ETH and BTC are Economic Bandwidth

And why economic bandwidth is the most under appreciated source of scalability in crypto

I’m sending this Economic Bandwidth piece to everyone including free subscribers. I think it’s that important! If you’d like to receive future Thursday pieces and start going bankless at warp speed subscribe now & support the program as a paying member. (Here’s what you get)

Dear Crypto Natives,

This thought-piece has been on my mind for a while now. Here’s a synopsis:

The concept of economic bandwidth is way under appreciated. When we talk about scaling blockchains we always talk about transactions per second (TPS). But that’s only a measure of scale for the networks of blockchains.

What about scaling the base money?

Let’s level up on economic bandwidth.


P.S. Subscribe to the full program so you don’t miss David Hoffman’s killer new piece next wk. I’m also going to introduce subscribers to an incredible new money protocol on Tuesday. 🔥


ETH and BTC are Economic Bandwidth

I have three things to say here:

  1. The asset is not the network

  2. Value is economic bandwidth

  3. Crypto is a social technology

The asset is not the network

First thing.

The asset is not the network.

ETH is an asset. Ethereum is a network.

BTC is an asset. Bitcoin is a network.

We need this drilled into our heads because we forget so often. We can easily get caught in the crypto meme bubbles others have crammed into our brains without even realizing it.

For instance, how many times have you heard something like this?

“Bitcoin is a digital gold and Ethereum is a smart-contract platform”

There’s something off in that statement. Did you catch it? It’s comparing two separate things: Bitcoin the asset vs Ethereum the smart-contract platform.

This makes no sense—it’s like comparing Euros to FedWire.

If you want to compare the two networks doesn’t it make more sense to say, “Bitcoin is a transaction network for Bitcoin and Ethereum is a smart-contract platform”

And if you’re comparing the assets, well, they’re both a commodity store-of-value like gold, they’re both a currency for paying for blockspace, and they’re both crypto money.

But people miss this distinction. They default to the silly memes that tell them the important thing about Bitcoin is BTC the asset and the important thing about ETH is Ethereum the network. These memes are wrong.

Another story

I was talking to some people in the Ethereum community recently about marketing. Their focus—Ethereum as a blockchain platform. Ethereum as a decentralized internet. Ethereum as the home for DeFi.

“What about ETH the asset?” I asked.

“Oh, we don’t talk about price stuff” was the reply. “Bitcoin has the digital gold narrative and Ethereum needs a good narrative too.”

Again, see what just happened? Same mistake. They’re comparing Bitcoin the asset to Ethereum the network. Apples meet oranges. These people aren’t maximalists, but somehow they’re subconsciously buying into silly maximalist memes—that ETH doesn’t matter (just Ethereum!), that Bitcoin is the only “digital gold”.

The network is not the asset.

Value is economic bandwidth

Second thing.

There’s an obsession with improving crypto scalability by network metrics—TPS. Transactions per second. Some people make the mistake of thinking all TPS is equal. No. What we’re really after in crypto is trustless transactions per second. If you’re giving up decentralization for higher TPS you’re just a cloud provider.

But even trustless TPS is a limited definition of scalability. Don’t get me wrong. It’s a decent scalability metric for the network parts of blockchains. But it doesn’t measure the economic parts of blockchains. It can measure the scalability of Ethereum the network, but it doesn’t measure the scalability of ETH the asset.

It’s not enough to improve TPS. We also need to improve economic scalability. We need to increase the scalability of the cryptoassets themselves.

Trustless liquid value

You can measure cryptoasset scalability by the amount of liquid value available in the asset—the liquid market cap. High value, high liquidity assets can be sold with little impact on asset price. Dollars, Euros, T-bills, gold—these are the high value, high liquidity assets that provide economic bandwidth to the traditional financial system.

Want to see cryptoasset scalability live? Go to Messari now and peak at liquid value to see. Sort by “Liquid Marketcap” and look at “Real Volume” for a rough proxy.

Liquid value stores aren’t new to crypto. There are many real-world assets that are more liquid and higher value outside crypto. The revolution of crypto is that these cryptoassets can have trustless liquid value—value that isn’t backed by a central authority. Value that settles completely onchain. No sovereign, no court system, no threat-of-violence—purely crypto native.

This is why USDC can’t replace ETH

You can get liquid value on a crypto network really easily. Just use existing sources of trusted value. Import fiat stablecoins like USDC. Use tokenized T-bills. Tokenize gold. Some people think these will replace cryptonative assets as a store of value. But all of themm require a trusted third-party—banks, vaults, and legal systems. All of them settle natively on the legal system, not on the chain. They’re all useful, but limited. They’re foreign.

Trustless value is only present in crypto native assets. The high value, high liquidity trustless assets like BTC and ETH are the kings here. These settle onchain—no legal system, no banks, no meatspace, no trusted third-party. Tether, or USDC, or tokenized T-bills might beat BTC and ETH in liquidity and marketcap for a time but they can never beat them on the dimension of trustlessness.

USDC can never replace ETH on Ethereum.

Value is bandwidth

Trustless value is important because its economic bandwidth for a trustless economy.

With low bandwidth we have low capacity for trustless money applications. We’re dependent on the trusted systems we hoped to replace. With high economic bandwidth we can build an entire economy. A parallel money system.

We don’t have to wait. We can see this playing out now.

DAI is maximally trustless because it’s backed by a trustless value source—ETH as economic bandwidth. Uniswap also uses ETH for its economic bandwidth, but imagine if it used USDC? The protocol would be one OFAC mishap from being perma-frozen by Coinbase. (Yeah, Coinbase can freeze USDC at will). Hardly permissionless. Same as the old system.

These money protocols only exist due to the economic bandwidth of ETH.

(Above) This is a graph of $400m worth of ETH base money being used as economic bandwidth for the Ethereum economy

The Ethereum economy needs ETH bandwidth to thrive

The community discussion in Synthetix is fascinating these days. They’re debating whether they should add ETH as collateral to back their growing ecosystem of decentralized synthetic assets.

Their problem? Right now the $24m or so of all synths are self-referentially backed by the value of SNX, which itself derives value from the net present value of future Synthetix exchange fees (they’ve made $3.1m on exchange volume so far). A low liquidity, low value SNX gives them the economic bandwidth of a 56k modem. To generate more snyths in order to grow their ecosystem and generate more exchange fees you know what they need? A bandwidth upgrade.

So early next year they plan to add ETH as a collateral option for Synthetix. This will give them broadband—call it a 78x upgrade on their current economic bandwidth (78x is the difference between SNX and ETH market cap). And probably more than 78x since ETH collateralization can be 600% less than SNX due to ETH’s higher liquidity.

Money protocols in the Ethereum economy like SNX need high economic bandwidth—so they need a high value ETH. And they’re using ETH’s bandwidth to grow. Scaling Ethereum isn’t just scaling the TPS of the network. It’s scaling the economic bandwidth of ETH.

Crypto is a social technology

Last thing.

All of this makes more sense if you think of Ethereum and Bitcoin more as a social tech like money or law and less as a hard tech like relational databases or programming languages.

You don’t necessarily scale a social tech through better software alone. Software plays an important role, but it’s not sufficient. How do you scale a social tech—how do you scale economic bandwidth?

The engineers among you may not like the answer to this question because it doesn’t have a technical solution. It’s soft, it’s squishy, it’s human. It requires things like:

  • Sticky narratives and memes

  • An intolerant minority of true believers

  • A predictable and easy-to-explain issuance policy

  • A social movement with a clear vision for a better world

And the VCs who’ve invested in ETH-killers won’t like this next part. Because the reality is their early involvement in base chains can permanently stunt the future economic bandwidth of their investments by:

  • Limiting coin distribution to accredited investors and backroom deals

  • Stifling the organic growth of early communities

  • Removing the upside for early crypto natives

  • Corporatizing the social movement

Indeed, in today’s environment of regulatory scrutiny is the type of open, public, low-value “immaculate ICO” that Ethereum had even possible?

Is the type of non-whale influenced proof-of-work coin distribution to cipher punks and true believers that Bitcoin had even possible when Wall Street and Sandhill are watching?

I have my ideas, but no one knows for sure how it’ll play out.

I do know this: economic bandwidth scales on the social layer.

And without economic bandwidth our crypto systems aren’t truly scalable.

Trillions in trustless economic activity will require trillions in economic bandwidth.

Money, store-of-value assets, reserve assets, whatever you want to call them—the high powered collateral assets like ETH and BTC are essential. They have to grow massively in value for this whole open finance thing to work.

Let’s pay more attention to our economic bandwidth.


  • Consider: how does the economic bandwidth of crypto systems scale?

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Filling out the skill cube

The concept of economic bandwidth is in the money layer of the skill cube. The assets in this layer comprise the biggest portion of a typical crypto money portfolio.

Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.

Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

How to make money on Uniswap

Unstoppable Liquidity (Market Monday)

Weekly Action Recap (Dec 1st)

Your action recap for the week of December 1st, 2019

Level up your open finance game three times a week. Subscribe to the Bankless program below.

Dear Crypto Natives,

A good week of level-ups:

We saw how technology is never the final settlement layer—there’s a deep social layer underneath these crypto machines.

We learned how to avoid doxing yourself when using crypto. (Read the rest of today’s recap for some awesome ant-doxing bonus tips from the Bankless community!)

We read Kain’s take on DeFi in ten years. A world where “capital is deployed in an instant to wherever it is most needed with almost zero barriers.”

Oh and I saw a demo for a new money protocol I’m really excited about. Not saying a word yet but Bankless subscribers will be first to hear about it in a week or two—I’ll include a tactic for ya. Stay tuned.

Now let’s do the recap!


Recap for the week of December 1st, 2019


3 BONUS TIPS on how to use crypto without doxing yourself

The Inner Circle came up with these fantastic supplemental tips on how to avoid doxing yourself in addition to the 4 we already talked about—here they are:

  1. Obfuscate the transaction amounts when you wash them. If you send an easily identifiable amount (like 11.43118754 ETH) into Coinbase and then out of Coinbase to another account, split or combine amounts (potentially from a few different accounts) it’s easy to track on chain.

    To avoid this:

    • Split or combine amounts (potentially from a few different accounts)

    • Add some delay between sending into an exchange and sending out

    • Consider pre-washing some funds for emergencies—potentially to catch a dip on a project you want to invest in. Waiting until the last minute could cause you to slip-up and dox yourself.

  2. Don’t forget—you can’t wash NFTs. Consider an ENS name. If you were to register a domain name through an unwashed Ethereum address that could be associated to your cold wallet then there’s no good way to un-dox yourself. Right now there are no ways to erase NFT owner history or transfer NFTs privately. Known tricks like routing funds through exchanges or using mixers like Tornado don't apply here.

  3. Check your addresses using Ethtective. Plug in an address you’d like to check here. It will show all other addresses linked to that address. Use it as a tool to ensure make sure your addresses are properly washed.

I’ve added these to the tactic for your reference.

If all this seems like a lot—don’t worry. It will get easier. We’re the vanguard remember? Beta testing this new financial system for the world.


  1. Execute any good market opportunities you saw in Market Monday

  2. Complete weekly assignment: convert crypto to a tax-advantaged account

  3. Learn and implement the 4 steps for good crypto address hygiene

  4. Review the 3 Bonus Tips to avoid doxing yourself (see end of article)

  5. Consider: will DeFi become more efficient than traditional finance?

Subscribe to the Bankless program. Inner CircleDeal SheetBonus content. Costs less than a coffee per week. Don’t invest in crypto until you invest in yourself.

Pay with cryptoyou can pay using ETH, BTC, or USDC. Annual subscription only.

Tag me on twitter when you subscribe & I’ll deliver 3 x 🔥

Cool to see Evan giving out a Bankless subscription! (subscribe to WiE btw)

Don’t forget…you can check the archive and get caught up anytime

Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.

Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case

DeFi in Ten Years

Kain Warwick of Synthetix on how DeFi might evolve over the next decade

I’m sending this thought piece to everyone—including free subscribers. If you’d like to receive future Thursday Thought Pieces then subscribe to the program as a paying member now.

Dear Crypto Natives,

As we prepare to enter 2020 it’s a good time to zoom out and go big picture. So I asked Kain Warwick of Synthetix to give us his thoughts on DeFi in 10 years.

Is DeFi capital coordination more efficient than the firm?

Will DeFi completely replace finance or will we get a hybrid?

What are the superpowers and shortfalls of money protocols?

He answers those questions in today’s thought piece. He also gives one of the best definitions of DeFi I’ve seen (I bolded that part so you don’t miss it).

As one of the few crypto projects that has successfully pivoted Kain provides a unique perspective on the future of DeFi—grounded and pragmatic, yet visionary.

Enjoy today’s Thought-piece!


P.S. Tomorrow’s weekly recap will include some extra anti-doxxing tips—the community came up with some awesome ones in the Inner Circle after Tuesday’s tatic. Watch for it!

P.P.S. Check out the How to make money on Synthetix tactic if you missed it


DeFi in Ten Years

By Bankless contributor: Kain Warwick - Founder Synthetix

It’s very tempting when asked what DeFi will look like in ten years to simply say “finance”. I think this answer misses the mark on two dimensions. The first is time. Scientific and technological revolutions take a long time, much longer than anticipated by early adopters. The thinking often goes, “This technology is just so self evidently superior how could everyone not switch?” but changing entrenched behaviour is hard and so transitions typically take decades not years. 

The second dimension is the lack of clarity as to whether decentralised coordination can more efficiently allocate capital than the status quo, and thus replace it. Finance is essentially the coordination of capital allocation to where it can most efficiently be used. Over the last five hundred years firms have become the preeminent capital coordination method of choice for modern societies. DeFi offers a compelling alternative to this model for a number of reasons but it is not clear yet that it is capable of replacing every aspect of the existing financial system.

I believe that it will ultimately replace most financial coordination games, or at the very least force them to evolve into a new hybrid form that leverages the best aspects of DeFi and CeFi. The most critical reason I think this will be the case is that efficient allocation of capital requires competition, in markets with low or no competition efficiency tends to be poor. DeFi is is a hyper competitive alternative to corporate capital allocation. DeFi lowers barriers to entry for market participants and simultaneously increases the efficiency of competition between market participants to a new level. DeFi means more competition, and better competition, which results in far more efficient markets.

The most efficient lending market imaginable

To illustrate these two points, let’s look at Compound, a decentralised lending protocol. The Compound protocol is a permissionless marketplace for lending. The barriers to entry are effectively zero. The rules for participants are clear, predefined and immutable. Apart from a current structural limitation in loans needing to be overcollateralized, Compound represents probably the most efficient lending market imaginable. Anyone anywhere in the world with capital can allocate it to Compound where anyone anywhere in the world can access it. This is very different to a traditional lending marketplace, where several firms compete with each other to efficiently source capital and then allocate it. In that model there are extremely high barriers to entry for both lenders and borrowers. So the majority of the competition is between a small number of large firms. There is some minimal intra-firm competition between salespeople and other employees in these firms trying outcompete their peers, but this is highly structured. In Compound you can have millions of sources of capital directly competing to allocate capital, and then at a higher level you will have other lending protocols competing to access these capital sources creating even more competition, so clearly the DeFi lending space is going to result in both more market participants and higher levels of competition between them. We are seeing glimmers of this already today.

However, the incumbent lending corporations have a significant advantage in that they have more information about lenders and can rely on the legal system for enforcement of debts, so they can offer low or no collateral loans which vastly expand their addressable market. So the current structural inefficiency in decentralised lending protocols will reduce the impact on lending markets until these inefficiencies are removed or reduced.

What’s missing from DeFi today?

Which brings us back to our original question, is it even possible to remove the structural inefficiencies that hold back DeFi? Crypto protocols operate in an environment where anything permitted by the system will likely happen. In traditional lending markets enforceability of contracts is reliant on the legal system, which is ultimately reliant on people with guns and cages. If DeFi can’t use guns and cages to enforce the rules, can it efficiently implement undercollateralized loans? And if not, what does this imply for the evolution of lending in DeFi? My sense is that it can but there are pieces missing such as decentralised identity, privacy in DeFI is another barrier.

In spite of these challenges I believe DeFi will continue to create new hyper-efficient markets, but so long as these structural inefficiencies exist DeFi will operate in parallel to traditional finance. Most of the challenges facing DeFi today will be resolved and it a proliferation of DeFi protocols will enable far more efficient capital allocation. The question then is, what will this look like and what will the impact be?

Trustless protocols with predefined rules

To project how DeFi will evolve we need to understand how these protocols function at a fundamental level and what types of capital coordination are best suited to be decentralised. Let’s use Uniswap as an example. Uniswap is a decentralised exchange that allows anyone to trade ETH and ERC20 tokens. Where most DeFi exchanges attempt to replicate the order book model seen in traditional trading venues, Uniswap leverages the trustless nature of Ethereum to enable anyone to pool capital to provide liquidity. You don’t need sophisticated tools or software you just need capital. You can pool your capital with others to provide a service (liquidity) to market participants and are paid based on your contribution. To understand how powerful this is new coordination pattern is let’s try to form a generalised description of a DeFi protocol.

DeFi is the replication of existing financial services by creating trustless protocols with predefined rules that allow open participation, where consumers of these services pay fees which are automatically distributed to protocol participants.

This definition doesn’t capture services like InstaDapp, DEX.AG and nor does it capture wallets and other user facing infrastructure. But I do believe it captures the likely path for the underlying protocols, but again this process is early and a lot of experimentation is happening.

In practice this means you no longer need a firm to coordinate capital allocation — a protocol can replace it. This lowers barriers to entry, as participation is open to anyone who abides by the rules. It also increases efficiency because the rules are enforced by the contracts rather than the legal system, ideally lowering risk and enforcement costs. It doesn’t reduce the barriers to entry for creating a new protocol though. Those can still be high, probably the most important though, is liquidity. But fundamentally competition and the open source nature of these protocols will continue to enable experimentation.

The challenges for new protocols

Liquidity will remain as the predominant challenge for new protocols, even the oldest and most well known like Augur and 0x struggle with liquidity today. There is some progress being made implementing cryptoeconomic incentives to bootstrap liquidity, but there is still a requirement for initial capital. Unfortunately this process has been recaptured by venture capitalists due to the failure of the ICO boom in the last market cycle. Which was more due to implementation issues than conceptual ones. DeFi in order to thrive needs to find a way to allocate capital to new protocols that creates strong alignment across all parties. There is some success here already with protocols like Nexus Mutual. Like DAO’s in 2019 I believe decentralised investment will make a resurgence at some point in the next ten years with ideally more structure and alignment between teams building protocols and those bootstrapping them with early capital. This is highly speculative and it’s possible the previous paragraph will not age well for any number of reasons. But it is hard to see how we can truly fulfill the promise of DeFi without alleviating the need for each new DeFi team to decamp to Sand Hill Road for a week. Until that is the case a significant barrier to entry will remain and reduce competition.

The implications of composability

The final aspect of DeFi to consider is the implications of composability—the ability to connect DeFi protocols permissionlessly. The ability to combine two distinct services to get a novel third service obviously exists today—firms form partnerships and joint ventures all the time, but these structures take months or years to be finalised. With DeFi we see protocols merged over a weekend at a hackathon. Probably the best example of this is InstaDapp, which created a bridge between Maker and Compound, two lending protocols, and in so doing increased the efficiency of the entire lending market, in a weekend. This is truly uncharted territory, and one of the aspects of DeFi that is hardest to predict the implications of. What is already clear though is some of the most exciting products and services will be created through combining two or even more protocols into a single interface to offer a new service for users.

A new era

There are significant challenges and uncertainty surrounding this financial revolution, because we are so early. But the promise of success is too large to demure. DeFi has the potential to usher in a new era of productivity as every single human in the world is onboarded and connected to sophisticated financial infrastructure and capital for the first time in human history. It is truly impossible to imagine the impact of a world where capital is deployed in an instant to wherever it is most needed with almost zero barriers. That vision is why we are here, so that we can hopefully live to see it as reality.


  • Consider: will DeFi become more efficient than traditional finance?

  • Consider: what’s holding DeFi back today—can these barriers be overcome?

Subscribe to the Bankless program. $12 per mo. Includes Inner Circle & Deal Sheet.

Author Blub

Kain Warwick is an entrepreneur and the Founder of Synthetix a money protocol for minting and exchanging synthetic assets based in the Ethereum economy. I appreciate Kain’s pragmatic yet idealistic approach to DeFi and it shows in his work—Synthetix is the first successful protocol pivot I’ve seen in the DeFi space—the Binance of DeFi as I’ve called it.

👉Send Bankless a DAI tip for today’s issue

Filling out the skill cube

Focus today was on money protocols—these DeFi protocol sit on top of the crypto money layer of the skill cube. Another Thursday another level-up!

Not financial or tax advice. This newsletter is strictly educational and is not investment advice or a solicitation to buy or sell any assets or to make any financial decisions. This newsletter is not tax advice. Talk to your accountant. Do your own research.

Disclosure. From time-to-time I may add links in this newsletter to products I use. I may receive commission if you make a purchase through one of these links. I’ll always disclose when this is the case.

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