0/ Ethereum is for financial market infrastructure: a guest thread by @malekanoms

The universal platform for crypto, blockchain apps, stablecoins & decentralized tech. An account about the Ethereum ecosystem maintained by @ethereumfndn.

1/ I recently co-authored a paper with ECB Director General Ulrich Bindseil, exploring how a network like Ethereum has features that represent a leap forward in financial infrastructure and enables financial products that can’t exist on TradFi rails

2/ The features in question are streaming payments, omni-asset settlement, programmability, and disintermediation

3/ On payments: a big part of the appeal of stablecoins is their unusual cost structure. Unlike TradFi payment rails, crypto networks don’t have a business model per se, only a security model. So while legacy rails look to raise fees, crypto will reduce them

4/ The likely end- state is one where crypto payments become effectively free, enabling streaming money, and raising interesting questions like “how often should bonds pay interest?”

5/ Next, most TradFi settlement systems are single asset, meaning they manage ownership of just one thing. US dollars exist in one such infrastructure, Euros in another, stocks in a third, etc. Economic activity that involves multiple assets is full of friction and risk

6/ Tokenization makes Ethereum omni-asset, with smart contracts enforcing atomic swaps.  Moving vital activity–like FX trading or derivative settlement–onchain will thus make the global financial system cheaper, more innovative, and a lot safer

7/ Today, most financial products are already automated, but in narrow ways. Programmability via smart contracts takes things to another level, thanks to the expressivity of a Turing complete language

8/ Perhaps more importantly, smart contracts are resilient and trustless. Automation is not very useful if the underlying platform can censor, or go down. Here, Ethereum is exceptional, even by blockchain standards. Blockchains should never go down

9/ Trustless programmability enables composability–something TradFi systems can’t ever offer since intermediaries can deny or revoke access. On Wall Street, walled gardens and fragmentation are a feature, not a bug. Ethereum fixes this

10/ Which brings us to disintermediation. We should note that intermediaries aren’t always bad. It’s only an overreliance on them that is problematic. Crypto networks offer both options, but the default is peer-to-peer finance

11/ Where intermediation is still preferred–like to pool capital for lending and trading–smart contracts play the role of banks and brokers. This means the best of both worlds

14/ The paper also discusses other chains. It considers, then argues against, permissioned networks. But it mostly focuses on Ethereum because that’s where most DeFi happens, and the chain offers more of the decentralized and security needed to make the above possible

13/ A platform like Ethereum doesn’t just make finance faster, cheaper, and safer. It also makes it more innovative. There’s a long history of new infrastructure leading to financial innovation, like when the telegraph enabled wire transfers

12/ Put together, all these features create exciting new possibilities for financial engineers, asset issuers, and users. We’ve already seen novel products that can only exist on a public blockchain, like flash loans, but we’ve likely barely scratched the surface