Ethereum — The machinery of change
Foreword — How Ethereum will impact our lives
You wake up, and see that $17.27 was automatically deducted from your primary wallet, as you had authorized to happen every day, to pay the rent for your apartment.
If you cancelled the authorization, then after a warning period ownership in the land registry contract would automatically transfer back to the landlord and the door lock would no longer recognise signatures signed by your smartphone’s private key as valid for letting you in. Of course, your landlord is bound by the same restrictions — if he shuts off his account paying the local government $6.60 land value tax per day, then he loses ownership and the contract automatically switches over so you are renting from the government instead. The government itself is simply a large decentralized organization, and you can see in real time the $6.60 moving on the blockchain and eventually getting into an account to pay for a medical research program trying to extend the human lifespan from 170 years to 230.
The internet that you are using to access this information is based on OpenGarden, which by then is a mature decentralized and incentivized mesh networking platform; you also paid $0.0009 to access the information, but your laptop also earned $0.0014 transmitting other people’s packets at the same time.
You then get up, and get into your Mastercar self-driving car to go to work. Originally, all self-driving cars were made by Google, but Master Corporation, a decentralized autonomous entity that automatically uses a combination of futarchy and liquid democracy to determine how the company should spend its funds each day, proved that its governance mechanism was so efficient that it overtook Google on some core services within three years, and alt-Mastercorps took over most of its other operations.
You get in, and Mastercar runs a optimized version of the A* search algorithm (for which James Wilbur automatically got a bounty of $782,228 worth of MSC from the Master Contract) to determine the optimal path to your primary workplace. Given that your self-tracking app has detected that you value your own time (or rather, the delta between time spent in a car versus time spent at home or work) at an average of $14.18 per hour, the Mastercar’s algorithm chooses a route which takes an extra 11 minutes in order to avoid road tolls and also on the way move a shipment from one side of the city to the other.
You drive out, and 30 minutes later you have spent $1.04 on electricity for your car, $1.39 on road tolls, but receive a reward of $2.60 for moving the shipment over.
You arrive at work — a location which is a hybrid living/working space where “employees” of five different alt-versions of Master Corporation are spending most of their time, except that you chose to live at home because you have a family. You then get to work, running simulations of a proposed new scalability algorithm for the now community/DAO-driven Ethereum 6.0.
Vitalik Buterin, Reddit 2014 (edited)
Introduction
Less than four years ago this sci-fi scenario seemed distant both in time and space, yet in late 2017 Cryptocribs, Slock.it, Aragon, Colony, District0x, Bounty0x, Swarm City and Arcade City are already producing the majority of these technologies and services. The future is truly around the corner.
Ethereum’s popularity and market cap have grown exponentially thanks to the evolutionary blockchain design, the boundless innovation that it already allows, and by force of the people gathered around the Ethereum Foundation, Consensys and the Enterprise Ethereum Alliance, while three billion Euros raised in ICOs this year may have also captured some attention.
Governance
Large scale open-source software projects such as Linux and Bitcoin have historically been centred around their core developers and the people directly interacting with them, many of whom often advocate and vote on proposed changes publicly. Ethereum is largely similar and I will briefly introduce the key actors and provide a concrete example of governance during a crisis period.
Consensys and Enterprise Ethereum Alliance
Ethereum has had an entrepreneurial side from early on and Joe Lubin’s Consensys takes the lead in providing design and development of productised solutions and services with the best known project being Dubai Smart City.
Consensys acts as hub organisation around which multiple ventures from within the community have gathered to create shared commons and contribute open-source software infrastructure, while remaining otherwise independent from each other. Some of the best known products from Consensys, namely INFURA, uPort, Truffle and MetaMask are must haves for Ethereum developers and knowledgeable users while other products such as Balance3, OpenLaw, WeiFund, Boardroom and Ujo Music are ready for businesses today. Consensys Capital, the VC arm led by Kavita Gupta provides financing for groundbreaking blockchain companies.
Andrew Keys leads the EEA, bringing together industry knowledge with many high profile private sector businesses already enrolled. I had the pleasure of attending EEA’s first continental Europe meeting recently at ING’s offices and made a few notes on their positioning and concrete objectives that I will share another time. For now I will say that Enterprise customers have different requirements and there is no reason to expect the code bases to merge at any point in the future, but expect some valuable contributions from JP Morgan and ING.
Everyone involved in these organisations is influential in some form and will surely lobby for their interests and insights but there’s still a healthy demarcation between the business-focused and research-focused sides of the community.
The Foundation, the community and the hard-fork
The Foundation is led by Executive Director Ming Chang and Chief Scientist Vitalik Buterin and the team includes Vlad Zamfir, Karl Floersch, Ewerton Fraga, Christian Reitwiessner, Martin Swende, Viktor Tron, Yochi Hirai, Nick Johnson, Piper Merriam and others. Their focus is on scientific research and development, as well as promoting Ethereum itself at events and in numerous, great, blogs.
Thanks to a somewhat ASICs resistant Proof of Work algorithm, mining has been shared between hobbyists and professionals meaning that many in the community are directly invested in the project’s long term success. Adding one thousand plus developers and hackers who have started businesses or participated in building up the brand and developing critical tooling and services for Ethereum to uncountable crypto-traders makes for a vibrant and diverse bunch where a few crypto-sphere personalities developed a strong voice, and I’m including Vinay Gupta, Emin Gun Sirer, Luis Ivan Cuende, Andreas Antonopoulos, Juan Benet, Gavin Wood, Jason Teutsch, Peter van Valkenburgh, Philip Daian and countless others whose names elude both my memory and my browser’s history. This talented crowd can at times become quite vocal, but so far have only had one contentious hard-fork, the DAO.
The DAO incident was caused by a software bug on a smart contract and became the stress test for Ethereum’s governance model. Briefly, an attack on a contract holding 15% of total issuance at the time forced the community to hold series of votes until consensus was reached. Given the outcome, it hardly seems contentious now but the truth is this hard-fork marked a chain split with the birth of Ethereum Classic as a result.
Hard-forks are software updates that break backwards compatibility and there have been plenty of them, always openly discussed, diligently planned and executed by consensus. What sets the DAO fork apart is that part of the community saw the proposed solution as a bailout or worse, an attempt to rewrite blockchain-history. Several polling mechanisms were used in an effort to allow anyone holding Ether to vote on wether or not the fork should take place.
Transparency is really the game-changer and it’s possible to watch and participate in developer meetings live streamed on Youtube or interact with most of the core team on Reddit and Gitter. All software is open-source and Ethereum Improvement Proposals ( EIPs) are available on Github for open collaboration and discussion.
Ultimately, decisions relating to the public Ethereum blockchain are always taken by network consensus and voted upon by hashrate, node start-up flags, ETH balance (“skin in the game”) or some voting Dapp.
Monetary Policy
Proof of Work consensus rewards successful miners for their work but Ethereum has been moving towards a Proof of Stake algorithm since the beginning and this change will likely impact the current monetary issuance policy. I’ll briefly present the current approach and finish with a prediction of what might come after Casper.
Gas
Ether ( ETH) is the base token of the Ethereum blockchain and its current supply stands at about 96.1 million coins and has followed a predictable increase over time with tokens being issued to miners with each new block as per cryptoeconomic fundamentals, but it is not effectively hard-capped which leads many to discard it as a medium/long term investment.
An abundance of Ether is required for network security purposes and because the original use case is to act as the crypto-fuel needed to operate the Ethereum machinery, high prices could make deploying or interacting with a contract prohibitive in what would amount to some sort of economic attack to the network. This is managed by Ethereum’s issuance model and is often discussed.
Issuance Model
Ethereum’s issuance model accounts for roughly 1% inflation in supply year on year and aims at balancing out accidental losses or locked up balances in the network. It doesn’t quite make for a stablecoin mechanism because of the monetary inflation rate and relatively low transaction fees not matching market volatility.
Reductions in issuance are often discussed and as we stand today Casper’s adoption might first come through a hybrid model that guarantees existing miner’s investments are not discarded and provides a failsafe for network consensus.
Proof of Stake will bring the issuance rate towards zero, meaning that instead of relying on miners, the network will be kept safe by stackers who will lock up large amounts of Ether for periods of six to twelve months at a time so as to profit from block rewards and transaction fees collected. Moreover, potential attackers will have to hold large amounts of Ether themselves in order to perform a network attack which not only brings Ethereum’s cryptoeconomic security to a new level but also means that unsuccessful attacks will result in significant monetary losses for the attackers with Casper irreparably destroying the attacker’s Ether.
The idea of introducing scarcity mechanisms or “sinks” to reduce the total supply of Ether has been floated and is gaining significant interest. A sink could be compared to a “government tax” on the network, meaning that instead of transaction fees being payed to miners they would instead be burned out of existence. This will only be possible after the move to PoS is completed with the release of the Serenity protocol upgrade, forking from the current Metropolis chain.
If we trust free market dynamics to prevail, this should mean a reduction in circulating supply and monetary inflation should arise to match. #HODL
HODL
Bitcoin’s limited supply models gold-backed currencies or commodities and its easy to understand how BTC could gain value over time with coin losses, issuance reduction and adoption increase. Ethereum on the other hand is modelled after a gas-like utility and fundamentals such as business and consumer adoption, liquidity for ERC20 tokens and with other network’s tokens including Bitcoin itself, are all relevant valuation metrics and perhaps more relevant than issuance.
For non-traders and non-developers, buying Ether is largely justified by how the prospective investor responds to any one of the following:
- Staking: 32 ETH is the projected minimum amount needed to stake in Casper and there are plenty of reasons to speculate the returns will be positive, assuming no catastrophic attack happens such that Ethereum loses its market share.
- FOMO (Fear Of Missing Out): What if Ethereum in 2017 is the Amazon of 1997?
- Portfolio diversification: If investing in cryptos, ETH is consistently one of the top 3 coins by market capitalisation.
- Hedging agains the fall of a local fiat currency or preparing for the next financial crash.
Money
Money can be hard to define, but there is broad agreement on three fundamental functions, namely Store of Value (SoV), Unit of Account (UoA) and Means of Exchange (MoE).
Ether is a cryptocurrency and trusting it to have value is tied to one’s own views on privately issued currencies and blockchain technology itself. Effectively, ETH has proven to be a MoE and a UoA, with SoV being limited by market volatility.
ICOs
The good and the bad
Initial Coin Offerings are a new form of crowdfunding that allows open-source protocol and software infrastructure development to be financially incentivised by hobbyist investors from anywhere in the globe with an internet connection, while leaving the founders free from debt since the tokens generated serve to ensure the network’s continued use over time and do not give special rights nor guarantee profits to investors as equities would do. Truly a feat in operational disintermediation.
To better understand why ICOs are revolutionary, we should start by looking around GitHub and noting all the abandoned projects and the severely understaffed teams working on PGP, OpenSSL and other fundamental building blocks of the digital age. Traditional VC almost never invests in such projects and ICOs proved to be a viable alternative with hundreds of great projects gathering million of euros in voluntary contributions.
Money has the ability to make cryptography seem enticing to the masses, and throughout 2017 we have seen a surge of “fake” ICOs. Here I include businesses who could’ve easily obtained institutional funding, teams with the support of celebrities but no blockchain experience, and startups creating a mix of tokenised securities and “app tokens”, often with no app being developed at all. The proper name for the later is “scam” and, at this stage, registered financial instruments seem an awkward match for open, distributed networks potentially accessed and operated globally, regardless of geo-political affiliations.
Merely having a token on a blockchain doesn’t ensure project success and at this point I’d say that most ICOs can’t and won’t return a profit to their backers and may very well get some founders in legal trouble.
ICOs can increase brand awareness and attract newcomers to the community who will inevitably invest in Ether and ERC20 Tokens and that’s good, but they also generate strong downwards pressure on the fiat price of ETH when teams start recklessly cashing out their funds flooding exchanges with massive sell orders, affecting performance for days.
It’s clear then that ICOs will need to evolve to become less attractive to unscrupulous speculators and scammers while still remaining functional at generating the incentives needed for core protocol innovation and open-source software infrastructure. Variations of the coin offering theme with limited legal jurisdictions and heavy restrictions as to who can become an investor will surely come and go.
Scalability
The key capability of a blockchain is distributed consensus but scalability is not yet a solved problem and Ethereum’s public blockchain increasing storage demands and the 15 transactions per second limit seeing recurring congestions caused largely by participation in highly anticipated ICOs. Developments are coming from both the Foundation with a sharding implementation expected to follow Casper, and from the community contributing Plasma, Raiden, generalised state-channels and ZK-SNARKs solutions.
A change in the consensus protocol is needed because Proof of Work leads miners racing for hashrate supremacy raising the barrier of entry outside of the reach of most hobbyists therefore reducing the decentralisation of the network while sharding allows for more efficient data management options assuming most nodes will not want to know the full state of the whole network, for ever.
State channel solutions are by definition second layer and that hints as to why the focus and development is coming mostly from the community. In short, it would be unreasonable to expect volunteers to maintain the architectural requirement of decentralisation at ever growing scales without some form of economic incentive and state channel allow for monetisation options while effectively reducing the computation costs by shifting some transaction processing off-chain.
Raiden, Micro-Raiden and Plasma
Raiden is a Lightning Network protocol implementation designed for secure off-chain transaction processing with on-chain validation for the Ethereum blockchain that will deliver near-instant payments at scale and is currently on the TestNet.
Micro-Raiden is a simpler solution that works for ERC20 token based micro-payments and will be available for use in the production network come December. A simple use case would be in managing the monthly subscriptions for pay-to-play content and are generally best suited for repeated interaction between limited sets of parties.
A number of initiatives have began working on generalised state channel technology which will bring similar capabilities to the Raiden project but with a different set of goals.
Plasma’s design goal is to move computation off-chain while maintaining on-chain consensus, and is a project led by Joseph Poon, author of the original Lightning Network protocol and Vitalik. It’s designed for billions of transactions per second and is best suited for systems with large user bases or ultimately positioned as bridge between multiple consortium and private chains who opt for shared single source of truth, let’s say Ethereum’s public blockchain. As is typical in the EtherSphere, there are new developments every other day. Plasma is supported by Omise, who aims to bring a single payment tech for the whole of the South East Asia with Ethereum.
Sharding
Ethereum’s blockchain’s size makes running a full node demanding in terms of storage, however node operators can chose to run as an Archive node, Full node, Light node or finally as an Embedded node.
Sharding is a data management technique that splits data stores and allows nodes to pick which they will keep locally while still maintaining the single distributed trust, effectively promoting network decentralisation and so gaining even more trust and value. Work has already begun and there is an expectation that most of the design is now established.
Distributed trust is why cloud hosting a public blockchain or centralising consensus are not viable long term options. We trusted Google because they weren’t Microsoft and we trusted Facebook because it wasn’t Google. Now we only trust in code. Vires in numeris.
Bonus content
Photo by https://www.reddit.com/user/aribolab
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