Every system is a machine. A set of rules and moving parts meant to help people. But there are times when the machines we use become hopelessly outdated and ineffective. The economy, the financial system, these are machines – tools – meant to circulate money around and allow people to live richer lives. But if the machine keeps pushing all the money to the top or if it breaks like it did in 1929 or 2008 or whatever year the next major malfunction occurs, then we should have a backup plan. Repairs and upgrades may not be enough. A new machine may be needed.
The origin of Ethereum starts with Block 0. The “Genesis Block” was brought to life on Jul-30-2015 03:26:13 PM +UTC. The first function of this machine was to get everyone to agree on a basic unit of scarcity – Ether or ETH. The first recorded piece of history on Ethereum sent ETH to the 8,893 people who participated in the crowdfunding event where you had to send bitcoin (BTC) to participate. Ethereum was born out of Bitcoin in more ways than one. Because it was ownable and transferable, a price was put on it. A market was created. This basic unit of scarcity could flow and transform via middlemen, exchanges, and traders who could convert this new thing ETH to something else like BTC, and eventually dollars and other currencies, becoming tangible money. A new economic machine was born, although very basic.
These were exciting times. And I was there for it. One of those 8,893 addresses belonged to me, and even though the earnings from that early investment have long been squandered, the idealism remains. Whether we felt Ethereum was a way to make the world more globally collected, or less authoritarian, or freer, there was a sense that something new was being created, something truly different.
Ethereum is an alternative economic machine capable of moving vast amounts of wealth, reliably and securely. But underneath that is something bigger; a virtual machine, a world computer for our digital age, a shared source of truth, software and cryptography that basically says, any change in the state of Ethereum must follow the math we all agree to use and since no one controls math, no one can control the truth.
Hope was in the air, and since money was involved, greed and impatience also permeated. People were eager to do more with their new toy, so the free market gave us “The DAO”. Not a version of a “Decentralized Autonomous Organization” but THE version of a piece of software could not be controlled. The DAO operated on a simple rule of taking in ETH, investing it, and returning more ETH. A money-making robot. It was exciting times until a hacker exploited a bug in the code and took all the money – a full 14% of all the ETH in circulation in the very early days of Ethereum’s existence. It was a catastrophic violation that could only be remedied by another violation – bending the rules of the protocol by rolling back the code. A change in the software that made it so the DAO Hack never happened and no one lost or gained any money because of it. It was a change in the timeline. A hard fork.
How could you change an immutable, source of truth like a blockchain? This is where social consensus comes in. The software doesn’t feel anything, it just runs as programmed and when enough of the people running the software switched to an alternative version with an alternative set of events, things went on as if the DAO hack never happened.
The event lived on in another timeline called Ethereum Classic where the DAO hack happened exactly as it did in the memory of those who lived through it. The Ethereum Classic version of events rejected the hard fork and branched off with an alternative set of events and its own native asset called ETC.
The people who ran the Ethereum software agreed on a version of events that would allow the very nascent protocol to escape a life-threatening injury while the people who ran the Ethereum Classic software agreed on the version of events that was truer to the rules of the protocol.
On Ethereum, the truth is a combination of hard mathematical logic and soft social consensus, something we must agree on AND prove using an objective set of logic. The DAO fork taught us that underneath the money, math, and logic, everything depends on the agreement machine.
The promise machine
If two people agree on the price of a cow, then you have a trade. If two people agree on terms for borrowing that cow, then you have a loan. If many people agree that trades and loans can be done using metal coins or pieces of paper or numbers on a computer, then you have money. Once you have a way to agree on the rules and points, then money can be anything.
At the genesis block, Ethereum was very simple. You could only send ETH between accounts. But Ethereum also had smart contracts, which can be thought of as promises that must be kept no matter what. These promises are written in code so could be very complex. The DAO was a smart contract. It showed how powerfully binding this type of promise could be because even when the smart contract threatened the underlying protocol, it could not be undone by its creators alone. Only an embarrassing and controversial, and socially coordinated hard fork could remedy the situation.
Borrowing is at least a 5000-year-old human tradition. Borrowing creates credit, which expands the money supply and generates new activity, and ideally unlocks some innovations or discoveries to increase productivity – letting us do more work with less effort. Even if the benefits are temporary or cyclical, any respectable economic machine needs to have the capacity to create credit.
Since loans are just promises, smart contracts should be able to create borrowing and lending on Ethereum.
When most people on the planet think about money, they don’t think of something like ETH. Regular people spend money on everyday items, put it in the bank, and expect the value to not change very much. ETH is not any of these things so in 2017 a system of smart contracts was created called MakerDAO. It took in ETH and created a new token called SAI (now called DAI). SAI was stable and was meant to always be worth a dollar. The SAI smart contract promised that 1 SAI = 1 USD. SAI was a stablecoin.
Once the smart contracts were live, anyone could interact with it by depositing ETH and borrowing SAI. The contract would keep your ETH until you repaid the SAI you borrowed. And if the price of ETH went up, you could borrow more. But if the price of ETH dropped too far, then the smart contract would automatically sell some of your ETH and repay your loan for you.
You promised to never borrow more SAI than the value of your ETH allowed, and SAI promised to always stay pegged to the dollar. When either promise was broken, then the contract would sell assets, without any room for argument or arbitration, in order to make things right.
It is a kind of promise that could not be broken by you or the team that developed the code or the MakerDAO organization. It’s fundamentally different than promises of the past such as land treaties made with the indigenous peoples of the Americas. If a contract or treaty was written up that promised a piece of land to a certain tribe of indigenous people, the only binding force was the integrity and good will of the people holding the most power. If one party possessed overwhelming violent force, then they could break the promise unilaterally.
Breaking MakerDAO’s contract would be like changing the DAO. It would require a controversial hard fork that requires at least a majority of the network to switch to a different version of the software, altering the timeline of events and likely creating an alternative history in the process. Unlike the tiny community that accepted the DAO hardfork, the Ethereum ecosystem now consists of millions of people who hold ETH, run the Ethereum software, or use the protocol in some way. This modern group of stakeholders is much more distributed than in the early days. And each new person who joins increases not only the number, but also the diversity of the group, which increases the network’s ability to defend the integrity of its promises.
There are a lot of scams on Ethereum. Anything new with money will have conmen and there is no shortage of scam artists in crypto. So, you can’t trust most things on Ethereum, but you can trust the logic underneath simply because no one controls math. The rules are fair. They apply equally to everyone.
Math and consensus are difficult things to manipulate, and this machine uses that fact to bind people together into promises that must be kept. You can trust that if a promise – a treaty – is written well, it cannot be broken in the same ways that treaties have been broken in the past. You would have to force or threaten millions of people to not run a computer program. They must agree to ignore or reject a version of the truth. And if only a few people continue to run the rebel software, then that thread of truth will live on.