Original Title: Low-risk DeFi can be for Ethereum what search was for Google

Original Author: Vitalik

Original Translation: CryptoLeo, Odaily Planet Daily

For a long time, the Ethereum community has faced a significant contradiction: the conflict between applications that can bring in enough economic activity to sustain the entire ecosystem, whether maintaining the value of ETH or supporting the value of individual projects, and applications that fulfill the original vision of Ethereum that people joined for.

Historically, these two categories have been very disconnected: the former being a combination of NFTs, Memecoins, and a form of DeFi supported by temporary or recursive power: people acquire protocol incentives through lending or form a circular argument: "ETH is valuable because people use the Ethereum chain to buy, sell, and leverage trade ETH." At the same time, there are also non-financial and semi-financial applications (such as Lens, Farcaster, ENS, Polymarket, Seer, privacy protocols) that are very attractive but have low usage, or users spend too little money (or other forms of economic activity) to sustain Ethereum's $500 billion economy.

This disconnect has led to many conflicts in the community, and most of the community's motivation is based on a theoretical hope that an application that meets both of these conditions at the same time could emerge. In this article, I will argue that as of this year, Ethereum has such an application, which is to Ethereum what search is to Google: low-risk DeFi aims to achieve democratized access to globally valuable asset classes (such as major currencies with competitive rates, stocks, bonds) for payments and savings.

Image Source: Aave

The analogy between Ethereum's low-risk DeFi and Google search is as follows. Google has made many interesting and valuable contributions to the world: the Chromium browser series, Pixel phones, AI work including the open-source Gemini model, the Go language, and more. But in terms of revenue generation, they are not highly profitable, and may even be losing money. Conversely, Google's largest source of revenue is search and advertising. Low-risk DeFi can play a similar role for Ethereum. Other applications (including non-financial and more experimental applications) are critical to Ethereum's role in the world and its culture, but they do not need to be seen as sources of revenue.

In fact, I hope Ethereum can do better than Google. Google is often criticized for losing its way and becoming like the antisocial profit-maximizing companies it seeks to replace. Ethereum's decentralized ethos is deeply rooted in both its technical and social dimensions, and I believe low-risk DeFi use cases establish a strong alignment between "doing good" and "doing well," a consistency that is absent in the advertising space.

Why Low-Risk DeFi?

When I say "low-risk DeFi," I mean basic functions such as payments and savings, as well as easy-to-understand tools like synthetic assets, full-collateralized borrowing, and the ability to exchange these assets.

There are two reasons to focus on these applications:

These applications provide Ethereum and its users with irreplaceable value;

These applications culturally align with the goals of the Ethereum community, whether at the application layer or in the technical properties of L1.

Why Does DeFi Have Value Now?

Historically, I have been skeptical of DeFi because it seemed to not offer any substantial service; instead, its main "selling points" seemed to be making money through highly speculative token trading (Ethereum's highest daily transaction fee income came from a poorly designed BAYC otherdeeds auction) or earning 10% to 30% returns through liquidity mining incentives.

One reason for this situation is regulatory barriers. People like Gary Gensler should be heavily criticized because they have created a regulatory environment where the less useful your application is, the safer you are; the more transparent your actions are, the clearer the assurances you provide to investors, the more likely you are to be seen as a "security."

Another reason is that in the early stages, the risks (protocol code vulnerabilities, oracle risks, general unknown risks) were too high, making more sustainable use cases difficult to achieve. If the risk was high, the only applications worth adopting had to be high-return applications, which could only come from unsustainable subsidies or speculation.

However, over time, protocol security has gradually improved, and risks have decreased.

(Ethereum DeFi Decline)

DeFi attacks and loss events continue to occur. However, these events are gradually being pushed to the ecosystem's more experimental and speculative fringes. Currently, more robust core applications are emerging, although unavoidable tail risks still exist, but TradFi also has such tail risks—given the increasing global political instability, for many people globally, TradFi's tail risks now exceed DeFi's. In the long run, the transparency and automated execution of a mature DeFi ecosystem are expected to make it more stable than traditional finance.

All of this is especially relevant to which "Long-Tail Serpent" type of users? Essentially those who want to enter the global market, buy, hold, and trade mainstream assets within it, but for whom there is no reliable traditional financial channel to achieve these goals. Cryptocurrency cannot sustainably generate higher returns, but it does have a magical quality that allows existing economic opportunities on a global scale to be accessed without permission.

Why does Low-Risk DeFi culturally align with the Ethereum Community's goals?

Low-Risk DeFi has several excellent features that make it an ideal choice:

- By using ETH as the collateral asset and paying high Gas fees, it has economically contributed to the Ethereum ecosystem and tokens;

- It has a clear, valuable noble purpose: to enable people to interact economically and accumulate wealth globally through permissionless and mechanism-based approaches;

- It does not bring undue incentives to Ethereum L1 (e.g., over centralization for the sake of high-frequency trading efficiency, which is more suitable for L2);

These are some very good attributes.

Returning to the Google analogy, a major flaw in its incentive alignment mechanism is that ad revenue drives companies to collect as much data as possible from users and retain ownership of that data. This contradicts the open-source and positive-sum spirit historically held by the incentives it idealized. For Ethereum, the cost of such inconsistency is even higher because Ethereum is a decentralized ecosystem, so any Ethereum activity cannot be a backstage decision of a few, it must act as a cultural focal point to be feasible.

A revenue-generating project is not necessarily the most innovative or exciting application of Ethereum, but at least it is not ethically or embarrassingly unattractive. If the largest application in the Ethereum ecosystem is a political meme coin, then you cannot seriously say that you are interested in this ecosystem. Low-Risk DeFi aims to achieve global permissionless payments and optimal savings opportunities, a financial form that is actively changing the world, as many people in globally impoverished areas can attest to.

What Can Low-Risk DeFi Evolve Into?

Another important feature of Low-Risk DeFi is that it can naturally synergize with many future, more interesting applications or evolve into these applications. For example:

Once we have built a mature financial and non-financial activity ecosystem on-chain (see: Balaji's ledger concept), exploring reputation-based, low-collateral lending becomes meaningful, which could become a more potent driver of financial inclusion. The Low-Risk DeFi and non-financial technologies (such as ZK identity proofs) we are building today all contribute to achieving this goal.

If prediction markets become more mature, we may start to see them used for hedging. If you hold stocks and believe that a certain global event on average is likely to cause the stock price to rise, and if there is liquidity and efficiency in prediction markets regarding that event, then betting on that event can be a reasonable statistical hedging strategy. Having prediction markets and traditional DeFi running on the same platform will make participating in such strategies easier.

Low-risk DeFi is often designed to make it easier for people to obtain dollars. However, most people entering the cryptocurrency space are not here to drive dollar adoption. Over time, we can begin to pivot the ecosystem towards other stable forms of value: a basket of currencies, "stablecoin-like," "personal token" projects based directly on consumer price index, and so on. The low-risk DeFi that we are building today, along with more experimental projects like Circles and various "stablecoin" projects, is all aimed at making this outcome more likely.

For all these reasons, I believe that, compared to Google's search and advertising business, focusing more on low-risk DeFi can economically help us better sustain the ecosystem while maintaining cultural and values consistency. Low-risk DeFi has already been supportive of the Ethereum economy and is synergistic with many more experimental applications people are building on Ethereum, a project we can all be proud of.

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