Ethereum: Slayer of Moloch 🔪

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Dear Bankless Nation,

Why does Ethereum exist?

To slay Moloch. 👹

David explains what that means in today’s piece.


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Author: David HoffmanBankless Nation Founding Father & The Etherean at POV-Crypto

The energy around DeFi tokens and yield farming has dominated the news cycle in Ethereum and crypto. During these eras of growth and development (it’s spring-time in Ethereum!), the content and narratives have focused on token speculation, alpha-leaking, and profit-maximization.

This phase of the crypto-cycle is always the phase that draws the most controversy. This is supposed to be world-changing technology, yet instead profit-maximalists are infiltrating and corrupting our communities in search of a quick buck.

They’ll get upset when BTC breaks ATHs and dominates news cycles and illiquid ERC20s pump 1,000x and makes overnight millionaires.

But this is just a new phase of wealth distribution mechanisms.

While many individuals will loudly condemn the promotion of such activities (especially those who own alternative assets that don’t have upside exposure to these activities), I take the opposite stance.

This bull phase of the bull-boom-crash-bear cycle is where a lot of value is generated. Unless we want this wealth concentrated into the hands of a few, we need to educate and inform about how these cycles work, and the technology that underpins them. It would be an absolute shame if DeFi was built, and then we gatekept the innovations for DeFi whales alone. If we want the value that is created to be distributed, we need to responsibly promote and educate the signal that is being relayed.

The last few months in DeFi have produced new assets with paradigm-breaking fundamentals. If we don’t advertise and promote the things coming out of DeFi, then they will be reserved for those that are already wealthy (and might ultimately come to fail as a result).

Every new cycle, the promise of life-changing wealth brings in hoards of new market participants, which ultimately adds to the fervor and ultimately creates further capital appreciation, generates more noise and news, which adds new market participants, and repeat.

As the music stops and market participants grow pessimistic, people leave. Markets contract, energy leaves, and those that stick around are left to clean up the mess. As with the cycles before us, those that remain behind are your new bear market friends. Long-lasting relationships, new anti-fragile products, and real value are created in bear markets. Value is created in the bear markets and expressed in the bull.

I’m a child of the last bull phase.

I entered the space in ~July of 2017, just 5 months before the peak of the 2017 market. Not early enough to be able to access sufficient upside in capital appreciation, but fortunately I am an idealist, an optimist, a sci-fi dreamer, and this allowed me to see the underlying currents that Ethereum had created, regardless of the fact that 99% of all ICOs were scammy cash grabs. Every cycle, Ethereum expresses itself differently, but those that stick around are the ones that come in via the bull market and gain access the signal through the noise of mooning tokens and ‘promising projects’.

Banking the unbanked…retaking control of our money…the life of a sovereign individual. These were the narratives that dominated the previous bull market, and will likely dominate this one too. Because they’re real. They will dominate every bull market because they are truth.

But we can go deeper. Ethereum can do those things, but there is something much more powerful that it can do…. that it is doing now!

What is the one single goal of Ethereum, above all others?

To slay Moloch 🔪

Moloch: Bane of Humanity

Moloch - Wikipedia

If you were around during the 2018-19 bear market, the story of Moloch was memed into the Ethereum narrative by Ameen Soleimani, creator of MolochDAO. Moloch is the god of human coordination failure, and the post Meditations on Moloch from the Slate Star Codex blog was the topic of conversation for weeks, if not months, during the long brutal bear market. While things were boring and slow, the story of Moloch and how Ethereum fits into the story was a fun mental exercise and community conversation.

Human Coordination Failure

The Moloch blog post goes through a few thought experiments that illustrate the power of Moloch… the answer to the question “why can’t we have nice things”… why countries can’t coordinate to solve climate change, or why we can’t save the oceans or forests, or Great Barrier Reef.

The essence of moloch is described this way:

Imagine the possibility of a dictatorless dystopia, one that every single citizen including the leadership hates but which nevertheless endures unconquered. It’s easy enough to imagine such a state. Imagine a country with two rules: first, every person must spend eight hours a day giving themselves strong electric shocks. Second, if anyone fails to follow a rule (including this one), or speaks out against it, or fails to enforce it, all citizens must unite to kill that person. Suppose these rules were well-enough established by tradition that everyone expected them to be enforced.

So you shock yourself for eight hours a day, because you know if you don’t everyone else will kill you, because if they don’t, everyone else will kill them, and so on. Every single citizen hates the system, but for lack of a good coordination mechanism it endures. From a god’s-eye-view, we can optimize the system to “everyone agrees to stop doing this at once”, but no one within the system is able to effect the transition without great risk to themselves.

Here are some examples of coordination failure in the Moloch post:

  1. The Prisoners Dilemma

…as played by two very dumb libertarians who keep ending up on defect-defect. There’s a much better outcome available if they could figure out the coordination, but coordination is hard. From a god’s-eye-view, we can agree that cooperate-cooperate is a better outcome than defect-defect, but neither prisoner within the system can make it happen.

  1. Fish-Farming Example

As a thought experiment, let’s consider aquaculture (fish farming) in a lake. Imagine a lake with a thousand identical fish farms owned by a thousand competing companies. Each fish farm earns a profit of $1000/month. For a while, all is well.

But each fish farm produces waste, which fouls the water in the lake. Let’s say each fish farm produces enough pollution to lower productivity in the lake by $1/month.

A thousand fish farms produce enough waste to lower productivity by $1000/month, meaning none of the fish farms are making any money. Capitalism to the rescue: someone invents a complex filtering system that removes waste products. It costs $300/month to operate. All fish farms voluntarily install it, the pollution ends, and the fish farms are now making a profit of $700/month – still a respectable sum.

But one farmer (let’s call him Steve) gets tired of spending the money to operate his filter. Now one fish farm worth of waste is polluting the lake, lowering productivity by $1. Steve earns $999 profit, and everyone else earns $699 profit.

Everyone else sees Steve is much more profitable than they are, because he’s not spending the maintenance costs on his filter. They disconnect their filters too.

Once four hundred people disconnect their filters, Steve is earning $600/month – less than he would be if he and everyone else had kept their filters on! And the poor virtuous filter users are only making $300. Steve goes around to everyone, saying “Wait! We all need to make a voluntary pact to use filters! Otherwise, everyone’s productivity goes down.”

Everyone agrees with him, and they all sign the Filter Pact, except one person who is sort of a jerk. Let’s call him Mike. Now everyone is back using filters again, except Mike. Mike earns $999/month, and everyone else earns $699/month. Slowly, people start thinking they too should be getting big bucks like Mike, and disconnect their filter for $300 extra profit…

A self-interested person never has any incentive to use a filter. A self-interested person has some incentive to sign a pact to make everyone use a filter, but in many cases has a stronger incentive to wait for everyone else to sign such a pact but opt out himself. This can lead to an undesirable equilibrium in which no one will sign such a pact.

3. Capitalism

Imagine a capitalist in a cutthroat industry. He employs workers in a sweatshop to sew garments, which he sells at minimal profit. Maybe he would like to pay his workers more, or give them nicer working conditions. But he can’t, because that would raise the price of his products and he would be outcompeted by his cheaper rivals and go bankrupt. Maybe many of his rivals are nice people who would like to pay their workers more, but unless they have some kind of ironclad guarantee that none of them are going to defect by undercutting their prices they can’t do it.

Like the rats, who gradually lose all values except sheer competition, so companies in an economic environment of sufficiently intense competition are forced to abandon all values except optimizing-for-profit or else be outcompeted by companies that optimized for profit better and so can sell the same service at a lower price.

(I’m not really sure how widely people appreciate the value of analogizing capitalism to evolution. Fit companies – defined as those that make the customer want to buy from them – survive, expand, and inspire future efforts, and unfit companies – defined as those no one wants to buy from – go bankrupt and die out along with their company DNA. The reasons Nature is red and tooth and claw are the same reasons the market is ruthless and exploitative)

From a god’s-eye-view, we can contrive a friendly industry where every company pays its workers a living wage. From within the system, there’s no way to enact it.

  1. Cancer

The human body is supposed to be made up of cells living harmoniously and pooling their resources for the greater good of the organism. If a cell defects from this equilibrium by investing its resources into copying itself, it and its descendants will flourish, eventually outcompeting all the other cells and taking over the body – at which point it dies. Or the situation may repeat, with certain cancer cells defecting against the rest of the tumor, thus slowing down its growth and causing the tumor to stagnate.

From a god’s-eye-view, the best solution is all cells cooperating so that they don’t all die. From within the system, cancerous cells will proliferate and outcompete the other—so that only the existence of the immune system keeps the natural incentive to turn cancerous in check.

Meditations On Moloch - Off-Topic - Open Carnage

In short, Moloch is represented by the extremely unfortunate reality that, the more humans successfully coordinate with each other, the stronger the incentive there is to defect and become a profit-maximalist.

We are all slaves to Moloch. His evil flows in our blood; his vices are our DNA. We are all rationally incentivized actors, and therefore ultimately we must follow his lead.

Moloch compels us.

Are there any that can resist him?

Coordination Layer

Over time, humans have found a way to generate coordination mechanisms in an attempt to thwart Moloch’s power. The story of the human species is finding better and better tools to coordinate with each other; to uphold the collective social contract. This is largely the story that is told in A Bankless Nation. Religion, states, the internet, money, crypto. These are the tools, with many others, that humans have created to help keep people cohered together and prevent defection. These things incentive coordination, which are the mechanisms that humanity needs the most.

What happens when we generate technology that enables defection prevention? What happens when we reduce the difficulty of maintaining coordination and collective goal-oriented behavior?

What happens if we solve global human coordination failure?

Ethereum is a smart-contract blockchain protocol, with its own native coordination mechanism (ETH). The smart-contracts on Ethereum are each their own coordination mechanism. They each have their own goal, and if humans coordinate around each application if they like the goal that is being striven for. Good coordination mechanisms are deep in the Protocol Sink Thesis, while bad ones are supplanted and replaced.

Unstoppable code, immutable transactions, and unprintable money is the ultimate coordination toolkit that humans have never had before. “Bitcoin is for Enemies!” is a chant frequently heard from of Bitcoiners, who praise Bitcoin for being money that even enemies can use. You can distrust everything about your enemy, but when they send you BTC you cryptographic assurance it’s the real thing. Because of Bitcoins, two enemies are given a common platform to coordinate themselves into being allies.

Ethereum takes this superpower and generalizes it. You no longer need to coordinate with another human. Rather, you coordinate with trustless smart-contracts. Finding, discovering, and building systems that enable unstoppable human coordination is SO INSANELY BULLISH FOR HUMANITY, that even the most grandiose sci-fi authors CAN’T DREAM of the future we’re about to build with this technology.

As discussed in the Protocol Sink Thesis, Ethereum is a protocol for protocols. Previous instances of large scale human coordination (religion, nation-states, shared stories) were lucky artifacts of the entropy of the universe—they were one-off successes.

Ethereum is different. Ethereum is a platform for the production of coordination mechanisms. Ethereum is a coordination mechanism factory.

  • Input: humans, attention, energy, and capital

  • Output: coordination mechanisms (with some loss along the way).

Ethereum means the world is about to become a lot more coordinated.

Galaxy Simulations Offer a New Solution to the Fermi Paradox | Quanta  Magazine

The Fermi Paradox

The Fermi paradox is the apparent contradiction between the lack of evidence for extraterrestrial civilizations and the predicted high estimates for their probability, as produced by models like the Drake equation.

Drake equation: How the alien formula works, what its variables mean -  Business Insider

The Fermi Paradox states that even pessimistic models of the frequently of life-suitable planets should have produced some aliens by now but for some reason, we can’t find any—that’s the paradox.

Out of the Fermi Paradox comes the Great Filter Theory. The Great Filter Theory is the idea that that at some point along the march from single-cellular organisms to inter-galactic space-fairing species, something breaks down. It’s simple deductive reason from the fact that:

  1. We can see kinda far into space

  2. We still don’t see any life

Therefore, there must be this shared filter that prevents life from growing large enough systems to be able to become detectable from our region of the galaxy.

The Fermi Paradox - Wait But Why

Is Moloch the great filter?

It seems clear that large-scale coordination is what we needs the most right now.

Global warming is banging at the gate. The most wealthy country in the world has been reduced to a global laughing stock due to its inability to coordinate. Social media is turning into dis-coordination and chaos-ensuing machines, polarizing humanity into hostile factions rather than cohered bodies. Facebook caused a genocide.

Maybe global human coordination isn’t the great filter, but it is definitely some sort of filter. Whether or not humanity can coordinate its way into solving problems will determine whether or not the human race is fit to live.

Can Ethereum Slay Moloch?

Ethereum is David. Moloch is Goliath.

Moloch has reigned supreme over the land since genesis. While older technologies like institutional religion and nation-state organization has reduced Moloch’s power, he is still alive and well, and those solutions have come with their own human sacrifices.

Ethereum is a neutral piece of technology. Nefarious actors can use it for bad just as altruistic actors can use it for good. But most every individual who lives, past present and future, wants to do good for the world. Very few people actively wake up with the intent to do evil and harm. Humans are good—it’s Moloch that corrupts us. We don’t have a strong enough citadel to keep him out… yet.

If there is ever going to be something that slays Moloch, it will something like Ethereum. But Ethereum can’t do it alone. Ethereum is just a body; it needs tools! Armor, weapons, training. This is our job.

The constant experiments in asset issuance (starting with the ICO) is Ethereum going through its training, learning how to best equip itself against coordination failure (SushiSwaps Sin of Betrayal). Bear markets are where we integrate that knowledge in order to craft the next tier of equipment to prepare for the next level.

The cycle is our level up.

I’m glad the readers of Bankless have been able to participate in DeFi-fun-times the last few months. I’m glad you’ve been able to profit too, either from responsible, low-risk asset investing or degen-leveraged-yield-farming. You are providing the Ethereum meta-consciousness with the data it needs to level up. Thank you for sharpening its sword.

Your Responsibility

Now that you know the story of Moloch, it is your responsibility to pass this information along. The best thing about the Meditations on Moloch blog is that it is something that everyone can resonate with. More importantly, it’s important that you become an ambassador to the effort of trying to slay Moloch. Liberal, conservative, democratic, republic, it doesn’t matter. Defeating Moloch is the most politically neutral thing you can do that is also objectively good for humanity.

Ethereum has many use-cases. It can solve a lot of problems. But if you had to answer the question, “what is the ONE problem that Ethereum is trying to solve”, there is no better answer than “human coordination”.

GitHub - MolochVentures/moloch: 👹 Moloch whose mind is pure machinery!  Moloch whose blood is running money!

The Role of the Bull Market

I started this piece discussing the specific role that the bull market plays with the 4-season cycles of crypto: Bull, cool-off, bear, warm-up — Summer, Fall, Winter, Spring. Right now, we’re in Spring. Over the next months and years, many people will come into this space in search of yield, profit, and appreciation. They come for the money, and the good ones stay for the tech.

As you meet these people, tell them about Moloch. Tell them about his powers. Tell them Moloch is the reason we can’t have nice things!

Then, tell them how Ethereum is the coordination layer for humanity. Tell them how smart contracts are robots that can’t defect. Tell them how humans invent new ways to overcome Moloch’s temptations, and how Ethereum is a new paradigm for the mass-production of these tools.

The way that we get Ethereum to level up faster is by embedding the story of Moloch into every profit-maxi’s head. They come for the money, but they stay for the revolution.

That revolution will be the revolution where humanity builds a coordination machine, in order to remove ourselves from the shadow of Moloch.

Ethereum, the Moloch-Slayer. 🔪

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Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.

Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

Bankless Apparel Season 0…launch! 🚀

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Dear Bankless Nation,

Bankless Apparel is here.

Season 0 goes live when this post is 1 hour old.

We’ve created a way for you to wear Ethereum. This is gonna be fun.

– David

p.s. if ultra legendary scarce swag isn’t your thing—don’t worry we’ll be launching a regular Bankless merch shop soon—stay tuned. 🏴

Bankless Apparel Campaign, Season 0 🚀

We are kicking off the first Season of Bankless Apparel from a design that I frequently use in my articles.

I often speak of Ethereum as a physical landscape; a 3-D place where the DeFi structure lives and grows.

Season 0 offers this metaphor in a tee-shirt!

“ETHSCAPE” Season 0 shirt

Each ETHSCAPE shirt is sold as a scarce redeemable token called a “BAP”. The ETHSCAPE shirt is a BAP0 token. Buy BAP0s on Uniswap when this post is 1 hr old.

Buy on Uniswap

SOTN to see Ryan & David Explain $BAPs

We just released episode 8 of SOTN—all about the magic YFI token….

📺 Watch State of the Nation #8: PUMPED – w/ $BAPS


BAP0 Sale

There will be Fourty-Eight (48) BAP0 of 50 BAP0s available on Uniswap. This makes makes Ethscape a Legendary class apparel item.

No more than 50 will ever exist.

BAP0 Stats:

  • Total Supply: 50 BAP0s

  • Pre-issuance: 2 BAP0s (David + Ryans BAP0)

  • Liquidity Market: Uniswap

  • Supplied: 48 ETH / 48 BAP0

  • Tier: Legendary

  • Uniswap exchange: BAP0-Uniswap Etherscan

Phase 1: Initial Liquidity

BAP0s will initially sell at Uniswap market rate starting at 1 ETH per BAP0. After 23 of the 48 BAP0s are sold we’ll move to Phase 2. The 23rd BAP will sell for approximately 5 ETH according to the Uni-AMM.

PHASE 2: Liquidity Adjustments

After the 23rd BAP is sold, we plan to withdraw 50% of the Uniswap liquidity for BAP0, and begin selling the withdrawn BAP0s into Uniswap to maintain a price of 5 ETH or less. If the price of BAP0 exceeds 5 ETH, we will continuously withdraw and sell BAP0s until there is no more available on Uniswap and all the available BAP0s are in people Ethereum wallets to be redeemed or resold back to Uniswap. 

This two-phase system ensures that the price curve for the BAP0 tokens remains as shallow as possible, and only increases in steepness once the tokens are fully distributed.


Uniswap will be seeded with BAPs and liquidity when this post is 1 hour old.

How to Buy

After liquidity has been provided you can buy BAP0s on Uniswap using ETH. You’ll need to add the BAP0 contract address to access it in Uniswap.

Buy on Uniswap

The Redemption

1 BAP0 is redeemable for 1 Ethscape shirt

In order to redeem 1 shirt, you must purchase a BAP0 from Uniswap, and BURN it. You can burn the BAP0 by sending it to the genesis address of Ethereum: 


Some wallets do not let you send it to the genesis address. Replacing the last 0 with a 1 also works:


Sending to the Parity Multisig address also works 😈

Email this transaction to, along with your shipping address and shirt size and we will coordinate the delivery of your Season 0 shirt! We’ll ask for additional confirmation transaction in response to this email.

Staking BAPs

If you want to be one of the 50 people with the Genesis Season BAP….

Buy BAP Season 0 on Uniswap

Check the timestamp. The market gets liquidity when this post is 1 hour old. Be ready. 🚀

Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.

Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

Introducing Bankless Apparel ($BAPs)

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Dear Bankless Nation,

Today, we are launching a new campaign of the Bankless revolution. 

Bankless Apparel Seasons

aka… SWAG

If there is one thing that is lacking in the crypto-world (after on-ramps, UX, off-chain assets), it is ways to express yourself as a member of the Digital Revolution. This new world is incredibly rich in culture, community, expression and opportunity, but we have extremely limited ways to actually expressing these things! 

This is why we are launching Bankless Apparel Seasons!

Season 0 just went live…check it out here!

Bankless Apparel Seasons combine crypto-economic digital scarcity with extremely unique and limited releases of high-quality clothing items. Owners of a Bankless Apparel Season have the benefit of knowing that the clothing item they purchased is extremely scarce and unique to them, and that they are one of a very small group of people that owns one of the items.

The ‘Seasons’ are regularly occurring releases of new unique items, which will never ever be released ever again. If you miss one Season, that’s okay! More Seasons are coming. BUT, if you see something you like, you better snag it before the Season ends! 

Fixing Fast Fashing

Fast Fashion is a genre of fashion that aims to quickly and cost-effectively generate massive amounts of identical clothing items that quickly answers to the current demands from the trends in the spotlight. It uses cheap labor and cheap materials to quickly produce clothing that resembles what is currently ‘in’. This type of fashion is met with controversy and criticism, as it requires slave-wage labor, as well as producing low-quality clothing that inevitably falls apart after a few washes. Fast fashion focuses on minimizing production costs in order to produce mass quantities of the same items under significant time constraints. The Fast Fashion industry only produces clothing that is designed to meet the fleeting demand from consumers who quickly move on to new trends, to which Fast Fashion also then works to keep up with.

While it may be nice to be able to keep up with current trends in a low-cost way, ultimately the costs upon the planet is significant. The fast-fashion industry produces incredible amounts of waste, as well as significant human-rights violations. It can also be argued that the consumer doesn’t save much money in the long run, as the clothing quickly decays and must be replaced by something new.  

Saifedean Ammous,  a highly controversial figure for his aggressiveness and toxicity, in his book ‘The Bitcoin Standard’ dedicates a chapter to this phenomenon where he links the existence of Fiat money to the generation of empty, hollow, low-quality products. He claims that the existence of cheap money with no real scarcity impacts the products that the world produces, and in turn makes them also cheap and low quality. According to Saifedean, this same phenomenon emerges in our food, entertainment, news… the whole world produces low-quality results based on low-quality money. 

While this is an extremely nebulous concept, and a difficult thesis to prove, I believe that in this specific instance, digital scarcity and digital scarcity tools can help produce products that have opposing characteristics to those produced by fast-fashion, and we’re going to run that experiment with the Bankless Apparel Seasons.

Bankless Apparel Seasons are about generating a constant flow of unique, scare, and high-quality clothing. Ethereum democratizes the ability to produce scarcity, as well as provides financial infrastructure to help manage that scarcity. We will leverage Ethereum’s digital scarcity tools to produce a new genre of apparel that hopefully generates more excitement and alignment between an individual and the clothing that they use to express themselves!

Bankless Apparel Season launches will be a regular, metered series of unique garments that will only ever be produced once. This campaign will be a continually rolling release of new, limited series of apparel. Over time, there will be many different shirts and styles, but no season will ever be produced twice, and no series will repurpose old designs. The garments produced will offer unique designs that would never be able to be found in a store, or through a drop-shipping company. Each garment from the Bankless Apparel Campaign will be

  • Unique

  • Scarce

  • High-Quality

  • Community-produced

  • Virtual


Each Bankless Apparel Season will feature a unique graphic that will stand out from the rest of the apparel in your wardrobe! 

The last iterations of social video games have illustrated the desire for people to express themselves with scarce skins. Items that impact how one’s character is represented in the video-game are sought-after commodities in virtual worlds, as they allow someone to be visually unique in ways that they enjoy. 

The Bankless Apparel Campaign is about enabling that uniqueness, in both the real world! Real-world Legendary Skins, with provable scarcity!


The apparel in each Bankless Apparel Season will be represented by Redeemable ERC20 tokens. Anyone may purchase a redeemable token from its Uniswap Exchange. These tokens can be redeemed for physical good.

Some apparel items will be rarer than others. Below are the apparel item tiers:

Every new series of Bankless Apparel will offer a fixed, low number of tokens available to purchase from its Uniswap Market. These tokens are only ever minted once, and can never be minted again. Each token will have its own unique ticker, BAP0, BAP1 etc.


Bankless Apparel runs on digital scarcity, which means that they will fetch a higher price than your typical cotton tee shirt from the GAP. This means that we can afford to pay for higher-quality merchandise to produce these items.

The opposite of apparel from the Fast Fashion industry is high-quality clothing that lasts the rest of your life; you should never have to replace the garment due to decay. The Bankless Apparel Campaign will focus on apparel that will stand the test of time, and never need to be replaced either from going ‘out of style’ or from the garment falling apart.

To me, this is how Ethereum and digital scarcity can impact seemingly distant issues like excess waste and climate change. If we are able to produce goods that don’t need to be replaced, as a planet we will consume less overall. High-quality products mean you buy something once, and it’s with you for the rest of your life. It becomes a part of your identity and not some means to an end.

This is also how we move away from sweat-shops and slave-wage labor. High-quality products require high-quality labor. If the scarce clothing movement gains traction, it will defund companies that support sweatshops, and instead, fund companies that produce clothing that stands the test of time. The companies that pay for more skilled labor will survive, creating high-paying jobs that demand more skills.


The best designs for Bankless Apparel Seasons aren’t going to come from one or a few artists. They’re going to come from the entire Bankless Nation. No one knows what the Nation wants more than the Nation itself, and the Bankless Nation is a nation that builds itself!

Future apparel designs will be sourced from the community via community-determined contests! The Bankless Nation will govern over what designs comes next to the Bankless Apparel Campaign.

To participate, artists can submit designs to Artists that have their design chosen by the community will receive a percentage of the BAP tokens for their season!

Virtual Future

We expect Bankless Apparel to find a place in emerging virtual worlds like CryptoVoxels, Decentraland, and eventually Twitter and Discord. Wear your apparel on your digital avatar! Sell it in a virtual marketplace! Once you own the item represented by a BAP token you own it forever, both physically if you choose to redeem it and also digitally.

This world is not yet ready; currently under construction. However, when the world of digital skin NFTs is born, the real-world products from Bankless Apparel Seasons will be given their virtual correlates. Owners of BAPs will be able to redeem for the physical good, as well as the virtual skin, in whatever form that may be!

Season 0

Season 0 is launching with the release of this post!

You can find the details about Season 0 here.

– David

Action steps:

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Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.

Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

A Bankless Nation – Part II 🏴

Level up your open finance game three times a week. Subscribe to the Bankless program below.

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Dear Crypto Natives,

This will be the last time I address you as crypto natives.

We’ve become something greater.

We’ve become a community formed on the basis of common values, economies, and culture each opting in to the social contract of a common set of digital protocols.

We’ve become a digital nation.

From here on out I’ll be addressing this to the Bankless Nation.

David goes deep into our nation today in his second of two pieces.

He concludes with an action item.

If you’re part of the bankless nation…

Bear the banner.

Hoist the flag.



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By Bankless writer: David HoffmanRealTBankless podcast & POV Crypto

A Bankless Nation – Part II 🏴

A Bankless Nation, Part I drew a line through the progression of different nation schemes that humans have discovered and used throughout history. Digital nations are where that line leads: the next iteration of human organizational infrastructure that will enable global coordination and commerce at scales larger than what the nation state is capable of. If humans are to ever generate a ‘Nation of Earth’, it’s going to be through the Bankless systems like Bitcoin or Ethereum; nation states have hit their limits to scale. 

Part II of this article takes us into the future. We draw comparisons to the nations and nation-constituents of the past, and how the same pattern is found in the digital nations of the future. Further, we talk about how digital nations are exclusively ‘opt-in’ systems, and how this creates strong free-market forces that are extremely competitive, and ultimately benefits the users the most. Lastly, we discuss how this free-market competition generates products that are found universally, reducing the importance or significance of the borders and boundaries of the nation state, returning power and control to the individual, and sets the conditions needed to foster a single global nation of coordinated humans. 

Let’s dive in.

Physical to Digital 

Nations have come and gone throughout history, and types of nations have come and gone throughout history as well. Nations are subjects of the universe and like all things, answers to the survival of the fittest. Unfit nations die, and efficient ones live on. Nations are composed of people, and when people see greener hills, they will migrate over eventually, whether a Nation wants them to or not. There’s little a Nation can do in preventing its people from migrating to new pastures given enough time. 

This is especially true with the to migration to digital nations. Tanks, planes, warships, and missiles mean nothing to Ethereum or Bitcoin. They simply exist in a different dimension. Additionally, they live in a dimension that individuals are perpetually connected to. There is no way to put the Internet back in the box it came it, and every day this becomes more and more true for the nations that reside on the Internet: Bitcoin, and Ethereum. 

Same Components, Improved Efficiency

Humans respond to incentives. “Show me the incentives and I will show you the outcome” said Charlie Munger. This truth is why we can be confident in the perpetual growth of digital nations. They are objectively greener pastures.

When we compare physical nations to digital nations, they are not fair comparisons. They are about as accurate as comparing physical nations to organized religion, when religion dominated the human landscape. However, the whole point of these comparisons IS that they are apples to oranges. We’re moving from a depleted and exhausted landscape to a fertile one. There should be meaningful differences in these comparisons.

The greener pastures found with digital nation are a result of the digital nations doing the same job as physical nations, but with more efficient mechanisms. Because digital nations are born in the crucible of the free-market, these efficiencies are passed to the users, rather than being captured by the powerful few for the extortion of the many. 

Many of the same functions found in nation states are also found in digital nations. We will discuss a few of these to illustrate how digital nations do the same job as physical nations, but better and with less costs. 

Obviously, these are A-to-B comparisons; the EVM does not do the same job as the Police. If you have an intruder in your house, please do not call the EVM. However, they also are doing the same job: protecting private property. The police force of a nation’s fundamental role in a nation is to protect private property, and the EVM ensures that assets are managed in accordance with the protocol. It’s the same thing, but contained in different nation paradigms. 


The USA protocol requires governance; this is the main innovation that set it apart from the Religious nations that came before it; the nation state protocol can be updated so that it can retain fitness to the world around it. 

Governance is costly. It requires the expenditure of energy and resources. It is difficult to decide what consensus actually is, and it takes a lot of deliberation and debate to make sure we are getting governance right. Ultimately, there are no assurances that nation state governance does actually arrive at the conclusion that matches the will of the people. The salaries of the governors are paid out of taxes regardless. 

Since there is no ‘competitor government’ over a nation state, the external forces that keeps expenditure in check are weak. There is always the threat of being elected out of power, but the financial costs of a government are rarely of concern of the voting constituency. There is no ‘fiscal responsibility’ party inside of a fiat-money regime; the money printer renders this moot.  

Digital Nation protocols like Bitcoin and Ethereum are designed to have minimal governance. The last time Bitcoin exerted any energy upon governance was during the Bitcoin-Bitcoin Cash hardfork. Ethereum retains governance-by-rough-consensus, which is partly volunteer work and partly funded by the initial issuance of the Ethereum native currency, but is destined to expire and follow in Bitcoin’s path of being a calcified system. 

At maturity, these systems are only successful if they are ungovernable, and thus require no governance expenditure. Bitcoin has shown to already be there, and Ethereum is actively working to get to the same place. As a result, the citizens of these digital nations are under no obligation to be funding the governance of these systems. 


All nations require defense expenditure. Without defenses, nations of all types are subject to attack and capture. As discussed in Part I, the value of a nation is a function of the economy that it produces, and the economy produced creates the incentive for its capture and coercion. Therefore, defense expenditure is required.

In the physical world, a Nation’s defense is also implicitly its offense. There’s nothing stopping the repurposing of defensive forces into offensive forces. This unfortunate reality is what generates the incentive for all nations to place extraordinary amounts of resources into bolstering their defenses; if a nation has an undeveloped defense, it can easily succumb to another’s defensive forces, because they are easily repurposed to an offensive force. An arms race ensues. All nations need to place an undue amount of proportion of their economic resources into defense, because these defense forces are switch-hitters. 

Digital nations have no such arms race, nor do they need to defend against any physical-world attack. The hashpower that defends the Bitcoin Nation is not found in any one specific geographic spot, and while Bitcoin hashpower is a-part of the physical world, it is not committed to any one specific spot; it can easily pick up and move. Even more nebulous, the stake that protects the Ethereum nation doesn’t even physically exist. It is a purely digital abstraction that no physical attack can even touch. Complete separating from the physical world. 

The $720B USA Military budget might as well be a fly-swatter against a digital nation.  

The Bitcoin defense hashpower, and the Ethereum stake are also in their own respective domains. Ethereum is not validated by SHA256 and BTC the asset has nothing to do with validating Bitcoin the blockchain. There is no arms-race of defense expenditure in these systems; they simply need to suck up a sufficiently large portion of their respective validating commodity (SHA256 chips, ETH) to ensure that there isn’t enough on the free market to warrant an attack. 

Digital Nations are minimally-extractive as a result of this. Additionally, there is no subjectivity around where the revenue comes from in order to fund defense. Defense spending comes from transaction fees. Transaction fees come from people who are making transactions. Making transactions adds to the bloat of the system, which is a real cost upon those operating a node. Those that merely store their wealth and make few to no transactions on the system are not taxed; only the constituents that add to the bloat. Nation states on the other hand have endless different rules about what is and are not taxed, and at what rate. The subjectivity of these taxes ultimately are inefficient, as they tax some people more than they should, and others less.  


The Judicial branch of the USA offers finality for the laws of the USA protocol. Like the rest of the government, the operation of the Judicial branch has financial costs it bears upon tax-payers, as well as the centralization of decision-making into 9 justices of the Supreme Court. The Supreme Court of the USA is deliberately a slow-moving machine; it takes time to get things right. However, during that time when decisions have not yet been made, people’s lives and businesses hang in the balance. And, once again, there is no getting around subjectivity. Humans are fallible, and supreme court justices are no exception.   

The ‘judiciary’ of digital nations are those that operate the nodes with the full history of the blockchain. These node operates do not take compensation, and thus impart no tax upon the system. Their operation is completely objectivity; either it follows the protocol, or it is a fork. Objectivity means that no costs are required to discover and follow the correct outcome.

Additionally, there is no gatekeeping to who can become part of a digital nation judiciary. In digital nations, we are all the judiciary, because only we decide what software we run. 

Internal Enforcement

All Nations require internal regulation to ensure that no one is breaking the rules of the protocol. Physical nations have police forces that enforce and uphold the laws of the nation. This the component of the nation-state that keeps its internal operations in check. 

Like all things in nation states, subjectivity and error are inevitable. The 2020 riots in the USA illustrated the misalignment between the police of the USA nation, and its constituent people. Protestors claim that the police are an unchecked force with undue political influence, and that the system of checks-and-balances have forgotten to check the police. Indeed, as the USA has become a safer place to live, nationwide police budgets have continued to increase. In 2015, taxpayers paid $250M to fund police-misconduct settlement payouts

In digital nations, the enforcement of the laws of the protocol is trivial and objective. The Bitcoin script and Ethereum EVM are what ensure that all updates to the system follow the protocol. A transaction on Bitcoin or Ethereum is either valid, or invalid. There is no in-between. If there is ever an attempt to do something unlawful in these systems, it is rejected before it is ever included, which maintains efficiency and reduces expenditure. The costs of maintaining the rules of digital nations are bundled into the Defense costs, as they ultimately serve the same purpose: ensure that the system perpetually is able to make valid state updates, forever. 

Summary of Comparisons

If there is an intruder in your home, do not call the EVM. Likewise, please continue to participate in your local democracy. Bitcoin and Ethereum do not fix this. However, they do enable cheaper and more secure places to store your money and wealth. They offer low-to-no tax safe havens for capital, in systems that provide maximum property rights and strong assurances of future access. 

Digital nations do not fix the potholes in your street. They do, however, return power to the individual and control over his/her money & wealth.


The fundamental difference that sets Bitcoin and Ethereum apart is that Bitcoin is a protocol, and Ethereum is a protocol-of-protocols. In Part 1, we discussed how the USA scaled its nation further than any nation before it because it enabled sub-protocols under the main-protocol. The sub-protocols (the states) are enabled to set more finely-tuned rules for their particular domain, in order to make sure that the protocol fits for a wider array of environments. As a result, the aggregate USA protocol is a flexible and dynamic protocol-of-protocols that could morph to accurately fit into its environment. 

Every contract on Ethereum is its own subnation of Ethereum. By default, a contract has complete sovereignty over its own realm. Other contracts on Ethereum can only influence another, if it is given explicit approval to do so. 

All Ethereum subnations receive the full protection that the Ethereum blockchain can give it. So long as Ethereum can withstand attack, Ethereum subnations are guaranteed to live forever.

An Ethereum subnation is also a business that offers its services to others, designed to generate economic activity by some particular means. This is how Ethereum generates the taxes to fund the security budget as well. All subnations on Ethereum generate economic activity that pays transaction fees to the validators of the Ethereum nation. 

Subnations like Uniswap, MakerDAO, Compound have their own internal fees that generate security for their own domain. The 0.3% exchange fee on Uniswap incentivizes liquidity to come to Uniswap, making the exchange manipulation-resistant. The MakerDAO Stability Fee establishes the market cap of MKR, which incentivizes buyers-of-last resort. Compound has its interest fees to borrowers, partly paid to suppliers, and in the future will likely be paid to the balance sheet of the COMP token owners, which has similar mechanisms to both Uniswap and MakerDAO. 

These fees are the taxes upon the constituents of each subnation. Part 1 of this article illustrated how, over time, nations charge more and more taxes upon their constituency. In the beginning, a nation charges what it needs to offer decent protection. Once a monopoly is established, and the ability to exit is gone, fair taxes turn into extortion. Unlike physical nations, applications on Ethereum can never prevent ‘exit’ from their subnation. If any subnation begins to charge extortion-level taxes, it is likely that it will push the capital inside its system elsewhere, where the same services can be found at a lower tax rate. Ethereum is a digital nation of minimally-extractive subnations. 

Subnations on Ethereum can either be a single contract with a single function, or a connected system of multiple contracts, with a network of if-this, then-that conditions that results in a holistic product. 

Single-Contract Kingdoms

A single Uniswap exchange is a good example of a ‘single-contract Kingdom’. One single Uniswap market is wholly composed of one single contract address. All other Ethereum addresses are able to access and use the Uniswap contract, but no other address has the ability to change the protocol and manipulate the way it operates; the protocol is fixed. 

Single-contract subnations are robust due to their simplicity. Having just one contract contain all the necessary functions reduces possible attack vectors by an order of magnitude. There is simply less to be concerned about. The real-world correlate for a single-contract subnation is a ‘city-state’, like Singapore or Monaco, and similarly, draw strength from their autonomy from the rest of the world. 

Complete autonomy from the rest of the Ethereum ecosystem allows for these single-contract subnations to be relatively immune from the changes to the rest of the Ethereum ecosystem, and are only truly exposed to the size of the ecosystem at large. Other applications on Ethereum can come and go, but Uniswap and all its exchanges will remain indefinitely 

Multi-Contract Coalitions

More ambitious goals require more flexibility than what a single-contract kingdom can offer. Different requirements of a larger system can be segregated into separate contracts. Each contract is only responsible for its functioning, and the outputs of that contract are the inputs for others in its coalition. This allows for each contract to specialize and focus on one particular task while relying on other contracts to do the same. If the builders of this subnation orchestrate these different contracts correctly, the holistic system of inputs/outputs of all contracts creates a resulting product of the multi-contract coalition. 

The larger and more complex applications on Ethereum are unions of multiple contracts that work together to produce a whole that is greater than the sum of each part. These coalitions of contracts are composed systems of incentives, agents, and input/outputs. The goal of these subnation protocols is to produce a healthy economy that returns nourishment back to the protocol. 


MakerDAO is an Ethereum subnation. MakerDAO is a composition of many different interconnecting agents, with incentives, inputs and outputs. The Maker protocol is a system that is designed to produce a useful output (DAI), and receive nourishment for doing so (Stability Fees). 


Compound is also an Ethereum subnation. It follows the same basic rules I’ve been describing.

Free Entrance, Free Exit

Governance is perhaps humanity’s largest unsolved problem. The main reason why nations have come and gone throughout history is that we have not yet solved governance at its fundamental level. How do we decide how to fairly govern the systems that govern us? Further, the repercussions of poor governance in nations is significant, due to the fact that the constituents of a nation are typically unable to ‘opt-out’ of these systems. When religions were in their prime, ‘opting out’ was to choose either oppression or death. Nation states now blanket the Earth, and there is no place to go once you revoke citizenship. Revoking citizenship is simply not an advantageous thing to do anyway. You are trapped. Old nations are monopolies that are also able to dictate how to live your life. 

Digital nations are exclusively opt-in systems. When you are born, you are claimed as a constituent of the nation you are born in, but you are not yet a citizen of Ethereum or Bitcoin. That is your choice to take when you chose it. 

This difference cannot be understated. Because digital nations are opt-in, they must compete for your citizenship. They must give you good reason to join their domain. In order to attract constituents and capital, digital nations must deliver real products and valuable services in order to attract participation. 

Digital nations are born in the crucible. They start with nothing, and the only way they grow in users and value is by providing real value for the world.

Legacy nations have never had to experience such a strong degree of free-market competition. Having monopolistic control over their constituents and their constituent’s capital has rendered them immune from free-market pressures. Even those with the resources and connections available to hide their assets off-shore (as shown in the Panama Papers) don’t have any ability to leverage their wealth; just to store it offshore. 

Bitcoin and Ethereum allow people from inside nation states to migrate their capital to the digital domain, where it can be unshackled and highly fluid. As a result of this ability to exit, nation states will be forced to reduce the extortion of their constituents, or else risk incentivizing an exodus of capital. 

The same is true for Ethereum subnations. I expect the capital on Ethereum to be fluid throughout its subnations from now until the end of time. Ethereum subnations are in direct competition with each other to attract capital and users. If someone builds a new subnation on Ethereum that offers the same or better products/services for the same or fewer cost, then we can expect capital and users to flow downstream into these new pools. If an application charges too much for its service, it risks being forked with a reduced fee or being replaced by a competitor offering a similar service. MakerDAO, Compound, and Aave all offer sufficiently comparable services so that the fees they charge keep the others in check. 

The Sovereign Individual 

Discussed in Part I, the Nation offers scaffolding to the individual, so that the individual can live their life with maximum freedom and autonomy. Nations that restrict freedom and autonomy from the individual (Religions, the USSR, China) tend to be replaced by ones that don’t. This is because there is no better way to organize an economy than to leave the people to their own devices so that the people can decide how to best provide value to the world, by leveraging a combination of what their skills are, and what they enjoy doing. 

The opt-in nature of digital nations, along with the free-market competition of applications on-top of them, preserves the sovereignty of the individual by giving the users maximum autonomy and freedoms. In digital nations, all users are Admins. 

In a world dominated by digital nations over nation states, the physical location of capital and value is gone. Money and assets live solely on the internet. Every single subnation on Ethereum is just one transaction away and lives inside a small device in your pocket. The power this gives to the individual cannot be overstated. You have the full force of the Ethereum digital nation at your fingertips, no matter what nation-state you are apart of, or cross into. 

The purpose of a nation is to foster an economy. The economy of digital nations are contained inside the internet, but will also manifest itself in the physical world as well. When a customer pays for the products or services of a business using BTC, ETH, or DAI, a transaction was made where no nation state was relevant. The same business, service, or product could serve the same individual anywhere in the world, and the transaction would appear the same. 

This is the path to a single, global community of humans. The protocolization of money and finance via digital nations are the tools needed to break through the limits of organizational scale that we have reached via the traditional nation state. The economy of the world will become a single, global economy when it operates under one single money and financial system, that treats all users equally.

Nation states, businesses, and individuals are all treated equally under the purview of the digital nation. Because no one is given privileges that others do not have, we can break through the glass ceiling of global coordination and generate a holistic economy of planet Earth. 


Worldbuilding is the process of constructing an imaginary world, sometimes associated with a whole fictional universe. Developing an imaginary setting with coherent qualities such as history, geography, and ecology is a key task for many science fiction or fantasy writers. Worldbuilding often involves the creation of maps, a backstory, and people, including social customs and, in some cases, an invented language for the world.

Worldbuilding is the art of a fictitious universe, that is realistic and coherent enough to capture the mind of the audience. Using a more expansive definition, it reflects the current state of Ethereum. 

Ethereum is the New World. It is a landscape of new opportunity, waiting for settlers to come and settle upon it. Riches await those who dare to enter uncharted territory and establish something of significance there. Those that venture forth into the unknown and cultivate the land they settle on, are rewarded by the future users of their land. 

Unlike a fabricated world found in a fantasy novel or sci-fi movie, Ethereum still obeys the laws of the universe. It must generate a coherent setting where real-world problems are solved, and the current state of the outside world, as well as the rest of Ethereum, impact what should and should not be built. While Ethereum is a blank-slate, it also answers to Darwinian rules: only what is fit will survive. 

“Cryptocurrency enthusiasts keep re-learning the lessons that regular finance learned decades ago, and that you can see a lot of financial history replaying itself, sped up, by observing cryptocurrency. … the story of cryptocurrency might [also] be the opposite, that it’s about traveling back in time to progressively forget the lessons of modern finance.”  – Matt Levine

Ethereum is a blank slate. It is a blank slate that is quickly being populated with all kinds of financial and economic experiments. With Ethereum, we have the opportunity to ‘start fresh’, and construct a new financial paradigm from scratch. We have the privilege of picking out the lessons of history that have worked while being able to leave behind the ones that didn’t. It is likely that all successful financial mechanisms that humans have discovered will be replicated as applications on Ethereum. Similarly, the Ill-fated phenomenon of hyper-financialization that has caused the 2008 crisis and the 2020 ‘money-printer-go-brrr’ will likely not succeed on Ethereum. These things will not find themselves ‘fit’ when thrown into the free-market crucible that is Ethereum. 

The ‘Single-Contract Kingdoms’ and ‘Multi-Contract Coalitions’ of Ethereum make up the Ethereum Nation. In my piece ‘Ethereum is an Emergent Structure’, I discussed how the DeFi apps on Ethereum coalesce over time into a single financial structure, and how that structure is ‘Ethereum’

Ethereum will be built by pioneers and pilgrims as they move westward into the New World, settle on an empty plot of land, cultivate it, and incentivize others to join them in the fruits of their labor, by having exposure to the upset of the land they’ve built. This is how Ethereum will be built. 

Bear the Banner

All nations have their own culture. They generate symbolic totems to symbolize their participation in something greater than themselves. Ernest Becker in his book ‘Denial of Death’ labels culture, religion, nations, or any ‘in-group’ such as sports teams, fraternities, social clubs, secret societies as ‘immortality projects’. Individuals are aware of their mortality and eventual death, and they harness this fear of death by being apart of a system that is greater than themselves.

The constituent members of these systems come and go, but the entity itself lives on. Sports teams replace old players with young talent, but the team continues to compete. Leaders of nation states come and go, but the nation itself persists. Fraternities gain an entirely new set of members every 4 years, yet the rituals, secrets, and stories are passed on. The cells that make up a human body are replaced once every ~7 years, yet the body, mind, and spirit of the individual are still alive. 

Nations are immortal, so long as their constituents believe in their power and legitimacy. Digital nations are still in their infancy, and much of the culture and symbols of these systems are just now emerging. Bitcoiners wear the lightning bolt ‘⚡️’ to illustrate the lightning network, Ethereans wear the .eth name to signify their citizenship. Totems are a crucial component for the culture of a nation; they are symbols of meaning that the members of a nation can rally to and uphold together. They generate the symbolism that we can all share together as a community.

I have been wearing the black flag ⚑ as a symbol of a Bankless nation. An unmarked flag illustrates the neutrality of these systems. A flag with no marks and no colors reflects the removal of subjectivity from the Bankless nation. The colors, stripes, and shapes on a nation state flag reflect their subjective ‘this is good’ attitudes, and a black flag is the rejection of this attitude of governance. I do not accept to be governed by the whims of others and I and choose instead to participate in a system that has been cultivated by the free market. The black flag is a declaration of independence from the nations that come before it, yet it is also a nation. Badass.

If you are a part of the Bankless Nation, Bear the Banner! 

Author bio

David Hoffman is the Chief of Operations at RealT, co-host of the Bankless podcast, and co-host at POV Crypto. He writes for Bankless on open finance and Ethereum topics. Check out his talk on how ETH accrues value and this accompanying post.

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The Fundamental Value Proposition for Ether

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Dear Crypto Natives,

David writes some of the most imaginative long-form posts in the space. He’s doing something different in this one. Today’s post is a concise and succinct analysis on the investment thesis behind Ether.

Read it. Then use it as a cheat-sheet to help explain the value of Ether to others!


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By Bankless writer: David HoffmanRealTBankless podcast & POV Crypto

The fundamental value proposition for Ether is scarcity.

All activity on the Ethereum blockchain results in the generalized scarcity of Ether. The privileged role that Ether has as the native asset of Ethereum creates an inextricable link between the economic activity of all assets and financial applications on Ethereum, and the scarcity of Ether. As a result of this link, the health of the Ethereum economy is reflected in, and impacted by, the value of Ether. This link is created by the generalized demand, and therefore scarcity, that Ethereum places on Ether for the operation of economic activity recorded to the blockchain.  

Ethereum has 3 core pillars that are crucial to its operation as an ecosystem, and each represents a core mechanism of the Ethereum blockchain that also results in the scarcity and demand of Ether:

  1. ETH in DeFi: The amount of Ether that is deposited as collateral in Ethereum applications

  2. Staked ETH: The amount of Ether that is being staked to the network

  3. Burnt ETH: The amount and rate of Ether that has been/is being burnt in transaction fees.  

These three pillars represent the foundations of the Ethereum protocol and economy, and establish the privileged relationship between Ether the asset and Ethereum the protocol. The outcome of these three pillars is the generalized scarcity and demand for Ether. 

1. ETH in DeFi

The applications on Ethereum that have found product/market fit are applications that allow you to deposit assets in order to access some sort of financial product or service. Theoretically, these applications can support any asset found on Ethereum, however the native asset of every blockchain is always given a privileged position inside its own internal ecosystem. 

Strong trustlessness and censorship resistance are requisites in an M0 settlement currency. As the native asset to Ethereum, Ether will always have the strong settlement guarantees compared to all the assets on Ethereum. It is impossible for any asset that is issued or deployed to Ethereum to be able to match Ether’s level of trustlessness or censorship resistance, and therefore cannot match Ether’s assurance of settlement. Strong trustlessness and censorship resistance are requisites in an M0 settlement currency, and represent a core characteristic of Ether as an asset inside of Ethereum’s financial application ecosystem (called ‘DeFi’)

For these reasons, the various financial applications found on Ethereum will likely always have a bias towards ETH as ‘good collateral’. The establishment of Ether as ‘good collateral’ in Ethereum applications has been a driving force for increasing both Ether demand and Ether liquidity. As a result of the demand for the asset with the strongest settlement guarantees, Ether has become the most liquid asset inside of Ethereum, which further contributes to nature as ‘good collateral’. 

You can see this in the dominance of Ether collateral vs other assets inside of Ethereum’s financial applications.

(h/t to Checkmate for help on the above graphic)

Ethereum is a platform for hosting financial applications. All applications on Ethereum are financial in nature, as all crypto-economic systems like Bitcoin and Ethereum are economic in nature.

Currently, there are 2.7M ETH deposited into various DeFi applications, which represents just 2.5% of the total supply of ETH. The scarcity of Ether grows commensurately to the number of financial applications on Ethereum, as all financial applications require assets to be deposited in order to use them, and Ether has consistently been the collateral of choice for users of these Ethereum applications. Further, the growing number of financial applications on Ethereum increases the total addressable market (TAM) for Ethereum at large. Not only does the growth in Ethereum applications increase generalized demand for Ether, but the addition of new users increases the capital inflows that these applications are exposed to. 

While new entrants to Ethereum are not guaranteed to use Ether as their asset of choice, the privileged nature of Ether inside of Ethereum always offers a carrot. 

The growing number of useful Ethereum applications and the growing number of users using Ether inside those Ethereum applications directly contributes to the scarcity of Ether at large. The more people deposit Ether into Ethereum applications, the more scarce Ether becomes. 

The fundamental value proposition for DeFi is that it incents the depositing of a large percentage of the total supply of Ether, via the various individual products and services created by each application on Ethereum. 

2. Burnt ETH

(this section assumes EIP1559 is active. It is not currently active)

Economic activity on Ethereum results in the burning of ETH. In order to make a transaction (any transaction) on Ethereum, you must burn a small amount of ETH. In addition to this, you may also chose to ‘tip’ the validators of Ethereum, in order to allow you to ‘jump the line’; a carrot for validators for including your transaction earlier than others. 

The mechanism behind the burning of ETH is described here (short technical description) and here (longer narrative version). In short, burning ETH is a good way to measure one’s desire to have their transaction included, and is also a good way to increase the security of Ethereum in the long term. Because Ethereum issues new ETH via block-rewards to validators, the transaction fee does not need to be paid to the validators, and burning it provides a good game theoretically-safe mechanism of returning value to the ecosystem, by increasing the scarcity of all remaining ETH. 

Economic Activity

Because every transaction on Ethereum burns a small amount of ETH, the scarcity of ETH becomes a function of the economic activity on Ethereum. The growth in the economic activity on Ethereum increases the ETH Burn Rate, which contributes to the scarcity of ETH over time. 

As a credibly-neutral internet based asset-settlement network, Ethereum offers a compelling place to host economic activity. Economic activity always has two parts: assets, and financial logic. On Ethereum, these are called ‘tokens’ and ‘applications’. The establishment and growth of these on Ethereum creates a feedback loop of usefulness, as Ethereum itself becomes more useful as these things proliferate. 

The more applications that are available on Ethereum, the larger the possible kinds of economic activity there are. Derivative markets, prediction markets, lending and borrowing, and capital coordination all are enabled via Ethereum applications, and any asset on Ethereum can be leveraged inside these applications. The more total assets on Ethereum also enable further kinds of economic activity as well, as there are more assets available for applications to leverage. 

Simply put, more total assets, and more total financial applications on Ethereum contribute to a larger body of economic activity. This economic activity denotes the rate of ETH Burn and removal from supply, ultimately resulting in increasing ETH scarcity. 


Included in the Ethereum roadmap is Sharding. Sharding is Ethereum’s main path towards scaling, or, increasing the total transactional bandwidth of the Ethereum blockchain. Adding new data to a blockchain is inherently bottlenecked by the global distribution of nodes that make up the network. Sharding splices up a blockchain into 64 individual smaller blockchains, each with their own separate bandwidth constraints. The shards are ultimately composed together into a single blockchain. 

Sharding means more capacity. Because of sharding, Ethereum is able to host more total economic activity. Sharding allows Ethereum to serve 64x as many customers simultaneously, increasing Ethereum’s ability to generate revenue from fees. All revenue generated from fees is burnt. 

However, sharding also increases the supply of available blockspace for purchase. The bidding war that all transactions participate in is competing for 64x more supply, reducing the price that is ultimately paid. While this may result in reduced short term revenue, it may ultimately increase Ethereum’s ability to host more total economic activity at large. 

Currently, the Ethereum 1.x blockchain is ‘at capacity’, which results in the increased costs of transacting. Increased transaction costs reduces the viability of complex and expensive transactions, and limits the viability of many kinds of otherwise useful economic activity.  

With increased capacity brings lower fees per transaction, which enables a more complex set of possible transactions to be viable on Ethereum. More people will be willing to engage in more, and more complex, economic activity. As a result of the reduction in fees per transaction, a more vibrant economic ecosystem may emerge. 

The increased net size of the economic activity on Ethereum contributes to a greater rate of ETH Burn. The ETH Burn Rate is a measure of the rate at which ETH is becoming more scarce over time. As the economy of Ethereum progresses, the total amount of ETH burnt may represent a significant portion of the total supply of ETH, ultimately increasing ETH’s scarcity. 

3. Staked ETH

Ethereum achieves its security through proof-of-stake, a mechanism that forces all Ethereum Validators to have skin-in-the-game, or ‘stake’ in order to validate. If you want to be a validator on Ethereum (and earn validation rewards), you must purchase ETH as stake, and ‘stake it’ to the Ethereum protocol on the promise that you will not falsify a transaction. If you do falsify a transaction, you get your ETH ‘slashed’ (deleted). 

Stakers are compensated with ETH rewards from block-issuance, as well as any tips that were included in transactions. This represents the incentive to stake: returns on your Ether, paid in Ether. 

Current ETH 2 projections estimate roughly 10%-30% of the total supply of ETH participating in staking. If these projections are accurate, the proof-of-stake mechanism is responsible for making 10%-30% of the total supply of ETH inaccessible to the secondary market. In other words, staking makes ETH more scarce. 

The value of Ether is the force that protects Ethereum in Proof of Stake. The Proof-of-Stake consensus mechanism creates a “wall of value” against would-be attackers, and the size and strength of this wall comes from the amount and value of Ether that makes up this wall. 

In order to create this wall, Ethereum issues new Ether as the incentive for Ether stakers to stake their ETH. The creation of the value-wall that protects Ethereum is doubly-effective, as the supply of Ether that is used to build the wall reduces the remaining Ether available to the rest of the Ethereum ecosystem, making Ether less available for malicious attackers. 

If 30% of all ETH is staked, then there is only 70% of ETH remaining that is available to a would-be malicious attacker. If a malicious attacker were to attempt to attack Ethereum, it would need 30.1% of the total supply of ETH, which is 43% of the supply of all ETH that is not already staked. Purchasing 43% of all remaining available ETH is likely to be an extremely costly endeavor, as pursuing this effort is likely to increase the price of ETH on the secondary market to prohibitively expensive levels. 

Increased levels of security means that Ethereum is able to reduce new ETH issuance. The sole purpose of ETH issuance is to secure the Ethereum blockchain, and Ethereum has adopted the position of “Minimal Necessary Issuance” (MNI). If Ethereum is deemed to be overly secure with the current rate of issuance, the community may rally behind a reduction in issuance. It remains to be seen how Ethereum and the Ethereum community can effectively measure security, and coordinate around an appropriate change in issuance. 


The beauty of blockchain systems is that they are maximally transparent. All possible information is freely available. The scarcity mechanisms illustrated above can be observed and verified in real time. Moving forward into the future, we will be able to measure ETH scarcity in real time, using the following metrics: 

  • ETH Locked in DeFi
    The amount of ETH that has been deposited into Ethereum applications

  • Staked ETH
    The amount of ETH that has been deposited for staking

  • ETH Stake Rate
    The ETH-denominated returns being paid to Ether stakers, representing the strength of the incentive to stake ETH. 

  • ETH Issuance Rate
    The rate of issuance of new ETH paid to ETH stakers

  • ETH Burn Rate
    The rate of ETH burn from the transaction fees on Ethereum

  • ETH Issuance:Burn Ratio
    The ratio of the ETH Issuance Rate to the ETH Burn Rate

These represent the six verifiable, on-chain metrics that provide a way to measure the level of scarcity for Ether. 

Quality long term fundamental analysis on Ether’s valuation must account for these six variables. These metrics cohere into a holistic view as to the state of the relationship between Ether, Ethereum, and the economy on-top of it.

Ether Value; Ethereum Health

Ethereum leverages the value in its native asset, Ether, both as a means of protection and proliferation of the Ethereum economy. Ether offers Ethereum the protection it needs from would-be attackers, while simultaneously acts as a valuable asset for the financial applications on Ethereum. 

This creates a duality between the security and utility of Ethereum, which converges upon the value inside ETH. 

Ether allows Ethereum to leverage its value for security, in return for its primacy as an asset in the Ethereum economy. Ether’s primacy as an asset gives it the highest possible settlement guarantee you can give it. Ether’s first-class status on Ethereum inextricably ties the value of Ethereum as a network to the value of Ether as an asset. The value of the Ethereum network is instantiated in the price of Ether. 

As a result of this relationship, the growth and health of the Ethereum economy results in, and is promoted by, the scarcity/demand of Ether. As the Ethereum ecosystem grows, the core mechanisms of Ethereum that drive ETH scarcity grow stronger, which further instantiates the Ethereum economy into the world around it.

Action steps

  • Learn the three pillars of ETH scarcity & the six metrics that measure it

  • Listen to Episode #7 of Bankless podcast where the three pillars are discussed

Author Blurb

David Hoffman is the Chief of Operations at RealT and host at POV Crypto. He writes on open finance and Ethereum topics. Check out his talk on how ETH accrues value and this accompanying post.

Want to dive deeper on Ether’s Scarcity Mechanisms?

Listen to episode 7—Ether’s Value Mechanisms on iTunes | Spotify | YouTube

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Ethereum is an Emergent Structure

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Dear Crypto Natives,

David explores Ethereum as a living structure. 🤯🤯🤯


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By Bankless writer: David HoffmanRealTBankless host, & POV Crypto host


Emergence occurs when a system of interconnected parts is observed to have properties that its component-parts do not have on their own. Emergent properties are the result of the interactions of individual parts, but also the result of the interactions of the interactions of individual parts.

Emergent properties result from the combinations of interactions from the many components of a composed system.

The discrete parts of a system create permutations of combinations with all other parts. The larger the number of individual components in an interconnected system, the more powerful the emergent result is.

The Brain

Consciousness in the brain is a great example of emergence. Gestalt Psychology refers to the brain as “an organized whole, that is more than the sum of its parts”. You can compartmentalize the brain into different areas and label their function:

  • Occipital lobe: Inputs and processes visual stimulus

  • Temporal lobe: Inputs environmental stimulus and outputs meaning/significance

  • Parietal lobe: Orients the body in space-time

  • Pre-Frontal Cortex: produces goal-oriented behavior from the signals from the rest of the brain

However, you cannot find the brains ‘consciousness center’. Consciousness is an emergent phenomenon that is created when you combine the separate functioning structures of the brain together. Consciousness is a bi-product of the combinations of the discrete parts, yet it also represents the most significant characteristic of the human brain as a whole.


Markets are emergent phenomenons. No-one invented ‘the market’; rather it emerged as a result of the demand for the exchange of goods. Producers need an efficient place to exchange in order to access goods they don’t produce. As a result of the need for exchange, markets become more useful the more they are usedLarger markets have wider selections of goods available for trade and in higher quantities, and allow for more overall participants. As a market grows larger, more goods are available and more possible opportunities there are. The market becomes a better place to trade as it grows.

Markets are one of the unique things in this universe that get better when more people use them. This positive feedback loop creates the emergent product of markets: money.

For an illustration on how Uniswap reflects this phenomenon, read Uniswap is Infrastructure.


Money is the emergent phenomenon from markets. The need to exchange goods creates the demand for a single good that everyone uses to act as substrate for exchange. Wheat, oil, coffee, steel all have desirable properties that make them valuable commodities. The equivalent desirable property for money is that it is able to be exchanged for anything of equal value, without loss.

Money’s good is as a substrate, and money becomes more useful when more people use it. Good money has good network effects, and the best money has the best network effects. The most used a money is, the less lossy it becomes during exchange.

Side note:

Money as an emergent phenomenon illustrates why the competition to be internet money is so strong, and why crypto-communities become so tribal. There is only one jurisdiction on the internet, and therefore only one space for money to compete. Liquidity begets liquidity, and moneyness begets moneyness. Fiat monies like the Euro, Yuan, or Peso can all coexist with the USD, because of the authority of each respective government to enforce the usage of their money in their region. On the internet, there is only one region. There is one place for internet money to exist, and thus the competition for the label of internet money is fierce.

Ethereum is a Platform for Emergence

The intrinsic characteristics of Ethereum set Ethereum up to be a platform that fosters emergence.

  • It is a permissionless platform. Anyone can build.

  • It is a turing-complete platform. Anything can be built.

  • It is a composable platform. Anything built can interoperate with anything else.

These are the ingredients for emergence.

The rise of the Internet follows this same model. The Internet is an emergent system of interconnected users, websites, and traffic. Anyone can build anything on the internet, and anyone can access it. The rise of the internet was specifically enabled by the lack of obstacles to developing on it; no-one needs approval to built something on the internet.

As the internet developed, it began to develop faster. As it grew in users, the incentive for building on it grew, while the obstacles shrank. As time passed, more and more users came to the Internet, which ultimately forced the hand of every single company into establishing internet presence. Additionally, the tools for building on the internet became more robust and easier to use, reducing the costs of building something meaningful and allowing a greater set of people to become builders. A positive feedback loop set in; the incentives for being on the internet grew larger, while the obstacles for building on it got smaller.

Wikipedia the Emergent Platform for Knowledge

The Wikipedia vs Encyclopedia Britannica story is a great example of the success and power of open-source and permissionless value-creation. The ability for any and everyone to write content for Wikipedia turned it from being a website that competes with Encyclopedia Brittanica, to a database of all recorded human knowledge.

Growth of Wikipedia articles over time

Unlike the coordinated and centralized effort of Encyclopedia Brittanica, the chaotic and decentralized content creation of Wikipedia ultimately created something far more valuable. Simultaneously, Wikipedia created a superior product without paying for labor. Thousands and thousands of authors contributed endless hours of labor to produce free content for the platform.

Further, those that contributed the content are often experts in their field, intrinsically driven to share the knowledge they have gathered, allowing Wikipedia to organically access expert knowledge for every possible domain. If an article is inaccurate, it tends to automatically get reviewed and corrected by those more knowledgeable. As human knowledge progresses, Wikipedia automatically updates.

All of this happens organically.

Articles :: Websites :: Apps

The Internet, Wikipedia, and Ethereum all represent open technologies with similar paths:

  • Anyone can come to the platform and create something valuable

  • When someone builds something valuable, it makes the platform itself more valuable

  • The things that are built on the platform exhibit evolutionary qualities; they improve, iterate, or are replaced.

  • The things that are built on the platform make all other things more useful and easier to build

Ethereum is a Story of its Applications

Without applications Ethereum is nothing. Ethereum needs applications to be useful. Ethereum, and therefore Ether, derive utility and value from the applications on-top it.

All Applications are Adjacent to Each Other

When you build your application on Ethereum, you are building in the same space as all other applications. All apps have surface area with all other apps. This is Ethereum’s core feature. The integration of a virtual machine inside Ethereum was a revolutionary improvement in the development of crypto-economic systems, but the ability for apps to be composed together is perhaps an even greater feature.

This feature is known as composability, and composability fosters emergence.

Surface Area

In the Ethereum ecosystem, businesses are apps, and when an application is deployed, it generates products and services for people and other applications.

The creation of a product/service generates surface area. An application’s surface area is the external-facing components on an application that other apps can hook into and build off of.

Composability on Ethereum creates surface area. When an application is built it creates a product. This product represents the surface area of the applications

(Above) trees, leaves, veins & arteries, lung bronchi, lightning, broccoli, pinecones, snowflakes, rivers, supply chains, neural networks, social networks… the universe?

MakerDAO’s Surface Area:

  • DAI

  • The DSR

  • Vaults

  • Keepers

  • MKR Governance

  • MKR Auctions

These are the external-facing features of the MakerDAO application. It has a lot of surface area. Applications like Compound and Uniswap also have large surface areas

Side note: the cool thing about Uniswap is that it only has surface area. The correct definition for what a “DAO”: an application that only has surface area. Code on the inside, humans on the outside.

Each application on Ethereum generates surface area for others to latch onto and leverage. But when applications built each other, they create new surface area as well! This is how the Ethereum structure grows: different components building off of other components. Money Legos! The collective surface area of every composed app is the outline of the Ethereum structure in its entirety. Applications build on-and-around each-other, and the structure grows.

Like barnacles on a turtles back, each app increases the surface area, and generates new surface for others. Unlike Barnacles however, applications increase the well-being of the apps below it. Applications that built off each-other are inherently symbiotic; each provides services/customers/value for each-other.

Where the Emergence Emerges

Linear growth of applications produces quadratic growth of surface area.

Every new application on Ethereum generates larger permutations of possibilities than the applications previous. In the image above, K3 generated 2 possible connections, but K12 generated 11 possible connections. The more applications on Ethereum, the more potential there is for new applications. Growing the economic pie!

Imagine Ethereum at the genesis block, depicted by K1 in the diagram above. No contracts, no apps; the only thing that existed was the native asset Ether: a single 1D point in an empty universe. How do you build something like PoolTogether or DeFiZap in this early universe? You cannot; you first need more fundamental primitives to provide foundation and structure for higher-level apps. (RSA-tech tree!)

MakerDAO is the leader in the ETH Lockup Leaderboard is because of the magnitude of the surface area that it creates. The existence of DAI, the only stable cryptocurrency, creates such a wide new landscape for Ethereum applications to be built. The size of MakerDAOs surface area is illustrated by the never-ending list of DAI-derivatives (Chai, cDAI, aDAI, rDAI, LSDai, PLDai), as well as Vault services like CDPSaver, and most importantly, the growing list of DAI markets (dYdX, Uniswap, Oasis, Fulcrum, Curve, Compound).

Good applications create large surface areas. The ETH Locked in DeFi leaderboard can be viewed as a measure of each applications surface-area for other applications. Compound and Uniswap also have large surface area for other applications to be leverage.

Read Uniswap is Infrastructure: an exploration of the different faces of Uniswap that other apps can latch onto.

PoolTogether uses Dai inside of Compound, plus their own app, to produce a no-loss lottery. The PoolTogether app is built atop the surface area of MakerDAO and Compound. PoolTogether also produces PL-Dai, which other apps can leverage. PL-Dai is PoolTogether’s surface area for other apps. Now that PL-Dai exists, it can be made easily accessible by Uniswap, making it easy for other apps to build on PoolTogether!

(Below) 16 months ago…

(Below) 10 months ago…

(Below) 7 months ago…

(Below) Today

(Above) If this were able to be represented in 3D, everything would be standing on top of MakerDAO. Maker is smaller due it being split into SCD and MCD, as well as low velocity between DAI and Vaults.

Ethereum is an Organic Structure

The collection of applications on Ethereum compose EthereumApplications are not a subset of Ethereum, they are Ethereum. There is nothing that “is Ethereum”, other than the apps that live inside it.

As applications are built, deployed, and composed, the Ethereum structure grows. I’ve frequently illustrated Ethereum as a landscape. A physical plane of existence where things are built. Ethereum is the ground for builders to build structures on. Each application on Ethereum is a structure, which each contribute to the development of the Ethereum landscape.

(Above) Ethereum builder Austin Griffith ^

Perhaps this gives to meaning to the term “Buidler” when it comes to Ethereum devs. Those who construct and deploy code are building physical structures on Ethereum. Software engineers are called engineers for a reason; they are responsible for building stable structures for others to use.

A Composed Structure

Structures on Ethereum converge upon each other. The ETH deposited inside an application is a measure of the mass of the app. The more ETH an application has, the more mass it has, and the greater the gravitational pull it exerts on others.

ETH deposited into an app is a measure of how useful that application is, both to users and other apps. “Being useful” simply represents how many other users and apps need that product/service. “Being useful” is the incentive for others to use your application, and represents the strength of the gravitational pull that each app produces.

Everyone needs stability in their economic lives. Also, everyone needs to use the same currency that everyone else uses. It is 1000x easier to just use DAI than to create your own stablecoin. Since everyone is already using DAI, why try and solve all the problems that MakerDAO has already solved? Just use DAI. The gravitational pull that Maker has on the rest of the ecosystem is difficult to escape. Just give in. One stablecoin to rule them all.

The next biggest ETH-lockup applications are Compound and Uniswap, and along with Maker, these represent 75% of all the ETH locked in DeFi. Consequently, the majority of all Ethereum apps leverage these platforms because the surface area they’ve created is so large.

The gravitational pull that ETH-holding apps exhibit doesn’t only pull on a few apps; they pull on ALL apps. The gravity of ETH creates the convergence of applications from being many disparate individual structures, into one single superstructure. The growth of this superstructure is the growth of Ethereum. Ethereum is the sum of its apps.

This gravity is not confined to the internal ecosystem on Ethereum. The rules of money and economics transcend crypto. If there are users with economic activity, there is incentive to join the economy and capture some of that value that is being transacted. The gravitational pull generated from the economic activity inside Ethereum creates the incentive for legacy finance to migrate to Ethereum. Eventually, the incentive to either use, or be apart of, the Ethereum superstructure will pull in everyone. The larger the Ethereum structure grows, the stronger the influence it pulls on the outside world.

Ethereum is a City

Cities exist because they are epicenters of economic activity. Living in a city increases ones exposure to the economic activity inside it. Cities are places of opportunity and growth; ever since the industrial revolution humans have converged upon cities in order to access the opportunities available. The economic activity that cities generate creates the same gravitational pull illustrated above.

Cities are Efficient Structures

It’s easier to coordinate and distribute resources when everyone is living in the same spot. The public, and goods distributors, can converge on the same spot in order to access the same markets. Distributing food is easier when everyone can access the same supermarkets. Distributers have fewer destinations to go to, and are able to distribute more goods, faster. When lots of people all use public transportation, the costs of building and maintaining transportation reduce on a per-unit basis. It would be idiotic to build a subway in North Dakota. Indeed, the efficiency of cities increase with scale: bigger cities are more efficient than smaller ones (liquidity begets liquidity).

Cities are Emergent Structures

No one coordinates the development of a city; they are constructed from the incentives of thousands of different individuals. Even things like city governments or city counsels only have so much control over the direction and evolution of the city. The development and growth of cities is through chaordic organizationorganization through chaos. Chaordic organization is the description of the resultant product of emergent systems: auto-organization of separate-but-composed units.

The demand to live inside a city generates the demand for both housing and workspace, creating to incentive for developers to build structures to house humans and human labor. With the growth of housing and bazaars comes growth in population, and increased demand for secondary and tertiary services. Over time and iteration, human meeting-places turn into skyscrapers and 1,000-unit apartments. Supermarkets and restaurants feed everyone; offices coordinate labor; bars and music venues entertain; daycares and schools. Hospitals. Hotels. Gyms. Casinos. Parks. Clubs. Skateparks.

What began as a handful of individuals needing to secure a livelihood emerged into a complex and integrated system of efficient resource allocation and exchange.

Ethereum exhibits these same qualities. Every application on Ethereum represents opportunity for others. Every new application built on Ethereum brings opportunity for new users and further applications. When new users and new apps arrive on Ethereum, further opportunities are created for the next wave of users to come and take advantage.

The structure build itself.

The Structure Builds Itself

Illustrated above, things like cities and Ethereum have positive feedback-loops that create self-fulfilling prophecies for their own existence. Just as markets, money, and cities become more useful and efficient as more people use them, Ethereum becomes a better place to build when others are already building there.

Following this same pattern, it’s easy to see why Ethereum as a platform has seen the success that no other platform has: large structures have already been built on Ethereum that offer large surface area for other applications. There are already products and services on Ethereum to make building your product/service easier. Everyone already lives in Ethereum; on the Internet there are no borders preventing migration from rural to urban.

However, Ethereum has an additional feature that cities, markets, and monies do not have when it comes to bootstrapping themselves into existence.

That feature is ETH.

Apps that Leverage ETH Are Adopted

At the genesis block, Ethereum was devoid of life, with Ether being the only object in its universe. From the point-of-view inside of Ethereum, Ether is looking for things to do. It is BORED and it needs ACTIVITIES. Applications on Ethereum represent attractions and places-of-interest for Ether to go.

Imagine you participated in the Ethereum presale and you are the owner of 10,000 ETH. How does an application like Peepeth (decentralized Twitter) benefit you? At the cost of 0.00001 ETH per tweet, you can tweet 100,000 tweets and still have 9,999.9 ETH leftover. Peepeth doesn’t solve the problem of how to effectively leverage your ETH.

(Above) The early days of DeFi. Maker’s early dominance as the first platform that allows you to leverage ETH as a valuable asset is clearly depicted.

Applications that leverage ETH as a valuable asset offer solutions to what you should do with your ETH.

In addition to the large surface area that MakerDAO creates, there is an additional thesis as to why MakerDAO saw such early success: it was the first application that allowed you to leverage the value of your ETH.

Applications that allow Ether to be leveraged as a valuable asset are automatically chosen by Ether-holders to use.

Because what else are they going to do… send 10 billion tweets on decentralized Twitter? It’s far more likely that Ether users put $10 billion into financial applications that allow users to find ways to leverage the capital inside their ETH for a productive output.

Applications that allow the productive use of Ether are automatically adopted.

All Ethereum users have at least one thing in common: they hold ETH. Since ETH is required to execute a transaction on Ethereum, this is basically guaranteed across the entire set of Ethereum users; they probably hold at least some amount of ETH.

Applications that create utility for ETH are generating incentives for depositing ETH into their app. When an application generates this incentive, they are generating the incentive to purchase and hold ETH in the first place. They are providing utility-value to ETH.

When “DeFi” is a collection of thousands of different applications that all generate incentives to deposit ETH, ETH becomes a generalized asset that is accepted everywhere on Ethereum as the main collateral of choice. In other words, ETH is Money for DeFi.

There is 2.8% of all ETH locked in DeFi. We are just in the early days of Ethereum applications being built to offer services to ETH holders. Yet, we have still seen a clear pattern of how future applications are going to be built.

  1. Build an application that uses ETH as collateral

  2. ETH is deposited into this application, proving that this app is useful to ETH-Holders

  3. The growth of ETH deposits proves to VC funds that they have found product/market fit for their app

  4. The app receives VC funding

  5. The team uses the funding to improve their product, in order generate more ETH-deposits.

At the genesis block, Ether is BORED. Applications on Ethereum automatically receive adoption when they provide services that offer ways to leverage the value of ETH.

PeePeth“What if we can make Ethereum useful to those that haven’t adopted it yet?”

MakerDAO: “What if we can make Ether more useful?”

Twitter users don’t care about PeePeth, but ETH-holders chose MakerDAO to succeed. MakerDAO gave ETH a path to utility. MakerDAO allows Ether holders to access a return on their capital. The same goes for Compound, Uniswap, and every application with ETH deposits. The ETH-locked in DeFi metric is a measure of each applications usefulness to Ether and Ether-holders.

Simultaneously, they generate the mechanism as to how ETH becomes valuable. When more DeFi applications leverage ETH as money, it makes ETH into money. If Ethereum and DeFi host the majority of the economic activity of crypto systems, then ETH is internet money. If they host the majority of economic activity of the entire globe, then ETH is money for the world.

This bootstrapping mechanism is how the Ethereum superstructure builds itself. The incentive to build products and services on Ethereum is built into the protocol itself. This is why DeFi as a use-case has taken off, while most other Ethereum apps have seen lackluster adoption. DeFi paves roads for ETH to be valuable, and ETH holders are incentived to take this path, because it’s the path that increases the value of their asset. ETH will build itself into internet money.

The Epicenter of Ethereum is Ether

The foundation of Ethereum’s city is Ether. The economic activity of Ethereum requires a currency, and the native currency of Ethereum is Ether. All roads in Ethereum lead to Ether. The gravitational pull from Ethereum apps is generated by the Ether that is deposited in it.

The genesis block of Ethereum was a 1-Dimensional structure. Ether was all that existed. The structure being built is being built on top of this single point. The collective weight of every application falls upon Ether. This weight is reflected in the market-price of ETH. The number on the scale that Ethereum stands on is the market-price of ETH.

The Ethereum economy generates demand for Ether. MakerDAO requires it, Uniswap requires it, Compound, dYdX, Augur, Aave, Set all require ETH. Applications like PoolTogether require DAI instead, but 1 DAI requires at least $1.5 of ETH in MakerDAO!

All roads on Ethereum lead to Ether. If Ethereum is a nation, then Ether is its capital.

The Superstructure is an Organism

Organisms are emergent beings. You, the reader, are a system of interconnecting components, which are themselves comprised of interconnecting components. Down to the trillions of individual cells, the superstructure of the human body is an orchestration of components across different scales.

The Cells

The cells are the smallest units of the organized whole. Each cell only knows about its adjacent ecosystem, and only acts in its self-interest to live long and prosper.

In the global economic system, cells are individual economic agents; individuals who have localized knowledge about the economy in their specific environment.

In Ethereum, the cells are the agents that engage with each application. Every market participant is acting in its own self-interest, with valence to the applications that they are familiar with and understand.

The Organs

Organs are themselves a structure of the cells that comprise them. An organ is something that is created out of the demand from the larger body. The need to pump blood, the need to filter toxins, the need to sense surroundings are all roles of individual organs, which are themselves comprised of cells.

Applications are organs. They are comprised of individuals that use the application to achieve their own goals, and as a result make the application larger and more useful. Each application on Ethereum produces an output for the rest of the structure to leverage; MakerDAO’s output is DAI, Compound’s output is cTokens, etc. Every organ in Ethereum fills a specific role inside of the greater structure.

The aggregate output of all the individual agents that engage with an Ethereum app are how Ethereum apps relate and orient themselves in reference to other applications.

The liver, the organ that is responsible for removing toxins, is located next to digestive tract, the place where toxins arrive in the body. The heart is located in the center, where it can most efficiently distribute nutrients. These organs exhibit chaordic organization. This is how Ethereum apps auto-organize. Complementary applications will naturally converge upon each-others in order to effectively leverage each other’s surface area.

The Body

The body is the final product of chaordic organization. After millions of recursive iterations by natural selection and evolution, the body is a streamlined and efficient system, produced by internal fights over scarce resources inside a single ecosystem. The body is like a city; many individual components that organically orchestrate to produce an emergent result.

Ethereum is a body. All the applications on Ethereum represent the individual organs that compose the greater whole. The outputs of every application are combined and converged by the body to achieve a single, prime objective: to live long and prosper. The emergent goal of the Ethereum ecosystem is to grow. Ethereum’s main goal is to survive. Once this goal is achieved, it can focus on its secondary goal; to thrive. All organisms have these two goals:

  1. Survive (defense)

  2. Thrive (offense)

Ethereum’s defense comes from its consensus algorithm: The amount of staked ETH. This is that wall that must be overcome in order to bring-down Ethereum. These are the scales that protect the body. The more ETH staked, the denser the scales.

(Above) Ethereum dgafing about its larger, legacy finance alternatives. This is a Pangolin, BTW

Ethereum’s offense comes from the utility and value that Ethereum applications provide, which we can measure as ETH Locked in DeFi. Ethereum applications are the teeth and claws of Ethereum: the weapons for the hunt. These applications are tools for ETH holders, and threats to any competitor outside of Ethereum.

Each head is an Ethereum app; the size of each corresponds to the amount of ETH locked inside

The Gravity of The Superstructure is the Monetary Premium of ETH

All the apps that compose the superstructure have mass that weighs upon Ether. The weight that Ether bears in supporting the superstructure is reflected in the U.S. dollar price (the Normal Force on ETH). The higher the weight of the structure, the more load it bears on Ether. This reads like a stressful scenario, but I assure you, its actually awesome 😎

The collective weight of the Ethereum superstructure is a measure its demand for Ether. A superstructure that has 0 ETH locked in it is weightless and meaningless. A superstructure that has 3.2M ETH in it is a system that pulls 3.2M ETH off the secondary market, and drives 3.2M ETH worth of scarcity and demand. Currently, the Ethereum superstructure weights 3.2M ETH.

In order to support the weight of the Ethereum superstructure, the Ether price must increase. The superstructure represents gravitational pull on the supply of ETH: the collective incentive for people to deposit ETH inside of it.

The superstructure is a general structure. Ether, as the native asset of this superstructure, is accepted as currency everywhere in this superstructure.

Money is the good that is the most sale-able: the asset that is accepted anywhere and everywhere, for the least amount of slippage. Inside this super-structure, ETH is money. Because all roads lead to ETH, there will never be any other asset that is the most sale-able and liquid asset in Ethereum. As the native asset of Ethereum, it is destined to be the money for the ecosystem.

The weight of the superstructure on the market-price of ETH is what creates the monetary premium of ETH. The superstructure is a general structure, and the collective weight of Ethereum apps create a generalized positive price pressure on ETH.

“Generalized positive price pressure” is a synonym for “monetary premium”.


Ethereum is a superstructure of composed financial applications. All applications on Ethereum create surface-area for new applications to build off of, which in turn creates further surface area. Rather than leeching value, applications that build together are value-generative. Applications that built on others act as funnels for the applications below them. Applications that produce large surface areas create their own landscape for other applications to leverage. The larger the surface area, the more room there is to use.

The internal financial ecosystem of Ethereum exhibits chaordic organization. The gravitational pull generated from each application is the mechanism for how disparate discrete components organize in efficient and effective manners, and generate a single, efficient superstructure.

Each application in this structure has mass, and weighs upon the applications below it. The lower applications are foundational to the ones above them. They bear the load, and also receive their share.

ETH is the fundamental particle of the Ethereum universe: the native asset that produces the mass of Ethereum. The market cap of ETH is the weight of its mass: it’s influence upon the world outside it. The ETH Locked in DeFi is the measure of the total mass of the Ethereum superstructure.

At the beginning of this article, we discussed how money is the emergent product of markets. Markets are places of exchange, and exchange is more efficient with money. Markets create the money.

Ethereum is a platform for markets. All significant DeFi applications: Maker, Compound, Uniswap, Augur, dYdX, are all market-applications. These market-generating applications all need a money to function. Ether, as the native currency of Ethereum is the most obvious choice. It’s holders want applications that use it as money, so that the holders… can use it as money. This creates a perpetual energy out of the ongoing incentive to use Ether as money.

The structure constructs itself

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Author Blub

David Hoffman is the Chief of Operations at RealT and host at POV Crypto. He writes on open finance and Ethereum topics. Check out his talk on how ETH accrues value and this accompanying post.

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