When Satoshi Nakamoto launched Bitcoin in 2009, he made it open source software (OSS). That means anyone can use all of the code that makes BTC work, in any way they want.
Since then, nearly all successful coins, decentralized projects, and tokens have also made their code open source. Why? It’s really the only way to build in this space. First of all, it creates trust because anyone can examine the code to check for anything suspicious.
But it’s much more than that. Since anyone can use or contribute to an OSS project, it also dramatically accelerates technological breakthroughs. Venture capital firm Andreessen Horowitz did a nice job explaining this in its 2018 piece Crypto and the Evolution of Open Source:
“…any smart contract developed on Ethereum becomes a shared service that can interact with any other service… incentivizing developers to improve on existing services, build on top of them, and enable combinatorial innovation at greater scale than ever before.”
Once an open source project has reached a critical mass of users and developers, it creates a powerful cycle of innovation. Today we’re going to look at how OSS crypto projects are set to disrupt traditional currencies, finance, and more.
Open Source + DeFi: Breaking Traditional Models
“Disruptive” is a word that gets thrown around a lot these days. But what we are seeing happen through the combination of crypto + OSS truly fits the description.
Imagine for a second if Google’s search engine was open source, and anyone could build their own version of it. Think of all the useful and unexpected technologies we’d see blossom if that happened. Or if JP Morgan open sourced all its banking software. This is sort of like that.
DEXs use Ethereum smart contracts to enable trustless, secure trading without a centralized entity making decisions. Everything is executed according to code and math, not human beings pushing buttons to approve transactions.
Uniswap code is open source, and is incredibly powerful. It has been used by hundreds of projects, and is constantly evolving. The most famous example is SushiSwap, a competitor that used Uniswap’s code as its base layer.
Now, you might think that this is a bad thing for Uniswap, since it now had a serious competitor using its own code. But it was actually a great thing for Uniswap because Sushiswap launched a key breakthrough that Uniswap quickly adopted: its own native crypto token.
In order to incentivize users to trade on SushiSwap, the Sushi team created their own token (SUSHI). This token is used as a reward for people who trade and provide liquidity on the platform. SUSHI can be used to reduce trading fees, or as a currency to trade tokens. Token holders also receive .05% of trading fees (Sushiswap as a platform takes .3% fee, .of which 25% goes to liquidity providers and .05% goes to token holders).
Needless to say, it worked and today SushiSwap has attracted over 300,000 users and has daily trade volume of around $240 million (side note: Sushiswap recently experienced a leadership crisis, which is a very interesting story about DEX drama for those who are curious – read more here).
Shortly after SushiSwap launched its token, Uniswap followed suit with the UNI token, and so far the token launch for both platforms has fueled adoption and been a major success. Today Uniswap is still the industry leader, but the fight for users with competitors like Sushi and dYdX continues to drive a ridiculous pace of innovation.
Decentralized exchanges are likely to play a big, big role in the future of finance. They can reduce costs, improve efficiency, and offer unprecedented transparency. Yes, there are still significant risks, and the technology is not yet ready for mainstream users. But we’re starting to see the possibilities with DeFi.
And once the layer 2 ETH scaling solutions we talked about in the last newsletter are more fully deployed, the possibilities with DEXs, and DeFi in general, get even better.
Another great example of the power of open source crypto is Litecoin. In 2011 the project’s founder, Charlie Lee, took BTC’s source code and launched a competing coin. Litecoin had 4x faster block times, and other optimizations for more speed and lower cost.
Once again, you might think it would be bad for Bitcoin to have more competition. But Litecoin has significantly contributed back to Bitcoin. For example, in 2016-17 there was a huge debate over SegWit, a Bitcoin Improvement Proposal (BIP). Segwit proponents argued it would increase BTC throughput (capacity), allow the Lightning Network to be built on top of BTC, and bring other benefits such as Schnorr Signatures.
But there were many in the Bitcoin community that opposed SegWit for various reasons. Some miners thought the Lightning Network would lower their transaction fee revenue. And there were security concerns around such a major upgrade, as well.
So Litecoin went ahead and activated SegWit in 2017, before Bitcoin. They demonstrated that it was safe, secure, and superior. Shortly after, Bitcoin adopted SegWit. In 2018 the BTC Lightning Network launched on Bitcoin and today SegWit + Lightning allows transactions to be sent quickly and cheaply (we covered the Lightning Network in more detail in Why HIVE is Going Big on BTC).
These are just a tiny peek at the innovations happening in DeFi and crypto. The space is evolving so rapidly it has become impossible to keep track of all the interesting projects.
Marc Andreessen is one of the most influential thinkers and investors in the tech world. In 1991 Marc built Mosaic, the first modern web browser, at the age of 22. He went on to co-found Netscape, and eventually launched VC firm Andreessen Horowitz (a16z) with his co-founder Ben Horowitz. Wired Magazine calls Andreessen The Man Who Makes the Future.
Marc thinks that crypto will end up being just as disruptive as the internet was. And a16z recently raised a massive $2.2 billion dedicated fund to invest in blockchain-based tech. He calls crypto a fundamental technological breakthrough:
“We view it as a technological transformation. There’s a fundamental technological breakthrough that has happened. It’s an area of computer science called distributed consensus… Money is one application… but it’s only one of many.”
I think this is the proper way to think about the space. And crypto’s open source nature is what makes these rapid advances possible.
When Satoshi released Bitcoin, he unleashed a genie of sorts. There’s no putting it back in the bottle at this point. The code is out there, it’s free to use, and it is constantly improving, growing, and evolving. In crypto and DeFi, breakthroughs are replicated, tweaked, improved upon, and then the whole cycle is repeated ad infinitum.
HIVE is incredibly excited to see how crypto ecosystems develop over the coming years. We will continue to support these efforts by providing reliable infrastructure, and making strategic investments where we think the risk/reward is attractive, such as our investment in DeFi Technologies (DEFTF).
Thanks for reading!
Editor, The HIVE Newsletter