Ethereum: What It Is, Why It’s Important, and How It’s Building Tomorrow
October 9, 2017
2017: The Year of Ethereum
2017 has seen the surging rise of cryptocurrencies and blockchain technology at a mainstream scale. No longer was crypto a topic reserved for geeks and tech enthusiasts — with the total market capitalization of all combined cryptocurrency at $149.8B as of October 8, 2017, crypto entities such as Bitcoin have become impossible to ignore for nearly every forward-thinking financial and technological institution. Of this $149.8B capitalization, $73.3B is directly attributable to Bitcoin, currently the world’s most popular (and most well-known) blockchain application. However, a looming contender threatens to dethrone Bitcoin from this position, and it holds a very realistic possibility of doing so. As recently as February 2017, Bitcoin’s market capitalization represented over 86.7% of the combined crypto market cap, but by October this number had fallen to 49.0%. In the same period, the market cap ratio of our contender to Bitcoin rose from 5.9% to 41.7%, reaching an unbelievable 83.2% high in June. Who is this mysterious contender? The Ethereum protocol.
implies Ethereum has become more valuable than Bitcoin. (Source: The Flippening)
Though we often forget this due to the decentralized emphasis of blockchain, Ethereum is in fact a Canadian-born technology. The concept for Ethereum was first proposed in late 2013 by Vitalik Buterin, a Russian-Canadian programmer, then a student at the University of Waterloo. But before we discuss what Ethereum is, a high-level understanding of blockchain technology is required.
What is Blockchain: The 60-Second Explanation
Quite simply, a blockchain is a distributed digital ledger that keeps a record of all transactions on its network. The most important characteristic of a blockchain is that it is distributed, as opposed to centralized — rather than data being stored in some central server akin to a traditional database structure, in a blockchain each participant acts as a node and is connected to one another and gets a copy of all information. This architecture keeps the network running even if individual nodes go offline, and allows participants in the network to bypass intermediaries, saving on transaction costs. In the Bitcoin use case, a user can send Bitcoin to someone across the world without the need to deal with any bank, resulting in a much cheaper transaction.
different architectures. Blockchain networks are distributed. (Source: CyberFrat)
Blockchains verify the validity of transactions using cryptography. When A wants to send B money, this transaction is put into a block along with other unconfirmed transactions and broadcasted to every node on the network. “Miners” confirm transactions in these blocks by using the computational power of their computers to solve complex math problems, in turn receiving new cryptocurrency for their work, such as Bitcoin. This is how fresh Bitcoin and similar tokens enters the money supply. Once a block is confirmed, it is appended to the previous block (hence, blockchain) and all nodes accept the information it contains, creating an immutable record of transactions. By design, blockchains are secure, transparent, and immutable.
So, what is Ethereum?
Whereas Bitcoin is a blockchain that operates strictly as a currency, with functionality largely limited to sending, receiving and recording the balance of each user’s Bitcoin, Ethereum is a blockchain that operates as a decentralized computing platform, allowing users to execute programs they create on the Ethereum blockchain. Think of Ethereum as a network of computers that run programs together, creating a true “world computer.”
But why is this important? It’s important because Ethereum stands to disrupt internet third-parties as we know them today. In the internet’s current form, our personal information is generally stored on clouds and servers privately-owned by companies like Amazon, Google and Facebook. While this configuration offers various conveniences like active service to address any potential performance or hosting issues, it also leaves users open to severe vulnerabilities. Cyber attacks present a major threat to the privacy and security of internet users — as recently as October 2017, Yahoo revealed that all 3 billion accounts associated with its network were comprised in a 2013 attack, rather than the original estimate of 1 billion accounts. Similarly, the May to July 2017 data breach at Equifax, one of the largest consumer credit reporting agencies of the US, resulted in the personal information theft of over 143 million US consumers. That’s 44% of all Americans, left vulnerable. This is the risk faced by users of centralized networks, such as the internet.
The internet’s centralized design is a vulnerability so substantial that Brian Behlendorf, creator of the Apache Web Server, labelled this the “original sin” of the internet. Behlendorf, joining many others, argues that the internet was always meant to be decentralized, although it was not technologically feasible at the time. Ethereum, however, may be the answer. Ethereum could be a major pioneer of this movement, by replacing traditional internet third-parties in certain feasible use cases, like executing insurance contracts, exchanging financial instruments, and storing data.
Ether: The Token of Ethereum
Broadly speaking, Ethereum aims to create a blockchain platform that effectively acts as a decentralized internet, which will allow users to run decentralized applications (“dapps,” for short). However, running these apps on the Ethereum network won’t (and can’t) be free, and that’s where Ether, the token of the Ethereum network, comes in. While Ether carries monetary value and can be traded just like Bitcoin, it differs from Bitcoin in that it has a functional usage — Ether can be converted to “fuel” on the Ethereum network, which is required for dapps to run. The amount of fuel (which, in fact, is the formal term) required to run a dapp depends on the amount of computing power needed and how long it takes to run. Users pay for fuel using Ether, and new Ether is created when miners successfully confirm transactions, just like how Bitcoin works.
As a quick aside, Ether (which, remember, is tradeable like Bitcoin) has done tremendously well from an investment standpoint. The price of Ether, as of October 8, 2017, was US$309.70. Back on January 1, 2017, it was $8.15. That’s an increase of over 3790%, in just 10 months. Is Ethereum (and broadly, all cryptocurrency) this generation’s tulip bulbs? We leave this question as an exercise for the reader.
Smart Contracts: A Core Ethereum Innovation
Smart contracts form the backbone of programs that run on the Ethereum network. A smart contract is a computer program that waits for specific input conditions to be met, at which point it will automatically execute a pre-programmed action. For example, a weather insurance policy could be setup as a smart contract — if the temperature rises above a certain threshold within an effective time period, then a pre-determined amount of cryptocurrency is automatically released to the policy holder. A traditional contract is a formal agreement between two parties that is typically enforceable by a third party (usually a court of law). Because smart contracts operate exactly as designed and cannot be changed once they are launched on the blockchain (remember, blockchain data is immutable), smart contracts not only define the rules and conditions around an agreement in the same manner as a traditional contract, but also automatically enforce these obligations, negating the need for an enforcing third party. Without an intermediary, smart contracts are much cheaper.
It’s worthwhile to mention that Bitcoin was the first platform to support smart contracts, in that users could transfer tokens to one another, which are only validated if certain conditions are met (if the transaction is cryptographically confirmed). However, Ethereum vastly expands the utility of smart contracts by providing users with the ability to build custom contracts that can accomplish virtually anything they wish, within technical boundaries.
Ethereum: A Turing-Complete System
Speaking of technical boundaries, one of Ethereum’s most remarkable attributes is that its language is Turing-complete. Colloquially, a system is Turing-complete if it can run any algorithm or computation and successfully produce a result, regardless of complexity and irrespective of computational time and memory required. Since every computer program can essentially be broken down into a series of computations (albeit a great many), in practical terms a Turing-complete system, such as Ethereum, could simulate the computational aspects of any computer program or programming language. Most languages in regular use today such as Java and Python are Turing complete. Interesting enough, some systems are unintentionally Turing-complete, with a prime example being the video game Minecraft. If you’ve ever seen a YouTube video of someone building a simple computer within Minecraft, then you’ve witnessed an example of its Turing-completeness.
Ethereum’s Turing-complete nature is extremely important. By being Turing-complete, the Ethereum network could theoretically run any computer program. However, in practice, finite limitations on computational power and speed substantially restrict what can be executed in Ethereum’s current iteration. The official Ethereum development tutorial concedes this restriction, stating, “Roughly, a good heuristic to use is that you will not be able to do anything on [Ethereum] that you cannot do on a smartphone from 1999.”
Thus, you won’t see fancy graphical renders or machine learning algorithms being run on Ethereum yet, but the current technical state is sufficient to support business logic (“If, then” conditionals, making the settlement of most contracts possible), signature verification (ownership of signed assets), and basic data storage.
How Dapps Are Run: The Ethereum Virtual Machine
Every time a program is run on Ethereum, every single node on the network compiles and processes it. While this may sound impossibly intensive, most programs are simple smart contracts, only a few lines long.
The part of Ethereum that actually handles computation is called the Ethereum Virtual Machine (EVM). When a program is compiled on Ethereum, it is converted from a high-level, human-readable language (usually Solidity) into “bytecode,” an assembly-level language read by the EVM. Ethereum’s notion as a “world computer” comes from the fact that every single node runs the EVM and executes the same instructions, simultaneously.
This immense computing parallelization across the entirety of Ethereum was not meant to increase computational efficacy. As a matter of fact, it has the opposite effect, making computations on Ethereum much slower and more resource-intensive than on a traditional computer. This is the root cause of the “1999 smartphone” limitation. Rather, every node runs EVM in sync to maintain consensus across the network. This decentralized consensus provides Ethereum with an unparalleled degree of fault tolerance, zero downtime, and data immutability.
The Achilles Heel: Ethereum’s Weaknesses
Ethereum, being an emerging technology, has its share of structural weaknesses. Vitalik Buterin, the Russian-Canadian founder of Ethereum, has himself conceded the following valid criticisms of Ethereum. Verbatim:
1. Scalability sucks; the blockchain design fundamentally relies on bottlenecks where individual nodes must process every single transaction in the entire network.
2. Proof of Work (what transaction verification is called) is extremely expensive, and furthermore is fundamentally vulnerable to 51% spawn camping attacks with no effective strategy for recovering from one. Selfish mining is profitable starting at 25–33% hashpower, and 51% censorship attacks are definitely profitable.
3. Privacy sucks.
4. It’s hard for regular users to hold large amounts of funds without running substantial risks of theft or loss due to theft or loss of their private keys.
5. Economics do not encourage good “storage hygiene”; insufficient incentives for clearing storage and insufficient cost for filling it, especially for long periods of time
6. Bunch of various marginal technical inefficiencies.
7. It’s hard for regular users to know that contracts they are interacting with do what they say they do, and do not have accidental or malicious bugs.
Essentially, the biggest weaknesses of Ethereum concern its scalability (due to the computing parallelization of the EVM), security of Ether as a crypto asset, and inefficient processing due to the way transactions are verified (miners must expend computing power, which itself takes time). A comparison easily illustrates Ethereum’s weaknesses — Ethereum’s blockchain currently supports approximately 15 transactions per second. Visa, on the other hand, processes 45,000. While Buterin’s long-term goal for Ethereum is to process transactions at a “Visa-scale,” the platform faces many technical hurdles before this is possible.
Use Cases: Applications of Ethereum
What can Ethereum realistically be used for? Even though the technology is still young, there is already a plethora of pragmatic use cases. Significant interest has been generated in the fields of finance, banking, healthcare, insurance, real estate, mortgage lending, consulting, payments, political elections and many more. The following is a non-exhaustive list of Ethereum use cases, many of which are already in use.
· Smart Property: A car rental company could assign a uniquely marked token to each vehicle and configure a car to run only if the owner of the corresponding token issues a transaction proving ownership. Tokens, acting as the “car keys,” can be traded on the Ethereum network, allowing cars to be used for any given amount of time by different users with ownership details kept by the blockchain.
· Asset Ownership Management: The ownership of digital assets can be managed on the Ethereum network by tagging digital objects like songs, movies, e-books and software with tokens. Whoever owns the token, owns the asset, creating transparency and traceability.
· Insurance: Insurance contracts can be directly set up on the Ethereum network via smart contracts, removing the need for costly intermediary underwriters. As an existing example, Dynamis is a P2P insurance platform that uses the blockchain and smart contracts to manage unemployment insurance by tapping into social networks like LinkedIn.
· Mortgages: Ethereum smart contracts significantly reduce the friction of between lenders and borrowers in a mortgage contract. Privacy issues are also resolved. As an example, Rex MLS is an Ethereum-based mortgage platform that permits P2P access to MLS (broker-relevant) information.
· Privacy and Identity: Smart contracts, owing to their self-enforcing nature, will eliminate the need for trust in a contract scenario, increasing the privacy of participating parties. Personal information can also be stored securely on Ethereum. Uport is one such Ethereum-built platform that functions as a self-sovereign identity and key management system.
· Financial Markets: Smart contracts can be used to facilitate the trading of financial securities such as stocks by dramatically reducing settlement times and costs, since the ownership of the security is transparent to the relevant parties at all times.
· Healthcare: A database built atop Ethereum’s blockchain can provide medical personnel with access to the status and files of patients, synchronously across the entire healthcare network. Existing databases are local or constrained, generating massive friction.
· Entertainment: Blockchain has strong potential to disrupt the entertainment industry, where content creators are only being paid a fraction of topline revenue. By using blockchain to cut out the middlemen (record labels, distribution platforms, etc.), a much greater percentage of revenue will go to the artist. Existing Ethereum companies like Ujo and Peertracks aim to decentralize the music industry by using smart contracts to bypass overhead platforms like Soundcloud, ReverbNation, and Spotify and bring music directly from the artist to the consumer.
A Decentralized Future: The Impact of Ethereum
Ethereum brings a vision of a decentralized future, one in which data breaches and reliance on trust are relics of the past. While the full impact of this budding technology will come to fruition in tomorrow’s reality, Ethereum’s current impact is nonetheless significant.
From a technological standpoint, Ethereum has created an entirely new way of running computer programs. Dapps provide unprecedented levels of transparency and security unfound in traditional computing. Low barriers to entry means innovation in this space will naturally bloom, resulting in dapps that provide greater utility to everyday users. With time, the dapp ecosystem should become mature enough to push Ethereum into mainstream usage. Entire industries may have to adapt in response to disruption by Ethereum-based projects.
From a resource consumption standpoint, Ethereum’s growing popularity has resulted in the entire network using more than a small country’s worth of electricity. A real-time index from Alex de Vries, founder of Digiconomist, a cryptocurrency analysis website, shows that each transaction on the Ethereum network now collectively expends as much as 45 Kilowatt hours (kWh) of electricity, with most of this spent during the transaction confirmation process (mining). 45 kWh is as much electricity consumed by an average North American household in a day and a half. On a macro basis, the entire Ethereum network could be using as much as 4.2 Terawatt hours (tWh), which is slightly more electricity consumed than the country of Cyprus. As a comparison, each Visa transaction uses roughly 0.00651 kWh. Ethereum’s inefficiencies are clear.
From a business standpoint, Ethereum has spawned an entirely new genre of companies — ones built entirely upon the Ethereum network. Indirectly, Ethereum has also created an entirely new way for companies to fundraise, called initial coin offerings (ICOs), in which companies issue proprietary tokens in exchange for established cryptocurrency like Bitcoin and Ether. All-time cumulative ICO funding, most of which is fueling these Ethereum companies, has reached a staggering $2.4B as of October 2017. We are sure to see a surge of companies born of Ethereum as the technology matures.
Ethereum: The Building Blocks of Tomorrow
At this moment in time, Ethereum is still a technology primarily explored by innovators and early adopters. Think of the early days of the internet, when only academics and homebrew enthusiasts had access. Ethereum is at a similar stage along the technology adoption curve. This is immensely exciting, as it implies that fruitful innovation and explosive growth is still ahead. Ethereum, alongside blockchain, is a technology that has the potential to revolutionize the way we manage data and interact with the world. While there are still technical hurdles to overcome, it is evident that this Canadian-born technology will help craft the future, one block at a time.
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