing downstream. At the bottom of the protocol sink there is an attractor that pulls applications and assets downward.
This attraction is a common universal need for global public goods.
image description
This diagram, which fully describes the sinking of the protocol, was recently circulated on Twitter. Things on Ethereum converge. They merge and descend together to the protocol sink. It also illustrates that Ethereum is not a bunch of individual applications, but a single network of interconnected applications.
protocol sinking
The need for a global platform where users create value is ubiquitous and creates a perpetual drive to build applications on Ethereum. Ethereum is the sinking of the "Minimal Extractor Coordinator": an internet basin converging on permissionless, trustless, unbiased money and financial applications.
The fundamental innovation of Ethereum is to provide a system of free security and protection for applications that aspire to be global public goods.
Global public goods are the things found at the bottom of the protocol library. The cryptoeconomic revolution is built on the basic assumption that this revolution will eventually give rise to a series of global public goods in the monetary and financial domains.
attack surface
There are two characteristics that determine a protocol's place in protocol sinking: attack surface and utility.
to trust
Attack surface is a measure that describes a protocol's weaknesses in terms of capture/control. In simple terms, a low attack surface means that there is no central point in the protocol. Trust, permission, and bias are the characteristics that determine where the "center" of an agreement is, and how easy it is to capture it.
License-free
to trust
How much do users trust others when using the protocol? Could the selfish motives of others affect the results of other users? Is someone obtaining information from the other party against the user's will or without the other party's knowledge? If trust is not an issue, the protocol's place in protocol sinking is reduced.
Can anyone use this protocol? Can someone limit or review protocol usage? Are there some administrative keys that give specific privileges to a special set of users? If everyone has equal access to the protocol and no one can censor everyone else, the protocol's place in protocol sinking is reduced.
utility
credible neutrality
Does the agreement benefit any particular user or entity over others? Is it unfair for a person or entity to benefit from the success of the agreement? If the agreement is fair or equitable enough, the agreement's position in the agreement sinking will be reduced.
utility
When a protocol has high utility, more value and money are injected into the application. This creates mass, and mass adds density. If the protocol has utility, it will be lowered in the protocol sink.
Assets and Applications
Protocol Sinking Spectrum
Each of the features above has its own spectrum. An application can be anywhere on the 0-100 scale in terms of attack surface and utility. Furthermore, the "total score" for these features illustrates the density of the protocol relative to other protocols. This scoring system is largely for the sake of explanation - just to illustrate the metaphor. I will refer to this as the "global public goods score" later in this article.
Protocol sinking is not only applicable to applications on Ethereum, but also to assets. On Ethereum, assets are applications. Not all apps are tokens, but all tokens are apps. An application on Ethereum is defined by a contract and its own address.
public goods
If it's a contract on Ethereum, it's an application.
public goods
non-exclusive
In economics, a public good is one that is non-exclusive and non-rivalrous, i.e. individuals cannot be excluded from using it, or can benefit from it without paying a fee, and the use of one person does not reduce the benefits of others use, or the item can be used by more than one person at the same time. This is in stark contrast to common goods such as wild fish stocks in the ocean, which are also non-exclusive but somewhat competitive because if too many fish are harvested, the stock is depleted.
non-competitive
non-exclusive
A good is exclusive if it is possible to prevent access to it by those who have not paid for it. A good or service is non-excludable if a consumer who has not paid for it cannot be prevented from obtaining it.
non-competitive
Public goods do not dry up with use. Air, water, and sunlight are all public goods. Listening to the radio does not prevent others from listening too. Street lights illuminate the way for everyone, without discrimination.
global public goods
As with everything, there is a range here. Streams and lakes are public goods; everyone can use them, and they are hard to deplete. However, they do also have the potential to be depleted one day. While they are "depletion resistant," the scale of the human species has shown that reservoirs, no matter how large, can become depleted. Rivers have an almost inexhaustible supply of water, thanks to the cycle of seasons that migrate precipitation to higher elevations, however, there is a rate limit to the movement of water upstream.
global public goods
anti-fragility
Global public goods are public goods, but their benefits benefit all countries, all people, and all generations. Global public goods scale well beyond typical public goods.
The ability of some public goods to scale to global and intergenerational scales comes from the antifragile properties of some public goods. Two different items can both be public goods, but if one of them is antifragile, it becomes a global public good.
anti-fragility
Antifragility is a property of a system that enhances its ability to thrive under stress, shocks, fluctuations, noise, errors, malfunctions, attacks, or the consequences of failure. This concept was introduced by Nassim Nicholas Taleb in his book Antifragile. As Taleb explains in his book, antifragility is fundamentally different from the concepts of resilience (the ability to recover from failure) and robustness (the ability to resist failure).
Ideas and knowledge are global public goods; when you share an idea, you not only keep the idea for yourself, but also allow others to use and share it. A good idea can spread throughout the world without detracting from its originator or the idea itself. Ideas can be passed down from generation to generation and never decay. Most importantly, an idea improves as more people think about it. Ideas are things that can be repeated and extended. These iterations are as scalable and shareable as the original idea itself. Good ideas are more easily shared, repeated, developed and adopted than bad ones, which is why a little spark turned into a revolution in such a short period of time. Ideas are better if everyone thinks the same way.
free rider problem
The Internet is a global public good. Internet use does not prevent other people from using it, and the more people use it, the more useful it will be to others. If there are more things on the Internet, the more utility the Internet can provide to more people, this will first bring more users to the Internet, and then create an impetus to further build on the Internet.
At the core of Web2 products is antifragility. Facebook, Instagram, and Twitter are all better products when more and more people around the world use them. However, the companies that own these products are as vulnerable as the rest of the world, and therein lies the problem of the scale of these products.
free rider problem
The "free rider" problem refers to the burden caused by the use or overuse of shared resources by those who do not pay their fair share. Streetlights are public goods that require resources to build and consume energy to run; this requires taxation on their users, and anyone who doesn't pay taxes places a burden on this public good to scale up and become more useful. This is why streetlights are not a global public good: using them doesn't make them more scalable.
By definition, global public goods are public goods that are not subject to the free-rider problem. But in fact, the opposite is true. Global public goods have a mechanism for making a minimal contribution to their use. By definition, global public goods cannot be used without returning an amount of value that exceeds the minimum threshold required to keep the global public good functioning. Provide it with the nutrients it needs to sustain life, as long as you use global public goods.
Unlike the tragedy of the commons, the global public goods experience is a “celebration of the commons,” bringing people together to celebrate the utility of our shared use, which grows as the celebration progresses.
Bitcoin is a global public good
Bitcoin has survived because of its strong antifragility. The value of Bitcoin assets comes from Bitcoin's anti-fragility. Bitcoin's anti-fragility provides the strongest guarantee for Bitcoin's future settlement in any time frame, which in turn gives rise to its utility and incentive to use in the first place.
Bitcoin succeeds because it is antifragile and has value in itself. Any other cryptoeconomic blockchain system born in this space must also exhibit antifragile properties, or it will eventually be forced to submit to the rules and paradigms that keep legacy systems running: the laws and regulations of countries (see XRP). Antifragile things don't need laws or regulations to keep going; they're self-sufficient. Antifragility is independence from outside help and support.
Bitcoin is the first example of a global public good that provides the world with a currency or financial platform that meets the current state of technology and the needs of citizens of the planet. Gold was once a global public good, but it is slowly becoming obsolete and obsolete as new technologies upend its utility.
Ethereum is a global public goods protocol
As we discussed in A Bankless Nation, Part II, Ethereum is a protocol of protocols. Ethereum is a platform for generating an environment conducive to the generation of global public goods applications. Ethereum is a platform with security and protection embedded in the protocol, which allows people to build applications without thinking about their own security and protection.
U.S. national parks are public goods because they are protected by U.S. government laws and regulations. Without this protection, they would either fall into the tragedy of the commons, or be fragmented as private property, unable to be used or appreciated by the general public.
Imagine if the Grand Canyon was filled with houses, buildings, streets, piped sewage systems. It's not going to be the Grand Canyon, it's going to be a tragedy.
In order to maintain the public goods status of national parks, the United States protects them through rules and regulations. It restricts access and use to ensure that the Grand Canyon can be enjoyed by everyone and everyone's children and grandchildren. America supports this public good with taxpayer dollars. Without this protection, national parks would not exist; they do not have the antifragility necessary to become self-sovereign, self-sustaining public goods. They need outside help. American laws and regulations protect and maintain public goods, because it believes that some things should be public goods, but if they are not protected, they will degenerate into private property.
Ethereum follows a similar model, but instead of local public goods like national parks, it is a platform for creating and protecting global public goods in the monetary and financial spheres.
Uniswap
Uniswap, MakerDAO, and Compound are all better financial applications because they are not restricted and regulated. A for-profit company under the jurisdiction of a nation-state simply cannot be called Uniswap. License-free secured loans that aren't regulated by Wall Street are just more useful. Borrowing and lending would be more efficient if rules and regulations were built into the agreement, but not managed by a central government.
Ethereum is a protocol for securing public goods, making them global public goods.
Thanks to the security provided by Ethereum, applications can replace nation-state rules and regulations with those that the protocol designer deems best for their particular application. Uniswap, Compound, Maker are sovereign by Ethereum; the only rule that Ethereum applies to them is that they must abide by the regulations of the EVM. Ethereum is a protocol for self-sovereignty of financial applications.
I recently wrote an article titled "Uniswap is Infrastructure" (Uniswap is Infrastructure), discussing several key points about the application of Uniswap.
The point of this post is to illustrate Uniswap's antifragility and its inherent ability to scale to meet global demand, whatever that demand may be. However, I realize now that I was actually describing how Uniswap is a global public good.
Uniswap keeps it alive by injecting its own nutrients into the protocol. The 0.3% transaction fee drives the protocol’s liquidity and creates an environment for Uniswap to expand to a global platform. The exchange fee means that all Uniswap consumers are also Uniswap producers; if you don't "give back" the agreement, you can't use Uniswap.
This is Uniswap's antifragility, and the mechanism by which it rises to global public good status.
Critics have repeatedly asked this question about Ethereum and the things built on top of it. What these critics really want to ask is whether the project has the ability to resist fragility and achieve global public good status.
COMP and the Governance Token Revolution
As a global public good, it is impossible to also be under the control of the management key. Governance keys state power and control over something, which is the opposite of the role and purpose of global public goods. Global public goods are public and require no external protection or support. Therefore, administrative keys should not exist in global public goods.
The existence of managed keys implies the potential for less trustless, permissionless, or trusted neutrality; if such a possibility exists, it cannot be a global public good.
Compound recently launched its COMP token, which is a game-changer, moving the protocol on Ethereum from a public good protected by a centralized entity to a global public good with a decentralized set of administrators. While COMP is the most prominent example of this, its underlying structure independent of COMP is a model to follow if many other Ethereum applications want to elevate themselves to the status of global public goods.
Lianwen Note:
《Gavin McDermott illustrates this model in his article "Meet the SAFG".》
The SAFG token model demonstrates how Ethereum applications can gracefully and seamlessly migrate from a protected public good to an antifragile global public good. This is the fundamental reason why the Ethereum and DeFi ecosystems are so excited about this new token model paradigm.
Lianwen Note:
Explore how the SAFG framework promotes DeFi governance: Take Compound and Futureswap as examples
protector protector
The ETH asset is a global public good, and most importantly, it is a global public good that supports the health of the Ethereum ecosystem, which is an ecosystem that includes more global public goods. All global public goods on Ethereum, now and in the future, depend on the value of ETH to function. The higher the price of ETH, the stronger Ethereum’s protection of the global public goods that run on it. Rejecting the value of ETH is not only a disservice to those trying to build value on Ethereum, it is a direct attack on those efforts.
This is why I strongly disagree with the notion that "hyping ETH" is a bad thing, I believe that people who can say such things must not understand this concept, nor understand that ETH is inseparable from all the efforts surrounding Ethereum and its development. As the price of ETH rises, so does the wall protecting the global public goods on Ethereum.
Fortunately, ETH itself is a global public good; it is anti-fragile and does not need the support of others to grow. I have written about the fate of ETH in Ethereum in several articles, and below I outline these conclusions through the lens of protecting Ethereum’s global public goods.
Like apps on Ethereum, all my articles are composable, each one builds on the other articles and makes the others better and more useful. In my opinion, this is a relevant end to this article.
Ethereum is an emerging construct
Applications on Ethereum are composable, and this composability allows applications to blend together over time.
Ethereum is not a platform of many independent applications, but a single structure of applications fused together.
As the highest-scoring global public goods asset on Ethereum, ETH is the starting point for the structure to gain its initial and most solid foundation.
We welcome and encourage other assets to provide support and foundation for this structure. In fact, other assets are required. You can't build a structure at a single point.
Due to its dominant position as Ethereum's native asset, ETH will always provide greater support and foundation for the Ethereum/DeFi structure
The weight of the structure is directly related to the price of the assets backing it in the secondary market.
ETH's Fundamental Value Proposition
Assuming planned protocol updates are included (PoS, EIP 1559), ETH will be directly affected by the health and size of the Ethereum economy.
The size of the Ethereum economy will lead to the scarcity of ETH in the form of EIP1559; the size of the Ethereum economy determines the speed of ETH destruction.
The scarcity of ETH is directly related to its utility score on the global public goods scoring scale.
The utility of ETH lies in its scarcity.
Both current and future global public goods on Ethereum will require ETH as an asset because of its high global public goods score.
The large number of global public goods on Ethereum will generate an endless demand for ETH.
Uniswap is infrastructure
Global public goods on Ethereum improve as more and more people use them.
Each global public good can serve as the infrastructure for other global public goods, making it easier to create new, more useful global public goods over time.
As new global public goods emerge on Ethereum, they in turn make the original global public goods more useful.
More and better global public goods appear on Ethereum, collectively pushing each other to move towards the bottom of the protocol sink.
When there are many high-efficiency global public goods at the bottom of the sinking of the Ethereum protocol, the gravity of the total market value of all global public goods agreements will reach the realm outside the ether body.
This creates a positive feedback loop not only in the quantity of global public goods, but also in the utility of global public goods, thus creating a double feedback loop in terms of incentivizing people to use Ethereum in the first place.
Conclusion: Ethereum is an attraction for global public goods
In Ethereum, antifragility begets antifragility. The last two points outlined in Uniswap is Infrastructure above illustrate the future of Ethereum: the promise of a fragile global public goods infrastructure.
Currently, only a few applications and a mere density of hundreds of millions of dollars can be found at the bottom of the protocol sinking. Over time, the more mass that accumulates at the bottom, the stronger the gravitational influence will become. This effect will pull content in protocol sinks to a higher position and force them to sink into the global public goods domain.
"Tell me the motivation, and I'll show you the results."
Lianwen Note:
Any unnecessary extraction during a transaction is a tax that will eventually be driven out by the copy-paste competition in the world of open source protocols. While this is a brave new world for businesses, minimizing extraction should benefit all of us as consumers.
Lianwen Note:
