Vitalik Buterin is the Co-Founder of Ethereum. Ethereum is a programmable blockchain hosting decentralized applications in finance, governance, gaming, and digital art, among others. Ethereum's native cryptocurrency, ether, follows bitcoin as the second most valuable cryptocurrency by market capitalization.
In Part 1, Buterin discusses whether cryptocurrencies will replace fiat currencies, the potential impact of decentralized finance, whether or not crypto will decrease inequality, and his favorite NFTs. Click here to read Part 2, where Buterin discusses regulation by the US Congress and Securities and Exchange Commission, decentralized autonomous organizations, and governance in a decentralized world.
Ethereum is sometimes referred to as “the world’s computer.” What does this mean in practice, and could you explain to our readers what Ethereum strives to be?
The idea behind the world computer metaphor is that Ethereum is this common global platform; it's a platform where anyone can upload these pieces of code that we call smart contracts. Anyone can publish these smart contracts, anyone can send transactions to interact with them, and code can run on the blockchain.
You have these different applications that are created by different people, and these different applications can directly talk to each other. If I make a smart contract, that's my application. Then you can build another smart contract application, and your application can talk to mine. Your application can even build into its workflow that it talks to mine. So you have this environment where everything is very tightly interconnected: anyone can build things, anyone can run things. The code is obviously all run in the open, in the clear. Everyone can see what's going on, anybody can verify that everything is being run correctly.
The idea is that it feels very similar to just being one computer. It's a network that's made up of many thousands of computers, but because it creates this environment where all of these programs are talking to each other and can be so closely connected to each other, the experience feels like everyone is putting and building things on the same computer. That's what the idea of a world computer is about.
Over the last year, cryptocurrencies have been viewed increasingly as a potential alternative to fiat currency. This June, El Salvador became the first country to adopt bitcoin as legal tender. So our first question is could you see a future where ether is used for a large percentage of economic transactions? Second, how does this shape how you think about Ethereum’s monetary policy?
Once we start talking about currencies getting big enough to be used macroeconomically, you have to distinguish between the medium of exchange and the unit of account. With fiat currency, the two normally are not separated. Well, technically, if you're doing international transactions, they could be separated. But generally, if the price is quoted in dollars, you're paying in dollars. If the price is quoted in Japanese yen, you're paying in Japanese yen. But with cryptocurrency commerce as it exists today, if I go to any of these online shops that accept bitcoin or accept ether or accept doge, then it might say US$125. But then, when we actually go there, it's going to tell me to pay something like US$0.033.
There are different views within the cryptocurrency space about how this could evolve. Some people, sometimes called maximalists, believe that cryptocurrency at some point will completely replace fiat currency and when this happens, it will even be stable. They would say that right now, cryptocurrency is volatile because it's still a new system; it's still an unknown question of whether or not it actually will succeed in different events and affect people's opinions quickly, so the price will move up and down a lot. But once it becomes something very established, it will become much more stable and people will end up quoting prices in whatever cryptocurrency, and then paying a price for that cryptocurrency. That's one viewpoint.
Another viewpoint, and my own viewpoint is closer to this, is that I don't expect cryptocurrencies, or especially the kinds of relatively fixed supply cryptocurrencies that exist today, to really replace fiat currencies. I do expect them to exist as an alternative. I do expect them to provide important things that existing fiat currencies don't. But at the same time, the fiat currencies do provide things that cryptocurrencies don't, and price stability is one of those really important ones.
The reason why fiat currencies manage to be stable is because there are central banks and there's this entire institutional structure that has an explicit goal for them to be stable. Well, one of its goals, obviously there's controlling unemployment as well. But there's something in the mechanism that is explicitly trying to be stable. Whereas in the case of cryptocurrency, either the supply is fixed, or the supply, like in the case of EIP-1559 for example, can decrease or increase a little bit. But when that happens, it's not really directly tied to consumer demand or CPIs (Consumer Price Indices) or anything like that. For a decentralized cryptocurrency, it's very hard to make it tied to those things because those things are very difficult to measure. Part of the way cryptocurrencies stay decentralized is that they try to be simple, and so they don't try to measure complicated things in the real world.
We can look to the historical gold standard for one example of what might happen were bitcoin, ether, or another cryptocurrency to completely replace fiat. In the case of the gold standard, it was not fatal, but it was also more volatile than the status quo. And what that would look like today in this much more fast paced economy where information travels really quickly, I don't know. It's a bit of an open question. But, I do think that there is a big chance that cryptocurrencies will still be too volatile, and even if they win, central banks might have to start publishing CPIs and things will still be denominated in that instead of being denominated in crypto directly.
To summarize, there's a lot of uncertainty. It's very hard to predict what the economy would look like in that kind of really wild scenario. But in general, no, I'm definitely far from 100 percent confident that a world with only bitcoin or ether style currencies is one that would work really well.
And I also disagree with some of the more radical cryptocurrency people in that I don't expect the US dollar to collapse within two decades. My viewpoint is that in the future both fiat and crypto are going to be needed. How those two interplay with each other is going to be an interesting question.
El Salvador is a really interesting case because their economy is very heavily dollarized already. Normally, a central bank would be concerned that if it supported some cryptocurrency as the main unit of account or medium of exchange within the country, then the central bank would lose the power to do monetary policy. But in El Salvador they don't have the power to do monetary policy already. As we saw, their president seems to like having his axe to grind with the International Monetary Fund (IMF) and wanting to resist foreign pressure and all those things. He might also believe that if El Salvador moves over to bitcoin, they can get rid of the US dollar and that reduces channels for the United States to influence things in El Salvador. Those are the kinds of things that I imagined might be affecting their judgment, but how that generalizes to other countries is much more complicated.
A common critique of cryptocurrencies is that they exhibit even more inequality than the rest of the economy, with several whales controlling an outsized portion of many tokens’ supplies. On the other hand, proponents claim that crypto will bank the unbanked and meaningfully improve financial inclusion. Do you think crypto will increase or decrease wealth inequality, and how do you think we should measure said inequality?
Both of those things are true: crypto can improve the ability of people in various quarters of the world to be part of the same global economy as those of us in wealthy countries are already. But at the same time, it is true that the coin distributions of these cryptocurrencies can be very lopsided. This is one of the reasons why I, personally, am not a big fan of this “cryptocurrencies take over the world completely” vision.
It's actually kind of funny. As cryptocurrencies go from being nothing to being a medium size, even their coin distribution can reduce global wealth inequality because instead of being like the older group of people that already have money, it's the older group of people and then a newer group of people: because there's more people sharing the pie, inequality goes down a bit. But then, obviously if cryptocurrencies take over the world completely, if the new pie gets bigger than the old, that doesn't matter anymore. It just matters that the new supply by itself has a few hundred people that control a large part of the supply. So I think it's a fair critique.
One of the ways that I would address some of the criticisms is of course cryptocurrency isn't just about holding and storing money. It's also about what you can use it to do. And I think there's a lot of ways in which it can empower people that are not going to be well integrated into the system already. Another is you could look at any one particular cryptocurrency, but then you could also look at the entire space. The entire space is less concentrated just because there's more of them.
It's definitely a complicated relationship, but there's different factors going in different directions. The most important thing is that inequality is a very good reason, among many, why people in the crypto space should be focused on improving the ability of crypto to be actually used and useful, and not just be a rock that sits around going up in price from time to time.
Currently, Decentralized Finance (DeFi) is one of the dominant use cases on top of Ethereum, with the potential to replace many of Wall Street’s financial intermediaries. Could you explain how DeFi might be used to replace Wall Street brokers? How do you expect Wall Street to respond to the rise of DeFi, if at all?
DeFi is offering some alternatives to, right now not everything that Wall Street does, but definitely some things that Wall Street does. There is the question of how sustainable it would be if many more people start using DeFi. For example, one of the things that DeFi offers right now that people like to advertise and talk about is it offers pretty high interest rates on stablecoins. If you take a US Dollar Coin (USDC) and then stick it into one of these platforms, you can get rates of return—I haven't looked up the latest numbers—higher than the government bonds that are going negative lately, but higher than large cap, or even medium cap corporate bonds. That's a powerful selling point.
The question is, when you have people receiving those interest rates, then there has to be someone paying those interest rates and who is willing to pay those interest rates. Realistically, right now, there's basically two sources of funding for that. One is this concept called liquidity farming where when new platforms bootstrap themselves for the first time, they often create their own token. They try to distribute their own token to their users by saying, “Hey, if you deposit your coins in your platform, then proportional to how many coins you deposited we'll give you some number of our coins.” That's how they create their initial supply allocation. That's something that can't continue forever. If the coin supply grows forever, then it eventually goes to zero. So at some point that has to stop.
The other thing that pays for those interest rates is people speculating on cryptocurrency at leverage. If you really like some cryptocurrency, and you don't just want to buy it, like you want to buy it at 2x or 3x leverage, then if it goes up one percent, you gain three percent. Your balance sheet looks like: I have US$100 of X coin, and I have negative US$50 of USDC or whatever it is. Then on that negative US$50 of USDC, you'll end up paying the 10 percent annual interest or whatever. It is sustainable, to some extent, but also it's not something that can expand to an entire US$100 trillion economy. In order for it to be possible for that to expand to the economy, cryptocurrencies themselves have to be big enough that the pool of people that want to trade them at 3x leverage is that big.
There is a bit of a “Catch-22”: if your case for why crypto is going to be big is DeFi, and then your case for why DeFi interest rates are sustainable is cryptocurrency, then it's a circular argument. Those are the places where I push back with caution, and it's the reason why I personally don't go around to these forums excitedly saying, “This is going to replace banks because you can get six percent on your dollar and this is amazing.” It's true today, but how true is it going to be in the future? We'll see.
One place where I think DeFi can really help, and this gets back to international financial inclusion. There's a lot of people in all of these different countries around the world. I mean sometimes we're not even talking about poor countries, sometimes we're just talking about remittances, or even paying employees moving from the United States to Asia or something. In general, the difference between finance and online communication is that email is already incredibly global and incredibly easy to use globally. I'm in Singapore, you're in the United States, and even if I was in Kyrgyzstan and you were in Guatemala, and I sent you an email, then you're going to receive that email in one second. Maybe the National Security Agency (NSA) is also going to receive that email in one second, but for the average person the most important thing is that you're going to receive the email in one second.
For finance, within one country, you often have these very efficient systems. In Singapore, there's all sorts of these favors paid out. Within the EU payments area, SEPA is the name, the single euro payments area, it's very efficient to make payments. Within China, there's all these things. Within the United States, there's more and more things. But internationally, it's often inefficient: you have to deal with all these custom banking details, and it takes days and it's annoying.
Cryptocurrency really does solve that, and where DeFi comes in is that one of the big weaknesses that cryptocurrency has is this price volatility. If you're my employee, and I'm paying you, let's say, some number of thousands of dollars a month, then I pay you that amount of money. And then between when I send it and you receive it, there’s some big crypto market event like Elon Musk tweeted about it, China banned it, India banned it, India unbanned some, or some random celebrity tweeted about. It could go down 15 percent, it could go up 15 percent. A lot of people don't want paychecks that just randomly have a dice roll that make up a third of the entire paycheck.
But if you pay people with stablecoins, then that problem goes away completely. Stablecoins are possibly the simplest and the most important form of DeFi. There's two kinds of stablecoins: there's asset backed stablecoins, where you have a company that has assets in the bank, that company issues a token, and that token is backed by those assets in the bank. USDC is a good example of that. And then there's algorithmic stablecoins, where the entire stablecoin system is much more decentralized, it’s run by a smart contract, and they have some kind of decentralized arbitration system that figures out what the current price of the stablecoin is. If the price is high, then it does some things to push the price lower. If the price is too low, it does some things to push the price higher. It actually is backed by a large pool of more volatile cryptocurrency. Those things are decentralized. They are financial. It is DeFi. Dai is a great example of this; this is the maker of Dai stablecoin. Rai is another good one. But that's something really useful and powerful.
One of the poster child use cases of this, as you know if you're in Venezuela or Lebanon or whatever place happens to be suffering from hyperinflation right now, then you could move your money into bitcoin or into ether. That would be good and that would definitely be less risky than your local national currency. But you could also just move it into one of these stablecoins that's connected to US dollars. If you're a very poor person, you don't like speculating, and you value the certainty of having a particular amount of money, then that's also a good deal for you. You could end up also getting some cryptocurrency overtime because you realize, “Hey, this is an ecosystem that's providing a lot of value, and I want to be part of it in some small way.” But you don’t have to. So that’s DeFi, and that’s an example of real value that is being provided.
In addition to stablecoins, which are basically these algorithmic things that are mirroring US dollars, you can have algorithmic things that mirror pretty much anything. You can algorithmically mirror the S&P 500, you can mirror Tesla shares, you can mirror some MSCI World Index, you can mirror pretty much whatever index you want. If people want to have access to First World equivalent investment portfolios then that is also an option that exists. Those are some other examples of where I think DeFi can be really useful.
As far as where DeFi goes in the future, there's already a group of people that really benefits from it and that really values it. There are groups of people that value it for reasons that are sustainable that are going to continue being true five or ten years from now. But then there are, at the same time, also parts of this space that are propped up by these things that are much more temporary. That's probably something that this space will just have to adjust to and adapt to on its own. I'm sure that we're not going to see DeFi projects offering 10 percent interest rates on USDC decades from now. But at some point, it is going to become more moderate and that's totally fine.
Do you have a favorite Nonfungible Token (NFT)?
ENS domains are technically an NFT, I like those. ENS actually is the Ethereum Name System, it's basically a decentralized alternative to the domain name system. It translates IP addresses, that are like internet phone numbers with 10 digits, into things like Ethereum.org or whatever something.com. And ENS is just a decentralized smart contract on Ethereum that does the same thing.
If you want to send to me ether for example, then you don’t have to get my 42 character address and worry about copying it correctly, you can just send it to Vitalik.eth. Also with Vitalik.eth, if you have the right software installed, you can use it to add Vitalik.eth to access my blog. This is something that's increasingly used in the Ethereum ecosystem for all sorts of things.
I think it's fascinating, just because of this ability for users and pieces of content and objects and websites and anything to have names that are cross platform. That's not something that really exists yet. For example, if I'm talking to someone on telegram, I have my telegram username and telegram manages everyone's telegram usernames. But if we start talking to each other on WeChat, then I have my WeChat username and you have your WeChat username. If I start talking to you on some other platform, you have all these different silos and they have different names. Sometimes I have my name on one platform, but then I can't have my name on another platform because some scammer gets my name on another platform first. With ENS, you can theoretically have these identifiers or names that are not tied to any central authority. Then, you can just use that name and plug that into each and every one of those applications.
There already is an ecosystem that's starting to do this. For example, in the Ethereum space there's this decentralized messaging application called Status. Their thing is that they're trying to be fully decentralized: no server, if the company disappears tomorrow the application keeps running. In order to solve the problem of what names do you call people, they have this ENS integration so every Status account is an Ethereum account. If that Ethereum account has an ENS name, then that ENS name stores which name corresponds to which public encryption key or chat address or whatever. That's something that's very powerful. It's something that's slowly happening already and I think as that expands over time I expect there’s going to be a lot of projects finding all sorts of use cases for it.
Apostolicas and Nayar spoke with Vitalik Buterin via Zoom on September 2, 2021. This interview has been lightly edited for length and clarity. Apostolicas owns various cryptocurrencies, including ether. Click here to read Part 2.
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