Out of the Ether. Matthew Leising
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I really was sick, and I didn't have many good Ethereum sources at that time.
In fact, earlier in 2016 was the first time I'd spoken to anyone about Ethereum. I went to visit Joe Lubin in the funky Bushwick headquarters where he'd started ConsenSys, the largest innovation studio for applications that would run on top of the underlying Ethereum network. An Ethereum cofounder, Lubin is quiet and demure. A native Canadian, he has an intense focus that can make you feel you have his entire attention when you speak with him. He shaves off the hair that remains on his head and is strikingly handsome in the way that some men pull off being bald.
Years before I met Lubin I'd lived in Bushwick. The Brooklyn neighborhood had been much rougher in 2004. Restaurants were few and far between. A bar called Kings County was one of the only local gathering spots and was just around the corner from where ConsenSys would later set up shop. I had friends at the bar who told stories of being chased by packs of wild dogs, of returning late to their apartment from the subway to find a tiny slip of paper jammed into their keyhole, put there by the guys in the shadows who demanded everything they had. It was an amazing time.
I knew the building ConsenSys would come to occupy, next to an overpriced natural grocery store. Its facade was forever covered in graffiti long before ConsenSys moved in, a detail no profile of Lubin or his firm has ever seen fit to leave out.
Lubin built ConsenSys in the hopes of fostering the types of digital applications that would make Ethereum indispensable to the world. Think of a blockchain-based digital version of Uber, but without the middleman that is Uber taking 30 percent of every transaction. Consumers pay less, drivers earn more, and hopefully the user experience of clicking an app on a smartphone isn't much different. Or think of an app that directly connects artists with their fans without a record company and lawyers and agents all in the middle taking their cuts.
What's amazing about this idea of a new kind of Internet that's peer-to-peer is that Ethereum has money programmed into it already. Ether is the currency of the realm, meaning that banks can't shut it down. Losing access to banking is almost always a sure way to kill off something you don't like. Here it's impossible.
But what does a blockchain Uber really mean? Let's run through it and call it CarCoin. This is how I first came to understand Ethereum's potential method of mass disruption.
How does CarCoin make money? That has to be the first question. No one wants to build complicated software for free. What you do is create a new cryptocurrency along with the application for your ride-hailing business. CarCoin will be created and sold to the public. Importantly, you must have a CarCoin balance to access the app on your phone.
Now imagine CarCoin hits it out of the park. Everyone wants some. The price of CarCoin goes up. The founders and developers of CarCoin, meanwhile, have made sure to give themselves a lot of CarCoin for free.
They do this in hopes that its value rises; then they're sitting on pure profit and all their hard work has paid off. This is smart contract 101 stuff once you understand the 360-degree nature of the ecosystem Ethereum's inventor Vitalik Buterin and his colleagues created. The app, the coin, and the supply demand dynamics all intertwine. It makes sense, yet I now understand it never really was the vision in the early years.
The people who invented and created Ethereum were flying blind. Very little of how the project became a reality followed any kind of thought-out process. That goes as far as making sure to have a way of making money.
Fabian Vogelsteller was an essential early programmer for Ethereum. Starting in about 2014 he built, with Alex Van de Sande, the Mist wallet, one of the earliest and most important Ethereum apps as it allowed users to access the Ethereum blockchain and hold the different digital currencies they owned.
“There was no business model at the time,” Vogelsteller said. The economics are rather limited, as he spelled out. You can't charge for using smart contracts and people are already spending ether to access Ethereum – that's fundamental. A digital application can only hope to earn money if it provides a useful service to people. But that was the last thing on early developers' minds, he said.
“We never thought about business models at all. It was only about what to build, not how to make money,” Vogelsteller said. I was speaking to him in 2020 for a story I was writing about his new project, Lukso, an arts, culture, and fashion focused blockchain based on Ethereum. I ran my CarCoin example by him, and he zeroed in on the big problem right away: Why is CarCoin – i.e., the new cryptocurrency – necessary? Why not just use ether for everything? It's taking the money aspect of Ethereum a bit too far to build an entirely new coin on top of it.
While this criticism doesn't blow a hole in the idea of digital applications, it does call into question the nearly two-year-long orgy known as the initial coin offering market that took place from about 2016 to early 2018. Billions of dollars were raised by legitimate and completely fraudulent dev teams alike. Everyone was welcome at this scamfest. And all of it can be seen in hindsight as an enormous waste of time, energy, and the little creativity that went into most ICO projects. It was a folly, but only one of many to come.
“The whole Ethereum community, from the core developers and on, is pure idealism,” Vogelsteller said. This sanguine vibe is strongly tied to one of the universally shared beliefs among the people who created Ethereum: the Internet should be free so we can all share it and build cool things, to paraphrase how Fabian Vogelsteller described it to me.
The correct incentives are the next ingredient in this idealism pie. Fabian compared it to a jungle: brutal, yes, but it all works because the incentives line up in favor of keeping the entire ecosystem healthy. Shitty incentives in the jungle lead to death for everything. Blockchain has to believe in incentives because its core function – to date, at least – is tied directly to the network of computers that mine and validate transactions. Making as much money as possible by mining comes with a nifty side effect – it provides the best security for a blockchain network. Greedy miners are wanted.
“In nature we have a lot of these systems” of aligned incentives, Vogelsteller said. “In society we don't believe it's possible, but blockchain shows it is possible.”
So does CarCoin work, or not? I wish I could tell you, but advances in crypto-economics aren't exactly whizzing about the industry. As far as I know, as of early 2020 the debate about incentives goes on without a clear answer. There are many problems Ethereum has to face if it's to become universal, not least of which is how people make money from it.
But the middlemen are still there and seem ripe for the taking. The speed at which Uber overtook the taxi industry was phenomenal. It just feels right that they could be disrupted in a similarly brutal and quick fashion.
In the world of finance the applications for Ethereum are particularly ripe, as Wall Street is – at its core – the insanely well-entrenched pure expression of middlemen profit-takers, making their money from other people's money solely by virtue of sitting in between transactions.
Joe Lubin wanted to build a different way of conducting business. He's a great evangelist for Ethereum. He's the one who first explained it to me and made the light bulb go off above my head. I've spoken to many other people who had the same experience with him as he laid out his vision of an Ethereum-enabled financial system. For me, when he kept repeating the words “global computer” I finally saw it and had one of those moments when you think, Man, that is fucking cool.
Yet all of this stuff was incredibly speculative. In 2016, the idea that Ethereum could be used in the financial world was only being discussed by a few far-thinking bankers. On the one hand, Ethereum promised the world, it was a hell of a story, but in 2016, in terms of what you could point to as an actual product, Ethereum had nothing to show.
When I cowrote a story for Bloomberg Markets magazine in 2015 about Blythe Masters, a former JPMorgan executive who was now heading a blockchain startup, I didn't even mention Ethereum. This is not a knock against Ethereum – I certainly could've known more about it at the time – but it's also true that it was simply too early to be taking Ethereum seriously in a financial markets' sense. So I didn't dig into the story of the $55 million hack when I went back to work.