On June 26, 1974, several American banks transferred Deutsche Marks to Herstatt Bank intending to receive the corresponding value in US Dollars in a forex transaction. However, on that same day, German regulators revoked Herstatt Bank's banking license, making it unable to transfer the US dollars it owed to its counterparties.

The American banks were, as such, left with nothing. Not even their Deutsche Marks which they intended to sell. One leg of the transaction went through, but due to unforeseen consequences, the other side did not.

This risk is now often referred to as Herstatt risk.

What's the lesson here?

If Ethereum existed in 1974, this would not have happened. Herstatt Bank would have been able to do an OTC swap using an escrow smart contract, swapping tokenized DM for USD atomically such that either the entire transaction goes through or not at all.

A basic escrow contract is displayed below (written in two minutes, not production-ready.) But it serves to illustrate what we have done, which is about as much of an improvement to the traditional financial system as the invention of the legal system for dispute resolution: people and institutions can minimize the amount of trust they place in their counterparties.

/// @title Escrow
/// @author Ethereum Intern
/// Basic escrow contract.
contract Escrow {
	address p1;
	address p2;
	address t1;
	address t2;
	uint256 v1;
	uint256 v2;
	bool swapped;

	constructor(address _p1, address _p2, address _t1, address _t2, uint256 _v1, uint256 _v2) {
		(p1, p2) = (_p0, _p1);
		(t1, t2) = (_t1, _t2);
		(v1, v2) = (_v1, _v2);
	}

	function swap() {
		require(!swapped);
		require(IERC20(t1).transferFrom(address(p1), address(p2), v1));
		require(IERC20(t2).transferFrom(address(p2), address(p1), v2));
		swapped = true;
	}
}

The story of mankind is that of increasing coordination.

Early hominids evolved collaborative foraging strategies that required complex coordination, even before reaching what we would call general intelligence. This caused a selection for hominids capable of complex coordination, resulting in the evolution of skills such as pointing, gesturing and even language.

Hunter-gatherer societies, initially non-hierarchical small groups, took on a more structured character as they became larger.

In the beginning, leadership and decisionmaking was done informally based on age, skill or situational expertise, however this became unscalable quickly when societies grew. Formal hierarchy allowed for coordination on decisionmaking and resource allocation. This grew into tribes, chiefdoms and eventually full nation-states, this tendency of rising governance complexity further strengthened by the advent of agriculture.

By the 19th century, coordination had found various new subtrates. The railroad and the telegraph decreased the time taken to travel and communicate. Standardized time zones, timetables, and eventually the modern joint-stock corporation, a legal fiction designed to coordinate labor, technocapital, and information at scales larger than any single human lifespan.

Alongside it grew financial systems to allocate resources, first built on pure trust and then on a mixture of reputation backstopped by the State-provided dispute-resolution mechanisms (the legal system). Stock markets, along with bonds, mortgages, futures, options, more derivatives, more new types of tradable instruments that at a glance seem like mere flights of folly. Yet, this is not optional: it is the coordination layer of capitalism, in the limit directing money (tokens which represent actually desirable wealth) to more productive uses.

Let's fast-forward a few years to the 1990s. With the rise of personal computing also came a new group of people, mostly anarchists who saw this new technology as a means of liberation and as a weapon against the State. They protested against the US government's attempt to regulate strong encryption as a munition by showing its absurdity: printing it on t-shirts, sending copies of PGP between web servers to violate export control laws, et cetera.

When not fighting for the right to do certain types of mathematics, the cypherpunks theorized about a battle against the State conducted over the Internet, with agorist markets appearing in the dark, hiding from government regulation and providing safe spaces for conducting voluntary transactions.

Computer technology is on the verge of providing the ability for individuals and groups to communicate and interact with each other in a totally anonymous manner. Two persons may exchange messages, conduct business, and negotiate electronic contracts without ever knowing the True Name, or legal identity, of the other.

-Timothy C. May, The Crypto Anarchist Manifesto

Eventually, they won the Crypto Wars in court, where the Supreme Court ruled that this was a violation of the 1st Amendment and therefore unconstitutional. After this final victory, the cypherpunks fizzled out as a group, its members mainly joining the cryptography mailing list.

Yet in 2009, in the aftermath of the Great Financial Crisis, an entity known only as "Satoshi Nakamoto" emerged with an elegant solution to the problem of decentralized electronic money on the cryptography mailing list. He called it "Bitcoin": a coin based on a ledger backed by computational work performed.

Thus began cryptocurrency, the modern heir of the cypherpunk movement.

But one need only look at what power and capital monopolies seek to prevent to understand what is key to liberating the democratic nation.

They are going to regulate crypto which allows any person to send crypto to any person anywhere on the planet. Or to establish private organizations that are self-governed. This destroys all proprietary models of the power and capital monopolies.

Crypto will split into two. RegFi will be unusable and bolted down. It will be toothless. The other side will be the underground DarkFi. It will have bite.

-unknown, DarkFi Manifesto

There is currently a tendency across Western countries to become more authoritarian in response to public discontent about failing policies, worsening living conditions, high inflation, low job markets, et cetera.

Welfare states in decline try to hold on to their power and wealth for as long as possible, usually leading to authoritarian and confiscatory policies to finance rising public spending, accelerating a movement of capital away from them and to freer countries. We see this in the United Kingdom, the European Union, France and even (to a lesser extent) in the United States.

At the same time, we also observe a shift to the digital over physical: the libertarian / cypherpunk dream of stateless electronic money and online free markets is forming in front of our eyes, the greatest intellectual minds of our generation disseminate their knowledge in cyberspace away from traditional media, revolutions are organized online, politics has gone online, most of the youth spend time in the Wired than in meatspace and identify with online communities more than the nations they reside in.

We are witnessing the clash of Leviathans, the ideas of the State and the Network colliding. In some cases, the State wins. In others, the Network does. Yet, tthe proportion of memetic battles won by the Network is rising.

Three points:

(a) The Network is rising in power, while the American world order is in decline, and as such,

(b) global finance will move to credibly-neutral rails not tethered to any specific nation,

(c) leading to a new, maximally-permissionless onchain global financial system.

Ethereum is the only chain positioned to eat the world. The dollar will become worthless in 20 years, and what will replace it will either be ETH or built on Ethereum. After all, Bitcoin is incapable of serving as a global money due to security budget and scalability issues, and based on its current inertia this is not expected to change any time soon, plus the lack of Turing-complete smart contracts.

We already have new sovereign corporation-like entities tolerated by governments, such as Aave and Sky (though Sky is less cypherpunk now), which are a new class of organization, digital-first entities. And unlike traditional corporations, the assets are held by digital contracts rather than physical ones.

We are providing financial services that are easier and cheaper to use, allowing individuals to save and spend not in their local currencies but use any currency they prefer.

We must embrace anarchist praxis even if you believe anarchism is retarded because that is the only way to maintain cypherpunk values in a way that won't easily be coopted by the current regime. For example, similarly to how it is possible to have encryption with state backdoors yet it is not done, we should not aim to normalize compliance in DeFi. Governments must bend the knee to Ethereum, not the other way around.

Ethereum is a global, unstoppable, credibly neutral financial coordination mechanism for human flourishing.

The trajectory is clear and our victory is predetermined. All we can do is to make it go faster.

3 → ∞