Low-risk defi can be for Ethereum what search was for Google
2025 Sep 21
See all posts
Low-risk defi can be for Ethereum what search was for Google
Special thanks to Binji, Josh Rudolf, Haonan Li and Stani
Kulechov for feedback and review.
One of the important tensions in the Ethereum community for a long
time has been the tension between (i) applications that bring in
enough revenue to economically sustain the ecosystem, whether
that means sustaining the value of ETH or supporting individual projects
and (ii) applications that satisfy the underlying goals
that brought people into Ethereum.
Historically, these two categories were very disjoint: the former was
some combination of NFTs, memecoins, and a type of defi that was backed
up by temporary or recursive forces: people borrowing and lending to
chase incentives provided by protocols, or a circular argument of "ETH
is valuable because people use the Ethereum chain to buy and sell and
leverage-trade ETH". Meanwhile, non-financial and semi-financial
applications (eg. Lens, Farcaster, ENS, Polymarket, Seer, privacy
protocols) existed, and they were fascinating, but they either got very
little usage, or paid far too little in fees (or other forms of economic
activity) to sustain a $500 billion economy.
This disjointness created a lot of dissonance in the community, and a
large amount of community momentum was backed by the theoretical
hope that some application could emerge that fills both boxes at
the same time. In this post I will argue that, as of this year, Ethereum
has that application, something that can be for Ethereum what search was
for Google: low-risk defi, with a goal of achieving global
democratized access to payments and savings in valuable asset categories
(eg. major currencies with competitive interest rates, stocks,
bonds).
Deposit rates for major stablecoins on Aave.
The analogy between low-risk defi for Ethereum and search for
Google is as follows. Google does many interesting and valuable
things for the world: the Chromium family of browsers, Pixel phones,
their AI work including open-source Gemini models, the Go language, and
much much more. But
these things are all negligible or even negative as far as revenue
generation goes. Rather, the largest revenue generator is search and
ads. Low-risk defi can play a similar role for Ethereum. Other
applications (including non-financial and more experimental
applications) are crucially important for Ethereum's role in the world
and for its culture, but they do not need to be looked to as revenue
generators.
In fact, I hope Ethereum can do much better than
Google. Google is often
criticized
for losing
its way and becoming
like the antisocial profit-maximizing corporations that it sought to
replace. Ethereum has decentralization baked in at a much deeper
technical and social layer, and I would argue that the low-risk defi use
case creates a lot of alignment between "doing well" and "being good",
to a degree that does not exist for advertisement.
Why low-risk defi?
By "low-risk defi" I include both the basic function of payments and
savings, and well-understood tools like synthetic assets and fully
collateralized lending, and the ability to exchange between these
assets.
The reason to focus on these applications has two core
components:
- These applications provide irreplaceable value, both for Ethereum
and for its users.
- These applications are culturally congruent with the Ethereum
community's goals, both for the application layer and for the L1's
technical properties.
Why is defi valuable now?
Historically, I was more suspicious of defi because it did
not seem to be providing (1); rather, the main "selling points"
seemed to be making money from trading highly speculative tokens
(Ethereum's single largest day in fees was from a badly
designed digital monkey sale), or getting 10-30% yield from
liquidity farming incentives.
One reason why this was the case was regulatory barriers. Gary
Gensler and others deserve serious blame for creating a regulatory
environment where the more useless your application is, the safer you
are, and the more transparently you act and the more clear guarantees
you offer to investors, the more likely you are to be deemed "a
security".
Another reason why is that at the early stages, risk (protocol code
bug risk, oracle risk, general unknown-unknown risk) was too high for
more sustainable use cases to make sense. If risk is high, the only
applications that are worth it are applications whose returns are
even higher, and so can only come from unsustainable subsidies
or speculation.
But what happened over time is that the protocols became more secure
and the risk
decreased.
Ethereum L1 defi losses. Source: AI research
Defi hacks and losses continue to exist. But they are increasingly
being pushed out to further edges of the ecosystem where users are more
experimental and speculative. A stable core of applications is forming
that is proving remarkably robust. Tail risks that cannot be
ruled out continue to exist, but such tail risks exist in tradfi too -
and given increasing global political instability, for many people
worldwide the tail risks of tradfi are now greater than the tail risks
of defi. In the long run, one could expect the transparency and
automated execution in a mature defi ecosystem to make it much
more stable than tradfi.
Who are the "non-ouroboros" users for whom all this makes sense?
Basically, people and businesses who want access to a global market
within which they can buy, hold and trade mainstream assets, but for
whom there are not reliable traditional finance channels for getting
those things. Crypto does not have magic secret sauce for sustainably
creating much higher yields. But it does have magic secret
sauce for making the economic opportunities that already exist globally
and permissionlessly accessible.
Low-risk defi has several nice properties that make it ideal:
- It contributes to Ethereum and ETH economically,
both by using a large volume of ETH as a collateral asset, and by paying
high volumes of transaction fees
- It serves a clearly valuable and honorable purpose:
enabling global permissionless access to well-understood positive-sum
mechanisms of economic interaction and wealth-building
- It does not give Ethereum L1 perverse incentives
(eg. to over-centralize in search of HFT-friendly efficiencies, which
are more appropriate for L2s)
This is a very nice set of properties to have!
Going back to the analogy of Google, one major flaw in its incentive
alignment is that advertising revenue gives the company an incentive to
suck up as much data as possible from its users and keep that data
proprietary. This goes against the open-source and positive-sum
spirit that historically motivated its more idealistic efforts. The
cost of this kind of incongruence is even higher for Ethereum, because
Ethereum is a decentralized ecosystem, and so any activity that Ethereum
does cannot be a backroom decision of a few people, it must be viable as
a cultural rallying point.
The revenue generator does not have to be the most revolutionary or
exciting application of Ethereum. But it does need to be something that
is at least not actively unethical or not embarrassing. It's
just not possible to say with a straight face you are excited about the
ecosystem because it's positively changing the world, if its single
largest application is political memecoins. Low-risk defi, with a goal
of enabling global permissionless access to payments and to the best
savings opportunities, is a form of finance that is positively
changing the world, and many people in underprivileged
regions worldwide can attest
to this.
What can low-risk defi
evolve into?
Another important property of low-risk defi is that it is naturally
synergistic with, or can evolve into, a number of more interesting
future applications. To give a few examples:
- Once we have a mature ecosystem of financial and non-financial
activity happening onchain (see: Balaji's ledger of
record concept), it starts to make sense to explore
reputation-based undercollateralized lending, which is
potentially an even more powerful engine of financial inclusion. Both
the low-risk defi we build today, and the non-financial
wizardry (eg. ZK identity) we build today, are upstream of making this
outcome more likely.
- If prediction markets become more mature, we could
start to see them being used for hedging. If you are holding
stocks, and you believe that some world event is on average likely to
make stocks go up, and prediction markets for that event are liquid and
efficient, then it's a rational statistical hedging strategy to bet
against that event. Prediction markets and "traditional" defi (heh)
happening on the same platform will make it easier to engage in such
strategies.
- Today, low-risk defi is often about enabling easier access to the
USD. But most of us did not enter crypto to enable USD adoption. Hence,
over time we can start moving the ecosystem toward other stable
forms of value: basket currencies, "flatcoins" based directly on
consumer price indices, "personal tokens", etc. Both the
low-risk defi we build today, and more experimental projects like Circles
and the various "flatcoin" projects, are upstream of making this outcome
more likely.
For all these reasons, I would argue that a stronger focus on
low-risk defi puts us in a position much better for
economically sustaining the ecosystem while maintaining cultural and
values congruence than search and ads ever could for Google. Low-risk
defi is already supporting the Ethereum economy, it is making the world
a better place even today, and it is synergistic with many of the more
experimental applications that people on Ethereum are building. It is a
project that we can all be proud of.
Low-risk defi can be for Ethereum what search was for Google
2025 Sep 21 See all postsSpecial thanks to Binji, Josh Rudolf, Haonan Li and Stani Kulechov for feedback and review.
One of the important tensions in the Ethereum community for a long time has been the tension between (i) applications that bring in enough revenue to economically sustain the ecosystem, whether that means sustaining the value of ETH or supporting individual projects and (ii) applications that satisfy the underlying goals that brought people into Ethereum.
Historically, these two categories were very disjoint: the former was some combination of NFTs, memecoins, and a type of defi that was backed up by temporary or recursive forces: people borrowing and lending to chase incentives provided by protocols, or a circular argument of "ETH is valuable because people use the Ethereum chain to buy and sell and leverage-trade ETH". Meanwhile, non-financial and semi-financial applications (eg. Lens, Farcaster, ENS, Polymarket, Seer, privacy protocols) existed, and they were fascinating, but they either got very little usage, or paid far too little in fees (or other forms of economic activity) to sustain a $500 billion economy.
This disjointness created a lot of dissonance in the community, and a large amount of community momentum was backed by the theoretical hope that some application could emerge that fills both boxes at the same time. In this post I will argue that, as of this year, Ethereum has that application, something that can be for Ethereum what search was for Google: low-risk defi, with a goal of achieving global democratized access to payments and savings in valuable asset categories (eg. major currencies with competitive interest rates, stocks, bonds).
Deposit rates for major stablecoins on Aave.
The analogy between low-risk defi for Ethereum and search for Google is as follows. Google does many interesting and valuable things for the world: the Chromium family of browsers, Pixel phones, their AI work including open-source Gemini models, the Go language, and much much more. But these things are all negligible or even negative as far as revenue generation goes. Rather, the largest revenue generator is search and ads. Low-risk defi can play a similar role for Ethereum. Other applications (including non-financial and more experimental applications) are crucially important for Ethereum's role in the world and for its culture, but they do not need to be looked to as revenue generators.
In fact, I hope Ethereum can do much better than Google. Google is often criticized for losing its way and becoming like the antisocial profit-maximizing corporations that it sought to replace. Ethereum has decentralization baked in at a much deeper technical and social layer, and I would argue that the low-risk defi use case creates a lot of alignment between "doing well" and "being good", to a degree that does not exist for advertisement.
Why low-risk defi?
By "low-risk defi" I include both the basic function of payments and savings, and well-understood tools like synthetic assets and fully collateralized lending, and the ability to exchange between these assets.
The reason to focus on these applications has two core components:
Why is defi valuable now?
Historically, I was more suspicious of defi because it did not seem to be providing (1); rather, the main "selling points" seemed to be making money from trading highly speculative tokens (Ethereum's single largest day in fees was from a badly designed digital monkey sale), or getting 10-30% yield from liquidity farming incentives.
One reason why this was the case was regulatory barriers. Gary Gensler and others deserve serious blame for creating a regulatory environment where the more useless your application is, the safer you are, and the more transparently you act and the more clear guarantees you offer to investors, the more likely you are to be deemed "a security".
Another reason why is that at the early stages, risk (protocol code bug risk, oracle risk, general unknown-unknown risk) was too high for more sustainable use cases to make sense. If risk is high, the only applications that are worth it are applications whose returns are even higher, and so can only come from unsustainable subsidies or speculation.
But what happened over time is that the protocols became more secure and the risk decreased.
Ethereum L1 defi losses. Source: AI research
Defi hacks and losses continue to exist. But they are increasingly being pushed out to further edges of the ecosystem where users are more experimental and speculative. A stable core of applications is forming that is proving remarkably robust. Tail risks that cannot be ruled out continue to exist, but such tail risks exist in tradfi too - and given increasing global political instability, for many people worldwide the tail risks of tradfi are now greater than the tail risks of defi. In the long run, one could expect the transparency and automated execution in a mature defi ecosystem to make it much more stable than tradfi.
Who are the "non-ouroboros" users for whom all this makes sense? Basically, people and businesses who want access to a global market within which they can buy, hold and trade mainstream assets, but for whom there are not reliable traditional finance channels for getting those things. Crypto does not have magic secret sauce for sustainably creating much higher yields. But it does have magic secret sauce for making the economic opportunities that already exist globally and permissionlessly accessible.
Why is low-risk defi culturally congruent with the Ethereum community's goals?
Low-risk defi has several nice properties that make it ideal:
This is a very nice set of properties to have!
Going back to the analogy of Google, one major flaw in its incentive alignment is that advertising revenue gives the company an incentive to suck up as much data as possible from its users and keep that data proprietary. This goes against the open-source and positive-sum spirit that historically motivated its more idealistic efforts. The cost of this kind of incongruence is even higher for Ethereum, because Ethereum is a decentralized ecosystem, and so any activity that Ethereum does cannot be a backroom decision of a few people, it must be viable as a cultural rallying point.
The revenue generator does not have to be the most revolutionary or exciting application of Ethereum. But it does need to be something that is at least not actively unethical or not embarrassing. It's just not possible to say with a straight face you are excited about the ecosystem because it's positively changing the world, if its single largest application is political memecoins. Low-risk defi, with a goal of enabling global permissionless access to payments and to the best savings opportunities, is a form of finance that is positively changing the world, and many people in underprivileged regions worldwide can attest to this.
What can low-risk defi evolve into?
Another important property of low-risk defi is that it is naturally synergistic with, or can evolve into, a number of more interesting future applications. To give a few examples:
For all these reasons, I would argue that a stronger focus on low-risk defi puts us in a position much better for economically sustaining the ecosystem while maintaining cultural and values congruence than search and ads ever could for Google. Low-risk defi is already supporting the Ethereum economy, it is making the world a better place even today, and it is synergistic with many of the more experimental applications that people on Ethereum are building. It is a project that we can all be proud of.