In these Manichaean depictions, Ethereum represents the enemy of centralized banking. In fact, there is no contention here. Ethereum is not a threat to the established financial system because it is working to enhance it. The two systems are quickly becoming intertwined.
Financial institutions may benefit greatly from Ethereum’s basic value propositions of self-custody, transparency, and disintermediation, and these benefits can be achieved within the confines of current regulatory frameworks. Ethereum is well on its way to becoming the principal settlement layer for global financial transactions, thanks to its early progress toward institutional adoption and unparalleled network decentralization.
Neutrality in a multipolar world
Ethereum is not coming to bring about an anonymous black market or a currency without a central government. It provides a basic service: impartiality.
Ethereum is the first genuinely neutral arbiter in the world’s financial system, and its introduction couldn’t come at a better time. U.S. dominance in international affairs is diminishing, and domestic politics in major countries are becoming more unstable. Reliable rules of the road for the financial system are desperately needed in a multipolar world.
Ethereum’s transaction settlement and data storage technology is nearly hack-proof. That’s because it has the most distributed consensus layer of any cryptocurrency, with over 500,000 validators spread across over 10,000 physical nodes in dozens of countries. Ethereum’s decentralization is increasing, not decreasing, despite fears to the opposite.
Ethereum is not intended to be a substitute for legally binding contracts or governmental agencies in the resolution of disputes. What it guarantees, with its unbreakable and impartial code, is that it will prevent innumerable disputes from ever forming.
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Solving the principal-agent problem
Events like Celsius, FTX, and Silvergate that preceded the “crypto winter” were more reflective of the flaws in conventional finance than of crypto’s. Oversight and centralization issues exacerbated the age-old principal-agent dilemma in each case.
Regulation has typically been the go-to solution for this type of issue in the past. More regulation is required, but Ethereum has more long-term answers. Distributed ledger technology and trustless smart contracts can eliminate key aspects of the principal-agent problem.
Ethereum and other scaling chains will quickly spread over the financial and asset management industries. Every single investor will self-custody their assets in trustless smart contracts, from savings accounts to retirement portfolios, and the tokenization of fiat currencies will be nearly frictionless thanks to tightly controlled on-ramps.
Meanwhile, investors and, eventually, regulators will demand that asset managers use trustless on-chain oracles to report fund performance. In these sectors, Ethereum will not violate regulations; rather, it will strengthen them. Authorities will eventually pay as much attention to smart contract technical specifications as they do to required liquidity reserves.
Ethereum’s future is not permissionless. Identity-based permissioning will be commonplace, yet so seamless that it will be virtually imperceptible. State censorship will be a major worry as central bank digital currencies proliferate. Legislation prohibiting governments from arbitrarily seizing digital assets will gain substantial political traction.
In short, Ethereum has the ability to significantly reduce private financial misbehavior while having a modest impact on governmental censorship.
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Nascent institutional adoption
Ethereum’s future may be a long way off, but its building blocks are now available. In 2021, decentralized finance (DeFi) erupted into a speculative firestorm, but that flurry of activity encouraged significant innovation. The technology is now available to establish a wide range of decentralized marketplaces and tokenized financial instruments.
What is lacking is integration with the larger financial system. This is the focus of a new breed of regulated fiat-to-crypto onramps and custodians, such as Circle. With USD Coin, its tokenized dollar, the corporation based in the United States established the groundwork for the digital economy. Circle is now constructing other important infrastructure, including as hybrid fiat-and-crypto accounts with direct access to Ethereum and its scaling networks.
Expect a proliferation of tokenized securities in the next years, beginning with risk-off fixed-income instruments. In addition, there will be significant investment in Ethereum staking pools, which will emerge as a crucial strategic asset in the institutional crypto market. On-chain financial reporting, improved user flows for regulatory compliance, and institutional-grade tokenized derivatives will also be prioritized.
To be sure, a recent flurry of enforcement actions has dampened development effort in the United States, but it will continue to be a major market for the next wave of regulated protocols.
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Taking care of the limitless garden
The increase in governmental pressure on cryptocurrency, notably DeFi, signals the end of an age. Large swaths of Ethereum’s ecosystem, particularly protocols that are unable or unwilling to adapt to the shifting scenario, will be successfully weeded out. Those who stay, on the other hand, will be ideally suited to incorporation into the existing financial system. Ethereum’s transformational impact on traditional finance is only getting started.
