Ethereum, the world computer that will enable the web 3.0

Currently, Ethereum is the second most valuable cryptocurrency in the world with 69 billion Euros worth of Ether in circulating supply. That means Ethereum has a lot of monetary value, but honestly, who cares about another huge market cap? Set aside the ridiculous amounts of money invested in Ether, and what is left are the truly exciting possibilities the Ethereum network opens up. Ethereum’s technology with its new ways of computing are astounding and below I’ll try to explain a little bit about why that is and how it works.

Vitalik Buterin

To understand Ethereum we briefly have to talk about Bitcoin. In 2008, a white paper called “Bitcoin: A Peer-to-Peer Electronic Cash System” was published by an unknown author under the pseudonym Satoshi Nakamoto. Bitcoin was published as open source software and quickly the Bitcoin network was up and running. Bitcoin is a digital currency, that uses a global network of computers to maintain a shared ledger, called a blockchain. The blockchain keeps track of who owns which Bitcoin. It is a decentralised, peer-to-peer, digital currency. To use Bitcoin there is no need for a central authority, an intermediary, or a bank. Bitcoin is censorship resistant, tamper-proof, economically secure, and has a decentralised consensus process (which in itself is a revolutionary concept).

Soon after Bitcoin came online, people realised that blockchain technology could not only facilitate the exchange of monetary value, but you could theoretically exchange anything of value. So, in 2013, a 19-year old genius called Vitalik Buterin published the Ethereum white paper  “A Next Generation Smart Contract and Decentralized Application Platform”. In it he proposed an open source platform that would enable programmers to build blockchain applications that could facilitate the exchange of money, content, property, shares, you name it. In its core Ethereum is a protocol, which means it proposes the rules for information exchange.

Vitalik Buterin

Smart Contracts

The logic that programmers can build on top of Ethereum is called a smart contract. These smart contracts are executed automagically based on real world data. Think of them as If-This-Then-That statements. An example: Let’s say two parents want to add funds to their kids’ savings account every month until he or she is 18-years old. This can be added in a smart contract really easily; IF it is the first day of the month, THEN transfer x-amount to said kids’ wallet, IF kid is ≥18, THEN stop executing. This will then run automatically on the Ethereum blockchain.

These smart contracts are censorship resistant, immutable, and publicly verifiable. That means that no central authority can suddenly change the rules, no single party can change the conditions, and anyone can verify that the contract is in place. Now imagine what else can be automated and decentralised this way. Think about rent payment, insurance contracts (including pay-out), asset management, supply chains, certificates, identity, and real estate. Until now, a lot of the processes behind these examples depend on manual interactions. Person A has to email or call person B, person B has to get approval from person C, all the while person A is waiting (days or even weeks) for a confirmation or payment. With smart contracts, slow and expensive middle men are no longer a necessity, and dangerous and powerful central authorities are being cut out. Smart contracts on a public blockchain create trust-less exchange of value, between any two parties in a peer-to-peer network. I know it is hard to imagine now, but this will change our society in every single way. This is an invention that will touch the core of our human civilisation and what it means to be human.

“A consensus-based, globally executed virtual machine” – Vitalik Buterin

Ether

The programmability of Ethereum is extensive and the network is Turing complete, meaning that any reasonable computational problem can be computed by the Ethereum network. Simply put, anything you would like to compute, any program you can think of, can be translated and run on the Ethereum network. Compute power on the Ethereum network is payed for with Ether. In other words, Ether is used as fuel to pay for using the Ethereum blockchain, for instance to send a smart contract to the blockchain or to execute the smart contract. The price of executing a function on Ethereum is literally called gas and is calculated in small amounts of Ether. Ether (ETH), can of course also be used as any other cryptocurrency, but it primarily functions as gas to fuel the Ethereum network. Because of speculation and enthusiasm about future applications being built on the Ethereum network, the price of Ether has gone up like crazy in the past year.

Ethereum price chart

dAPPs

Applications that use smart contracts and run on Ethereum are called dApps: decentralised Apps. Anyone can build a dApp and distribute it anywhere. Actually, there are already several dApps in the iOS app store, like Toshi, uPort and imToken. These dApps look and feel like normal apps on an iPhone, but they connect with the Ethereum network. The key here is that dApps will enable using the Ethereum blockchain in such a native and normal way, that the average person using the dApp does not notice any difference compared to traditional smartphone apps. However since dApps run on a distributed blockchain, there is no central point of attack for hackers, which adds tremendous security to these applications. Put all the above information together and you can think of Ethereum as the app-store for the web 3.0.

Tokens

So now that you roughly understand what Ethereum is, what smart contracts are, how Ether functions as gas for the network, and that dApps run on top of this network, let’s talk about another interesting part of Ethereum: Tokens. You can think of tokens as separate cryptocurrencies, which are part of a smart contract. Often dApps will use their own token to facilitate a function within the ecosystem of the dApp. A good example would be going to a festival, where at the entrance you can exchange your cash for festival coins against a small fee (gas). Then, in the ecosystem of the festival these coins (or tokens) function as a currency, since they facilitate you paying for drinks or food. Another example is chips at a casino, but tokens can have many more complex features.

Right now there are already hundreds of different tokens, like BAT, SUB, REQ, TRON, SPANK and BLOOM. Take Basic Attention Token (BAT), BAT is trying to solve the problem of annoying online ads by paying content hosts (for example the website of your favourite news channel) directly. That way, a user can load some BAT tokens in a wallet in their browser and pay the content host via BAT micro-payments, and thus remove obtrusive ads. Spend more time on that site, and the content hosts receives more BAT. You can even block sites from receiving payments if they behave wrongly (a good economic incentive to behave) and you can send more to other sites if you like. Since Google and Facebook alone receive 80% of all global ad revenue online, monetisation via BAT (direct payments from reader to supplier) can finally offer a good alternative to ads. Sounds like heaven? Check out Brave browser who already supports this as we speak.

Remember, these tokens are a cryptocurrency in their own right. They can be traded freely, you can buy or sell them on a ton of different exchanges, and you can trade them peer-to-peer. Because most tokens have a fixed supply, meaning there will never be more than a certain amount, there is a fair bit of speculation about their value. Ultimately, you could buy tokens at a low price now and profit from their rising values in the future (hello Bitcoin). The decisions on which tokens to buy could rely simply on speculation, or for example on the development team which is doing an amazing job and you believe in the functional value of that token. But how do you get these tokens into circulation?

ICO’s

Let’s say you’re working on an awesome idea for a dApp, but you need some funding to take it to the next level. Initial Coin Offerings (ICO’s) are a great way to achieve this. During a ICO, you offer your tokens to the public. This is how investors or enthusiasts get an early opportunity to purchase tokens before the final product has been built, often for a very low price, hoping that the project will be successful and the value of the token will increase in the future. Obviously, this is a very risky thing to do. You have to poses some technical knowledge to asses the viability of a project and to see how far they have come already. But on the other side, it also offers a great way for developers to get access to funds without having to find venture capitalists, which is extremely hard to do and often means exchanging a part of their stake in return for funds.

ICO’s created a new and exciting fundraising mechanism that has gained a lot in popularity this year. It offers a very democratic way of investing in technology. Anybody, rich or poor, from anywhere in the world can now invest in an idea. But because of the influx of large amounts of money, there are many people that will try to scam others. They will host a site with a great story, some flashy visuals and a slick team. However, when you dig deeper it turns out the team doesn’t exists or is working on something else, the product isn’t even in the early stages of being made, or the smart contract (that is supposed to automagically return your tokens when receiving Ether) is nowhere to be found. So please be extra careful when looking at ICO’s, they can be great fun, but do your own proper research. Only invest in technology that you understand.

Bugs

Keep in mind that Ethereum is a very young technology, and even though a lot is being built on the network already, there are still dedicated developers working on further development of the core of Ethereum. Code can contain bugs and thus problems have, and will, arise. For example, recently because of a mistake in some code, a large sum of funds were locked up in a broken smart contract. Of course this is unfavourable and leads to skepticism, but the amazing thing is that Ethereum is fully open source. Anybody can review the code and anybody can help improve the network. Also, there is no CEO of Ethereum, nobody is in charge of the process. Vitalik, because he is the founder and a genius, has a lot of weight in the community, however if enough people don’t like a certain direction Ethereum is headed, they can fork the code and continue on their own path.

“Ethereum aims to take the promise of decentralisation, openness and security that is at the core of blockchain technology and brings it to almost anything that can be computed.”
– Vitalik Buterin

In another post I will discuss the practical implications of Ethereum and explain why I think Ethereum, and cryptocurrencies in general, will have a profound impact on our societies, on governance, on politics, on law, on monetary policies and on social constructs in general. Especially in these times of bought media influence, world wide corruption and crumbling net neutrality, the power of Ethereum as a decentralised, global network of computers, is unprecedented.