TLDR

Societies naturally have a tendency to prefer centrally planned economies because, even if it is detrimental to the society as a whole, they is predictable. Nothing is predictable in cryptocurrency because it is not centrally planned. Centrally Planned States begin from the inside out and we rarely see them coming.

The Invisible Hand

The Free Market is an illusion these days. For this reason, many politicians speak more openly about capital markets than free markets. This is important because the market is not free. The idea of a free market was born in during the Enlightenment Period where much thought was directed toward free ideas.

Mercantilism is an economic policy that seeks to increase a nation's wealth and power through restrictive trade practices. The goal is to maximize exports and minimize imports, and to accumulate wealth in the form of gold and silver.

The Economy of the day was one that thought of the heads of state & the heads of church first, followed by the elite classes and then your working citizens. The primary market of the day was mercantilism where goods and services were extracted from a conquered nation at a prescribed price.

Workers also had guilds who maintained the price of their labor and their overall control over the industry they commanded. The price of labor was often cornered or it was free. The common act of slavery reduced the cost of labor toward zero.

In no way was the market at all free. The Market was commanded by Kings & Queens. It was cornered by specialized labor groups, slaves, or extremely underpaid workers. Prices were held captive by restrictive trade between partners.

In a free system, every individual is selfish and acts for their own benefit. This means that humans will respond to the economic incentive provided by others and their actions. Broadly, this is called the invisible hand.

Why am I bringing this up? I loved cryptocurrency initially because it was the first place that I could watch all of the bare bones economic incentives on chain. It was the first time I saw the invisible hand. Like most societies, as we grow older and evolve, the invisible hand must die by our hands. Controls of capital and investments are somehow a natural human phenomena that I’ve found as far back as Mesopotamia.

Ethereum, and cryptocurrency broadly, was supposed to be a beautiful land of milk and honey on the back of this invisible hand, but I beginning to see parties come to life with an aim to attack it. So, I am writing this article.

Protect the Yeoman

The yeoman farmer was the true epitome of the United States, in the eyes of Thomas Jefferson. He thought, very often, to create a world where this individual was benefited constantly.

The Yeoman farmer, during the industrial revolution, became the city slicker that we see most commonly today. Urbanization produced many benefits, but also many negatives. The idea that citizens could depend on the state to intervene when they ran into trouble occurred in this moment because for once we could lay eyes on our leaders and see how they lived, rather than reading from a page or hearing from a traveler.

In this time period, the United States began centralizing many things so the government could act to aid the whims of the citizens. The Federal Reserve, Internal Revenue Service, & the bulk of our national agencies found their birth in the early 1900’s.

The cries of the nation became the cries of those who could cry the loudest or who simply had enough money. Even to this day, a degree of lobbying is accepted to accomplish anything and very little of it comes from your every day Yeoman.

The yeoman farmer -- later idealized by Thomas Jefferson and his political supporters -- refers to the population of common people like these, who maintained small subsistence farms largely by family labor. Source

Thomas Jefferson’s Yeoman conversation in the early days needs to be had more often in the Ethereum space as we begin to enter our industrial revolution with near infinite block space (Manifest Destiny). As Layer 2’s sprout from Optimism’s OP Stack or Layer 3’s from Arbitrum’s Orbit, it is imperative that we remember what got Ethereum this far. The invisible hand.

Who is the yeoman? What do they want?

The Yeoman Ethereum user is the user that has gotten the blockchain this far. Masked behind the transaction ID’s and the merkled trees are human beings that simply want to make money. They prowl around the landscapes provided by developers in search of interest rates, jpegs, and alpha. Leaping from one L2 to the next, across bridges while dodging fees and slippage. This base layer of economic activity is what the L1 must continue to support and encourage even through its maturation.

However, the L1 is not an autonomous being but it does only as it is told by the L0. The Layer 0 is the amalgamation of the humans who dedicate their lives to developing protocols and applications to benefit the landscape where we find our yeoman gallivanting about.

The Layer 0, in recent months, is looking to guide the Yeoman away from certain doom and destruction. The Yeoman is too foolish, you see? Dumb & simple minded. They need us to help them to save the L1 that we have built.

The Beacon is Lit

The Ethereum Ecosystem is built atop of the beacon chain that validates and finalizes the transactions on the main chain. Fees are accrued in this process, better known as proof of stake. The Yeoman saw the Beacon lit with promise of interest and yields, but this does not promise a brighter future.

Above is an image of the amount of Ether Staked with a given provider. It illustrates the diverse players that validate & finalize transactions on Ethereum. The bulk of the Ether that is staked is either staked through a Centralized Exchange or through a Decentralized Staking Service.

Centralized Exchange staking has its own risks, which are blatant. Regulators and stockholders have direct access to which blocks get minted immediately and which get delayed. These risks can be mitigated only if the leader of the centralized exchange is an altruist or is the stockholders / regulators are.

The Decentralized Staking Service is much different from the other, as they answer to token holders who are much easier to deal with than old world machinery. Nonetheless, our decentralized communities are guided solely by the invisible hand. The more ether staked through a given provider, the more number go up for the staking service’s governance token.

However this creates centralization risk. If 33% of the ether is locked up with one provider that provider is capable of threatening finality, holding the network hostage.

When you go into Ethereum mechanics, it’s true that with 33% of the network, you can affect the network finality. Blocks would not be closed, theoretically. - Marin Tvrdić

Good Intentions

Upon noticing this threat, many people in the Ethereum ecosystem began speaking out about solutions. There was a large hope that people would be altruistic and move to decentralize the network by moving their ether from one provider to another. RocketPool, a liquid staking provider, markets itself as a more decentralized and more altruistic alternative to Lido.

When the merge was completed withdrawals were a few months away and much of the discussion was looking to see Lido, the largest staking provider, have the large withdrawals. Naturally this did not materialize as many wanted it to.

Lido seems to be a network favorite for our Yeoman Users and one that is consistently swelling. Seen as a beacon to the yeoman, but as a recharging volcano to the L0, something must be done.

There was a post about enshrining liquid staking. This would effectively be state sponsored staking on behalf of the Ethereum Foundation and likely threaten much of the capital that exist in decentralized finance.

Competition between financial intermediaries is valuable and necessary but - as with competition in other industries - success in that competition should follow from effectiveness in meeting demands of customers. - John Kay, Oxford Economist

First, this destroys a lot of capital. Lido (LDO), RocketPool (RPL) & many other liquid staking protocols with tokens incentives would fall by the wayside. Why might this happen? It would be amoral for the Ethereum Foundation to take a cut of any of the liquid staking rewards, so this protocol option would offer 100% reward compared to 90% - 95% elsewhere. The Yeoman would move to the higher yield.

Secondly, this destroys the competition and removes incentive for further innovation with liquid staking models. The lack of competition effectively kills the invisible hand and subsequently begins the destruction of what made cryptocurrency unique.

Lastly, it creates the culture of intervention. We sat idle as Terra Luna collapsed and allowed market forces to behave in their natural forms. We have watched black swan events on chain, but NOW we have finally found reason to be intervene in markets. Central planning, over the course of modern history, has made decentralized cryptocurrency appealing.

Potential Solutions

How does one change a market structure? Let us ask the traditional finance sector which is reeling from the free and open markets of decentralized finance, so much so they’d rather ban it than support it. That is right. We must innovate to create disruptive technologies that force new market structures.

The market reacts only to those Yeomen who follow the invisible hand’s inevitable wisdom. So build. We must build new forms of liquid staking derivatives to challenge the current market and find out what characteristics of the Lido Staked Ether could be amplified or improved to challenge the standing beast.

Lastly, I must say that we mustn’t rely solely on altruism. The true lure of cryptocurrency is a better life away from centrally planned economies. We must think of ways that take advantage of the yeoman’s incessant yearning for profit.

The Free Market is inherently selfish & everyone invests and acts on their own behalf. Apps may be built for all good purposes, hopes and dreams but they grow because they instill primitives (& write code) that encourage selfish behavior to be beneficial to the whole. Source