“Is Ethereum the AOL of Crypto?” by Albert Wenger

The gist of Albert’s post is that one area of activity on Ethereum, Decentralized Finance (or “Open Finance” if you prefer) may be circularly dependent on a small segment of the Ethereum community for both its funding and its users. There are two arguments there, which I’ll do my best to steelman:

1. Is DeFi dependent on Ethereum for funding?

Albert’s first argument goes like this: DeFi has been a success for Ethereum so far. However, if it is the case that most DeFi companies are being financed “by Ethereum”, then it may create a circular dependency that could be undone by some adverse event, similar to how the dot-com bust undid AOL. For instance, if most DeFi companies are being funded by large ETH holders selling ETH, and those companies were to fail, this could lower the price of ETH. This in turn would mean there is less funding available for new DeFi companies, meaning less success, meaning a lower ETH price, and on and on.

The obvious question is simply: is it true that a lot of DeFi is “financed via Ethereum”?

Albert gives two examples of what he means by this:

When a DeFi project has its own token. I assume the point here is that a project with its own token is financially dependent on the price of that token, which we assume might be correlated with the price of ETH. Such a project might also simply hold a lot of ETH.

When a DeFi project is financially supported by organizations or people with large holdings of ETH (e.g. ConsenSys, which he calls out specifically).

Surveying the DeFi industry, Albert’s claim seems mostly false. Most of the top DeFi projects (1) do not have their own token, and (2) have raised (and continue to raise) outside VC capital.

To use one metric, out of the 10 top DeFi projects listed on DeFi Pulse:

4 have their own token (MakerDAO, Synthetix, Bancor, Kyber)

8 have raised VC money (MakerDAO, Compound, Synthetix, dYdX, Uniswap, Set, Dharma, wBTC (via Kyber), Bancor, and Kyber)

1 raised money from ConsenSys (Nuo)

This doesn’t include other stablecoins like USDT, USDC, Gemini, and others — all funded by VC and large exchanges.

It doesn’t seem true that DeFi is being propped up by large ETH holders. What companies or projects is Albert thinking of when he writes this critique, if not the ones listed above?

2. Is DeFi dependent on a small circular economy of users?

Separate from the AOL analogy, Albert is getting at a deeper question: is it dangerous that so much of DeFi is “self-referential” within Ethereum?

Traders who want leverage are the primary consumers of lending products, borrowing from ETH holders. Financial services and products (derivatives, trading services, etc) let users interact with or have exposure to a variety of ETH based assets, and some of those assets have little use outside of speculation.

Source: Alethio (link)

Whether you view the above description as a strike against DeFi probably depends on your frame of reference. On the one hand, it’s true that the lofty vision of a global alternative financial system that banks the unbanked and provides accessible financial services to the world is far from reality.

On the other hand, what should we expect? Ethereum launched 5 years ago, Dai has existed for under 2 years, and DeFi as a proper noun is about 1 year old. Shouldn’t we expect an emergent financial system to begin as a very local phenomenon, while basic infrastructure and services are laid down, before expanding its scope? Even then, isn’t some amount of self-reference a good thing, since it creates demand for ETH?

It’s not even really true that DeFi is entirely walled off within Ethereum: see for instance efforts to integrate with Bitcoin like wBTC and tBTC, or the many companies working to bridge Ethereum to the legacy financial system (here are three examples just from the last month). DeFi’s integration with other ecosystems is just as true at the social level: Bitfinex, a company whose culture is very Bitcoin-centric, used Ethereum for their token sale.