Is Ethereum The Next Big Thing?
by Tim
Bryant
For
a majority of the world’s population, cryptocurrency and blockchain technologies
are still completely unknown terms, let alone ideas
that people have any coherent understanding of in regards to how they work and
what they mean for the future. For those who have at least heard of the
concepts, Bitcoin is often their only reference point
in the field, which is understandable, as it is the first successful
cryptocurrency and implementation of the blockchain technology. This allowed
Bitcoin to jump out of the gate as the industry leader, allowing it far more
exposure over time and around the world.
However,
given the revolutionary applications possible through blockchain technologies,
Bitcoin was inevitably not going to be the only cryptocurrency/technology to
enter this new space of possibility. While this field is still very new and
undefined, there are a plethora of new technologies, businesses, and
cryptocurrencies being developed at this very moment that make Bitcoin just one
component in a vastly expanding realm.
One
in particular, Ethereum, has really gained a lot of traction as of late,
catapulting it all the way up to the number two-rated cryptocurrency in terms
of market cap and price, behind only Bitcoin. While it is well behind Bitcoin
at the moment, the growth rate and potential capabilities of this new
technology has many, in both the crypto-world and mainstream finance, buzzing
with excitement about where it could go moving forward.
(Note:
I would highly recommend that anyone not familiar with Bitcoin or blockchain
technology to first check out my previous article,
which gives a beginner’s outline of the in’s and out’s of Bitcoin. It’s
imperative to have this prerequisite knowledge in order to properly understand
Ethereum, since I will skip over the basics of blockchain and cryptocurrency.)
What is Ethereum?
Now
Ethereum isn’t the only alternative cryptocurrency out there; in
fact there are more than 750 cryptocurrencies that currently exist. Many of
them have been referred to as “Bitcoin 2.0” as they were designed very similar
to Bitcoin, but with slightly different features. Many of them will eventually
have a value of zero in all honesty. However, others, mainly Ethereum, have
developed into something that is fundamentally different from Bitcoin,
providing value in new areas for users.
According
to its official website,
“Ethereum
is a decentralized platform that runs smart contracts: applications that run
exactly as programmed without any possibility of downtime, censorship, fraud,
or third party interference.
The
App runs on a custom built blockchain, an enormously powerful, shared global
infrastructure that can move value around and represent the ownership of
property. This enables users to create markets, store registries of debt or
promises, move funds in accordance with instructions given long in the past
(like a will or futures contact) and many other things that have not been
invented yet, all without a middleman or counterparty risk.”
Some
people have described Ethereum as a Supercomputer or Global Computer, while
others have described it as the Web 3.0 or The Law of the Internet, but the
basic idea is that it’s a single shared computer for users to exchange value
that is run by its decentralized network of users. Another way
to describe Ethereum is a decentralized virtual machine that can execute
peer-to-peer contracts using its own fuel/cryptocurrency to power it, called
Ether.
The
virtual supercomputer, which doesn’t exist in one physical location, runs on a
custom-built blockchain that uses open source software code and allows for a
shared infrastructure that can move around value and honor contracts without
the need for a central controller or a trusted third-party. These contracts,
which are often referred to as smart contracts, are essentially the
same as contracts in real life, but instead of being written out on paper and
requiring third-party to arbitration, the contracts are programmed into the
blockchain as computer programs (Turing-complete coding language) that then
become self-executing contracts. Essentially, the Ethereum network (blockchain)
is the arbitrator and simply carries out what is programmed into it.
For
example, when someone develops a will, they sometimes hire a lawyer to write it
out as well as use a lawyer to interpret it once it is breached or executed.
However, if the will were uploaded as a smart contract on to the blockchain,
the blockchain alone could divvy out the remains of the will upon activation,
aka the death, without the need to pay for a third-party to get involved. Blockchain Apparatus is a company
already aiming to build the infrastructure for these self-executing wills using
the Ethereum platform.
Another
example of a smart contract that could be implemented using the Ethereum
network is financial derivatives. So when Person A
agrees to buy a select item at a stated price on a specific date, instead of
the company who issued the contract having to trust the other person to pay or
utilize third-party clearing houses to make sure accounts are cleared, the
blockchain would simply facilitate the transaction between the two parties directly
and distribute out the payment instantaneously based upon the set agreements
that were programmed in. It also can store all this information on the
blockchain as well as integrate more efficiently with other users to keep
real-time pricing, information, and transactions up-to-date. Banks like Barclays and JP Morgan Chase are already
investing and researching into these technologies through a consortium called
R3. Here is further reading for
those interested.
One
last example to checkout on your own is a new ride sharing platform called Arcade City, which
aims to replace Uber by allowing the decentralized network of drivers to
control the company directly, instead of the central controlled business, Uber,
facilitating the ridesharing.
To
put it simply, Ethereum allows parties to trust each other in contracts without
the need for mediators or businesses to facilitate, since the decentralized
network (blockchain) will distribute out exactly what is programmed in. The
network acts as all the trust that is needed; and with all the data operating
on one network, unnecessary overhead/processing fees due to hard to maintain
and incompatible databases are greatly reduced. The network is also very
reliable due to its decentralized design, making it very hard to stop,
as there is no central point to attack. Governments, hackers, businesses, and central banks will find it incredibly hard
to interfere with or control the system, which bodes well for those that
advocate for freedom and decentralized power. Essentially, the computer can
never be turned off, unless the Internet is completely dismantled.
Additional Background:
Ethereum
was originally described in a white paper by Russian
Canadian Vitalik Buterin, a programmer
involved with Bitcoin, in late 2013.
Other
founders of Ethereum include Amir Chetrit, Anthony
Di Iorio, Jeffrey Wilcke, Gavin Wood, and Joseph Lubin. The
goal was to use blockchain technology for decentralized applications such as
smart contracts, instead of strictly limited to peer-to-peer financial
transactions.
Initial
funding for the Ethereum project was provided by a public crowdsale in July and
August 2014 that took in 31,529 bitcoins, worth approximately $18.5 million at
the time. In exchange 60,102,216 Ether were disbursed amongst the donors. The
Ethereum blockchain went live on July 30th,
2015, six and a half years after Bitcoin was first introduced. Currently,
Ethereum trades at around $14 per Ether and has a market capitalization a
little over one billion dollars, a feat reached in May 2016.
Some
other features that stand out with Ethereum are its Proof of Stake (POS) mining
system as opposed to the Bitcoin network, which uses Proof of Work (POW). It’s
important to understand that Ethereum uses the Proof of Work model currently,
but the plan is to move to a Proof Of Stake system once it scales up more. The
reason for the move is that many worry once the supply is capped; mining will
become too centralized due to lower financial incentive and higher-energy costs,
which weeds out the small level miners. In Proof Of Stake, miners are required
to have a direct stake in Ethereum in order to mine it. Essentially, miners can
only mine the same amount of Ether they have in their account. In theory, this
should discourage miners from doing anything detrimental to the system since
they have a personal stake in its success.
Another
small feature that should be noted and still needs to be addressed is what the
total supply of Ether will be. Right now, five new Ether are minted every 13
seconds with a total supply of over 80 million. The Ethereum team has stated
that they plan on lowering this number once the POS switch is made and possibly
even capping off the supply completely at a certain point. While this isn’t a
big deal in the early stages, the hope has to be that the supply is limited
similar to Bitcoin, so that no central controller can add to the supply and
dilute the value. This should be especially important since most in the
decentralized community of cryptocurrency have migrated here due to the
overprinting and over regulation of other currencies and payment systems.
Having systems tied down to objective rules is helpful to investors, users, and
developers because it gives them fixed variables to rely upon. This builds
strong foundations and makes for sound money.
Exciting Possibilities:
One
of most promising aspects about Ethereum is that it is such an open platform
for all types of people, organizations and businesses to come
in and develop upon. Anyone can put smart contracts on to the blockchain and
anyone can use the blockchain to develop whatever applications they would like.
The decentralized blockchain just honors the data it comes across, not caring
whom, why, or where it came from. In this regard, it is a highly flexible
system that allows for a diverse set of players, applications, and systems.
Everyone is a first class citizen in the network, similar to the Internet where
all the data is treated equally. No doubt this has led to a synergistic
environment amongst the community, with everyone building off each other to
benefit from both themselves and the network as a whole.
One
of the exciting possibilities for Ethereum is the cultivation of a variety of
different decentralized autonomous organizations (DAO’s), which are basically
new business organizations that run through rules incorporated in computer
programs, aka smart contracts. In this regard, businesses can operate in a
decentralized manner based on rules that are voluntarily agreed upon by its
members and subsequently programmed into the blockchain as smart contracts.
In
this type of horizontal business structure, there is no need for a central
decision maker. In theory, these organizations should morph into democratic
institutions where everyone in the group gets to consider proposals and vote on
them, as well as everyone sharing in the profits and loses of the organization.
This comes in sharp contrast to most companies today, which have central controllers
that dictate the direction of the company, while the stockholders receive
dividends, but don’t usually have voting or creative rights. Bitcoin is
considered an early example of a Decentralized Autonomous Organization, but
Ethereum seems to have taken it a step further by using smart contracts to
establish some type of agreed upon structure to these organizations.
A
new DAO was recently launched in May 2016 thanks to the most successful
crowdfund in history, taking in around $150 million from more than 11,000
investors, with the largest stake at just 4% of the total. In exchange, tokens
were issued out, which are basically stocks in the company as well as voting
rights. Literally called “The Dao,” it formed as an
investor-directed venture capital fund, with an objective to provide a new
decentralized business model for organizing both commercial and non-profit
enterprises. It is designed to both build the infrastructure of Ethereum for
everyone in the network (nonprofit) and invest in Ethermeum startups for the
profit of its investors (commercial). In this regard, the direction of the
company relies on the creative and democratic
will of the group, instead of some central board of directors.
There
are countless other possibilities that could stem from Ethereum such as new democratic structures in government to
decentralized banking systems to new media distribution platforms. In theory,
the use of blockchains and smart contracts could revolutionize everything that
is currently centrally controlled and make it more decentralized in nature with
open transparency and incredible precision. Ethereum could potentially bring
the entire world onto one operating platform that is open to everyone, yet has
no central force dominating it. It will allow the ever-growing peer-to-peer
sharing economy to scale unheard of heights, which naturally hurts big
business, but empowers the individual. Ethereum allows for a new economy, the
people’s economy, all based upon the mathematics of blockchain and the
decentralized law of smart contracts.
Potential Barriers:
One
of the obvious barriers to success is a lack of understanding amongst the
general public on the subject due to its highly technical
nature and the fact that it is still a very new and raw technology. Usually
innovative ideas like this do not hit the mainstream culture until they are
fully developed and understood. While this is good in some regard, since all
new technologies should be tested thoroughly before being utilized on a massive
scale, it can also be to the detriment of many people in that the average
person will miss out on the initial creative design of the system as well as
the profits that will likely ensue. If Ethereum lives up to its potential,
financial stakes and technological infrastructures will fill out quick, leaving
smaller gains for the average person that gets in too late.
Another
major obstacle for Ethereum is security. From a technical standpoint, Ethereum
has more complex software than Bitcoin and has undergone far less testing,
which means there is a lot more that can go wrong, especially as it begins to
scale and take on larger workloads. Undoubtedly, the system will need to
address these security concerns, especially if it wants to gain mainstream
adoption. Since cryptocurrency is more technical compared to other financial
instruments, many average users are scared of putting their money in new digital
assets like Ethereum and Bitcoin.
The
importance of security will also be tested from a government standpoint, as
these new payment systems can operate across borders and outside of today’s
legal jurisdictions. In many ways, these are both new economic systems, since
it is a peer-to-peer money system, and new ways of governance/law, in that new
systems of law are created due to smart contracts being programmed into the
network. This is a whole new paradigm of money and governance, so naturally that
scares a ton of people away. While this may not be a big deal yet, if the world
of cryptocurrency and blockchain continue to scale larger, they will inevitable
come face to face with the established economic/governmental system that aims
to maintain its continued dominance. The result of this confrontation is
unknown, but it will be an absolutely necessary battle in the journey to create
a new financial and cultural paradigm.
Finally,
scaling and in-group fighting are going to be some of the other major hurdles
to success for Ethereum. Scaling is essential to any new technology, especially
a new currency. With the Ethereum network being decentralized, facilitating an
environment where users cooperate with each other and build off one another as
opposed to constantly competing in unhealthy manners, or worse, sabotaging one
another, will be incredibly important; just ask Bitcoin, which is stalled at the
moment because of that very issue of in-fighting. Also, the network will need
to scale in design in order to handle more transactions per day, especially if
it is going to break into big markets like derivatives. Again, Bitcoin is
having the same problem of network scalability in terms of handling large
volumes, which is undeniably holding it back from exploding to new heights.
Ethereum has the added advantage of watching and learning from Bitcoin, but
they are still playing catch-up and will undoubtedly have to go through their
own growing pains along the way. Finally, Bitcoin is aiming to implement its
own smart contact system called Rootstock, which could rival Ethereum if rolled
out effectively.
What The Future Will Hold?
It’s
going to be very interesting to see how these completely new systems of
cryptocurrency and blockchain technology are implemented into our current
paradigm. I think when looking at Ethereum, it’s important to not only look at
it from a technical perspective, such as what it can actually do for society,
but also from a socio-cultural perspective, such as how existing systems will
react and interact with it. It seems more and more clear that the current paradigm of money is heading towards a major
collapse, revaluation, and redesign. I strongly believe these
new cryptocurrencies and blockchain technologies are going to play major roles
in the new monetary system that is slowly coming
into focus.
Ethereum
and Bitcoin, along with some other familiar financial instruments, such as precious metals, real estate/commodities,
alternative cryptocurrencies, and even Fiat, will all be meshed together into
one new financial paradigm. They are all likely to play a role, which will
undoubtedly be decided in the coming years. It seems quite clear that our new
system should not be a one size fits all equation, but instead needs to be a
competing system of various stores of value and payment systems, which all
intertwine and pull on each other to create one strong fabric that is all
hedged together.
This
technology is not a fad and not going away. In fact, it’s really just getting
started. This is a whole new systemic design of economies and government
happening before our very eyes, so if you want to change the world in major
ways, now is the time to get involved and participate. There will be plenty of
challenges along the way and major push back from the established system, but
these new tools of cryptocurrencies, blockchains, and smart contracts allow us
to change the game like never before. The tools are there; we just have to
learn to come together and use them correctly, because ultimately it will be us
who design the future. Let’s build bridges, instead of bringing each other
down.
Sources: https://www.youtube.com/watch?v=U_LK0t_qaPo, https://www.youtube.com/watch?v=ASCGQFZgcT8, https://en.bitcoin.it/wiki/Proof_of_Stake, https://en.wikipedia.org/wiki/Ethereum, https://bitcoinmagazine.com/articles/blockchain-technology-will-profoundly-change-the-derivatives-industry-1464368431, http://www.cnbc.com/2016/04/19/barclays-used-blockchain-tech-to-trade-derivatives.html, http://www.coindesk.com/7-cool-decentralized-apps-built-ethereum/
From The Last
American Vagabond @ http://www.thelastamericanvagabond.com/top-news/ethereum-next-big-thing/
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problems see http://nexusilluminati.blogspot.com/search/label/solutions
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