Ethereum, Smart Contracts, & DApps — The Next Steps
TL;DR — While Bitcoin is the most well-known crypto-currency, but it is limited in its functionality. Some of the real power behind innovations in blockchain technology comes from smart contracts that can be used to negotiate deals, the creation DApps (Decentralized Apps), and the tokenization of everything to understand value. Ethereum is the leading platform of this movement, but it is important to understand the underlying principle before building new platforms.
A Quick Disclaimer
Blockchain technology is an incredibly young concept. It’s recent spike in monetary gain and media buzz has caused a lot of people to want to dive in headfirst and hope for the best. Experts have been calling it the “new dotcom boom”, and enthusiasts see it as a way to upheave current systems in every industry. These articles are meant to be a primer on the field of blockchain technology, giving an overview of the landscape and an attempt to clear up confusion around topics. Yet these articles can only explore what is currently being done in the field, and as regulations are put into place and the uses of blockchain become more clear, definitions and understandings may change. That said, blockchain technology is an exciting subject and will definitely offer new opportunities for growth, and the possibilities are endless as to how it can help.
So What is Bitcoin Again?
Bitcoin is a cryptocurrency built on blockchain technology. In theory, Bitcoin will be able to be used in the same way we spend a U.S. dollar, but it is still trying to gain holding as a viable currency and is mostly speculation at the moment. The key to Bitcoin is that it is built on a blockchain network, which is a decentralized, constantly updating, and public ledger of transactions — making it highly secure.
What is a Smart Contract?
Also built on blockchain technology, a smart contract is a way to “exchange money, property, shares, or anything of value in a transparent, conflict-free way while avoiding the services of a middleman” (blockgeeks.com). Whereas Bitcoin can only exchange currency, smart contracts can exchange basically anything via an automatic transaction. A common analogy to a smart contract is a vending machine — you drop in a dollar, and your Snickers immediately drops out with no need to have someone process the transaction for you. However, experts are looking at smart contracts as a potential way to rent apartments, buy cars, and manage entire supply chains.
What is The Ethereum Project?
Created first in 2013 by Russian-American Vitalik Buterin, Ethereum is a new kind of blockchain that uses smart contracts to create a “world computer”. It was released to the public in 2015 and has become the second-highest valued cryptocurrency behind Bitcoin. However, Ethereum has an exponentially greater functionality. This is because of two reasons:
1 — Ethereum is verified at a much faster rate
Whereas each block in the Bitcoin blockchain is verified every ten minutes, each Ethereum block is verified every twelve seconds. This allows for more transactions, of all sorts, to take place. The speed difference comes from Ethereum’s “proof of stake” model of Bitcoin’s “proof-of-work”. A “proof-of-stake” verification relies on transaction fees paid by the the verifier to complete the payment. In this way, transactions on Ethereum can cycle through blocks faster and build more, even if some argue that it is less secure.
2 — Ethereum acts like a programming platform that people can build apps for
Due to the simplicity of transactions on the Ethereum platform, creators have begun building applications and networks that rely on Ether payments to verify users, show activity, and complete transactions. These decentralized applications (or DApps) are where the real innovation for businesses come into play. When you go on the news and hear about how companies are opening an Initial Coin Offering (ICO) to the public, they have either built a DApp on top of Ethereum (which they will say) or they built a DApp that is on their own blockchain.
A Bit More on DApps
What is worth understanding about DApps is that they have their own transactions and protocols within their “network”. A good way to picture how a DApp on top of Ethereum works is to think about Chuck E. Cheese’s. You go into a Chuck E. Cheese’s and give dollars for tokens, which can be used throughout the building to play games and win prizes. In the same way, DApps take Ether (the currency you get through Ethereum) to convert to whatever token the DApp uses for transactions. At the end of your use of the DApp, you can transfer your tokens back into Ether to “refocus” your wallet.
Each DApp on the Ethereum network goes through an ICO, which is more like a Kickstarter fund than it is an IPO done by an established company. These ICOs are ways for creators to get buy in to their DApp to help build the DApp or expand on it. The coins you receive here are your investment into that DApp, so when it makes money, so do you. However, these ICOs are still being explored by governmental institutions and regulation committees, as there are plenty of ICOs that are scams and will be rendered ineffective (and some that outright tell you they are a Ponzi scheme).
Wait, there are coins?
In the last article, we explained that essential aspect to Bitcoin being a secure and viable currency is the ability to verify each block in the blockchain. Every time a block is “mined” and verified, the miner gets a bitcoin, or more accurately, a token. In the case of bitcoins, these tokens represent a cryptocurrency, which is one of four basic kinds of tokens:
Currency Tokens
This is where we would place bitcoins. Currency tokens do little more than act as a digital fiat currency. These coins are also reliant on the supply and demand of the currency, much like the U.S. dollar.
Utility (or App) Tokens
Utility tokens, counter to currency tokens, allow people to actually use an app or service. This is where the Chuck E. Cheese’s analogy comes into play. For most DApps, the use of a utility token is simply a way to make sure that transactions are legitimate and that you can actually pay to play.
Asset Tokens
Unlike utility tokens, which operate like a token in an arcade, an asset token is basically a proof of ownership token. Sometimes asset tokens can have a physical commodity backing (i.e. Venezuela’s oil tokens) and sometimes they can be a digital hold on digital asset (i.e. Cryptokitties).
Equity and/or Security Tokens
The last kind of token worth discussing in this primer are equity or security tokens. Both tokens operate as a representation of ownership, but unlike an asset token, it is an ownership of a blockchain. When a blockchain company opens an ICO they might offer securities or equity tokens. Holders of these tokens could be voters for how a DApp is operated, or they could simply be investments that give them some monetary benefit.
This Seems Complicated…
It is! Each DApp in theory will have its own wallet, and you will have to transfer all that currency back into Ether, Bitcoin, etc. Otherwise it is like you are carrying around a wallet for U.S. dollars, a wallet for Pesos, a wallet for Chuck E. Cheese coins, and a wallet of Monopoly money. Each have a value, but some have a lot more than others, and you can’t universally spend any of it. Of course, since having a token does not always mean holding currency, a better analogy might be having an investment portfolio that exists solely in the blockchain world. And at the moment, a lot of these DApps, even Ethereum itself, are so young that understand the security and possibilities of what can actually occur are incredibly vague.
So, Why Should I Care?
Despite the complexity, security, and buy-in limits of diving into blockchain, the potential for innovative uses, transparency on the internet, and real-time tracking of goods and contracts are incredibly exciting. Ethereum is the foremost example of how to make blockchain technology benefit creators and users, as everyone gets paid for simply going about their daily lives and being on there. More importantly, blockchains, DApps, and the security of networks are constantly improving as more people learn how to create DApps and secure their networks.
In the next few articles, we will explore some of the areas of marketing that blockchain technology is trying to improve, such as changing how viewers and content creators can escape the middleman and how users can actually receive kickbacks for the ads they see online.
Further Reading
Adam Ludwin: A Letter to Jamie Dimon (and anyone else still struggling to understand cryptocurrencies)
The Motley Fool: 9 Brand-Name Companies That Have Joined the Enterprise Ethereum Alliance
VentureBeat: The Real Cost of Mining Ethereum
