Smart Contracts, DApps, and ICOs will become the new internet. Ethereum brings them all together
You’ve read my two previous articles on Bitcoin — and if you haven’t, start with those — watched a couple of YouTube videos, and finally saw that documentary on blockchain that’s been sitting in your queue for a year. Maybe you even brought up Bitcoin at Thanksgiving during the lull between your grandma talking about how she doesn’t usually like turkey because it’s so dry and your cousin spilling gravy all over himself. The reception was strong and now you feel like an expert. Well calm down buddy, because we’ve still got a lot to learn.
Bitcoin is only the tip of the iceberg. If we really want to understand the potential of blockchain, let’s talk about Ethereum. Established in 2014, Ethereum is the new kid on the block. If Bitcoin is the traditionalist, the guy who sits in coffee shops and reads Hemmingway, Ethereum is the visionary, the Red Bull drinking, hold-my-beer-while-I-try-this type kid. And it took the crypto world by storm.
The Ethereum project is headed by Vitalik Buterin, a 23-year-old, and he truly is one of the geniuses of our time. In 2013, Buterin envisioned a decentralized internet, on which anyone could build applications. This system would solve the current issues of our internet: the lack of available trust. As we understand, Bitcoin uses the blockchain, a decentralized and unchangeable method of information storage, to secure and confirm transactions on the Bitcoin network. Buterin created a new blockchain, one that transcended the limitations of transactions. What were you doing at 19?
When the internet was first developed, it was used for porn. The internet wasn’t advanced enough to support YouTube, Facebook, and endless animal GIFs. But it could support basic images — and teenagers everywhere rejoiced. Just as how in the early internet days, porn was the simplest application of the technology, Bitcoin utilizes the simplest function for the blockchain: transactions. Ethereum however, can do much more.
What can Ethereum do?
Ethereum is the main platform of today’s blockchain world. Ethereum is the operating system. Ethereum is the canvas, the paper, or that bar bathroom wall that you can’t help but read. It is the protocol people build upon. Ethereum is a generalized blockchain; it’s not specialized for any one purpose (unlike Bitcoin’s). It is generalized so that anyone can program it for their specific needs. Information and transactions are still placed in blocks and secured by miners, but the information doesn’t only need to be purely “send and receive” transactions; it can be used for far more complex applications. Just like with the internet, Ethereum is the toolbox for the development of this new technology — it’s up to developers and innovators to make use of the tools.
Let’s explore the toolbox of Ethereum and then we’ll look at what those tools can build.
When I came up with Ethereum, my first first thought was, ‘Okay, this thing is too good to be true.’ As it turned out, the core Ethereum idea was good — fundamentally, completely sound. — Vitalik Buterin
Ethereum’s most revolutionary technology is smart contracts. Anyone can deploy an Ethereum smart contract and the blockchain secures them in a decentralized and transparent manner. In today’s world, contracts can be any agreement, from corporate agreements to that fantasy football league that you WILL win one of these years! But a contract in its simplest form is a “if” and “then” agreement. If Bob wins the fantasy football league, then he has bragging rights for the whole year. If Ron can eat 23 crepes in an hour, then he doesn’t pay the bill (a questionable incentive…but anything goes in college towns). But since the restaurant might still charge Ron for those crepes after he eats them, we put contracts in writing and rely on lawyers, judges, and our institutions to enforce their terms. A smart contract on the other hand, is simply a cryptographically secured digital contract that enforces the terms via code.
The vending machine that you walk to every ten minutes at work because it’s “not technically a break” is the simplest example of a smart contract. There is a simple program running inside that receives an input and produces an output. If a dollar is put in and A4 pressed, then a Snickers will fall. Don’t put in the dollar, don’t get the Snickers, it doesn’t matter how much your shake it. Ethereum enables anyone — well, maybe not anyone considering my grandma still doesn’t have an email account, but anyone with programming knowledge — to program their own smart contracts.
So what does that mean in reality? It means that an unchangeable contract can be created, that can be seen by everyone, and where the terms are automatically enforced. For example, imagine that for Bob, bragging rights are not enough to incentivize him to spend his weeks pouring over football stats. He wants prize money. So everyone playing in the league throws in $10. Currently, either one trustworthy member of the league holds the cash, or they must use a third-party site to hold the money. Trust must be placed in one of these entities; for a $10 bet, the risk is minimal. But with huge amounts of money, there are serious risks associated with trusting middle men — let alone the additional fees. A smart contract could be programmed where all the money is sent to the Ethereum contract. The contract holds the money with the condition that the winner of the league will receive the funds. When proof of victory is provided to the contract, the funds release. If anyone breaks the terms of the agreement, their money is forfeited. No need for lawyers, judges, courts, or credit. There is no way to cheat and Bob gets his money. There’s just unfortunately still no way of encoding bragging rights.
DApps — Decentralized Applications
Ethereum allows any company to use their open source code to build upon the Ethereum blockchain. This allows people to have an easy-to-use and programmable blockchain that can be customized for their needs. Companies are created with fascinating ideas that utilize the toolbox that Ethereum provides. These applications address many issues and weaknesses that we have in our systems today, but likely most of the revolutionary ideas have not even been created yet.
So what makes a DApp a DApp? First, the application is decentralized. This is the most important characteristic. The DApp has open source code that anyone can read and verify and it isn’t controlled by any one entity. All the data from the application is stored in a public blockchain. And the application uses a token to allow users to interact with the DApp in a decentralized way.
Here’s a basic metaphor for how this system would work. Imagine a mall with lots of stores. The mall is Ethereum — it provides the sellers with the framework for the store. The store — Pho Real (trademarked name so don’t even think about taking it) — is the DApp, but it’s not owned by anyone. Instead, ownership of the store is shared by all those who work in the store in some manner. The rules of Pho Real are made public and can only be changed if a majority of the workers agree to the change. But you can’t spend dollars at Pho Real. You can only spend X Coin. X Coin is the special token for the store. Just like how at a casino, you can’t spend dollars, you can only spend purchased chips, it works the same at this store. And X Coin’s information and transactions are all stored within the mall’s vault, which is the Ethereum blockchain. Now when this store is created, to raise money for the general store operations, the store decides on how many of X Coin to create. Let’s say they create 10,000 of them. They then sell these coins to anyone who would like to purchase them. This is what the cryptocurrency world calls an ICO — Initial Coin Offering. Now the store is still in production; whether or not it delivers on its promise of providing a one-stop-shop for all your Pho-related needs remains to be seen. But since there are only 10,000 X Coins in creation, if this store offers a high demand product, the coin will also be in high demand and the price will rise. This is exactly what happens today. People purchase these tokens because they believe that one day, many people will want to use the product offered by the project, and that the demand for tokens will increase dramatically.
IEx.Ec and other cloud computing services: these DApps want to create a cloud computer. Today, when you aren’t using your computer, your computer’s processing power and graphics power stop working. But there are plenty of people around the world who, while you’re catching up on some Zzz, are trying to digitally delete their ex-girlfriend from all their prom photos or download the entire collection of Friends and could use a little help. These programs allow users to rent out the unused computing power of other people on the network at a price. People would merely connect to the network and commit their GPU or CPU. A smart contract would hold their computing resources which would be made available to a buyer if that buyer put money into the smart contract (sounds like a vending machine, right?). That money must be in the form of that company’s unique digital token. There is no risk, because if either the buyer or seller doesn’t uphold their end of the bargain, the contract is reversed. It’s 100% trustworthy. You don’t need a lawyer to tell you that.
Both sides place their bets into the smart contract. The terms of the bet are programmed into the smart contract. If Tom Brady throws 5 touchdowns, Brad wins the bet. The contract only executes when it receives word of Brady’s magnificent performance — and good god, who wouldn’t want to bet on the guy? Fees for setting a bet are paid with the ecosystem’s token.
There are tens of other use cases — future article idea?
As I mentioned above, and this deserves its own future article as well, ICOs are the new fundraising tool for blockchain startups. The companies create a business project and a token on the Ethereum blockchain. The token is offered for sale by use of a smart contract. The smart contract basically says that if you transfer this amount of Token Y, you will get this amount of our token. You buy the token as an investment opportunity and the company fundraises for initial capital.
Greater use cases
As our world transitions more and more into the digital world, this technology will be central in many of our industries. Soon, real world assets — ownership of cars and houses, diamonds and gold, and supply chain shipments — will be digitized. They will have a digital identity and can be traded, sold, tracked, and verified. The blockchain can store these assets while also protecting the information associated with them. With the Internet of Things, every electronic device in your house, from your coffee pot, fridge, and car, will be able to communicate and coordinate with one another. All these developments, combined with smart contracts and blockchain, create enormous potential.
Here are how smart contracts, DApps, and all the other tools in the Ethereum toolbox come together. Imagine how apartment renting works today. Creditors track social reputation and ensure that each party is relatively trustworthy. Sites like Airbnb have two options to provide security: One, they rely on reviews to provide confidence that Bill and Sally from Missouri aren’t a modern day Bonnie and Clyde. But that’s hardly foolproof. Or two, they request and hold lots of your personal information to hold you accountable, personal information that a middleman like Airbnb has no right to hold, is vulnerable to theft, and that ultimately they can (and do) abuse.
Or instead, the traditional route uses contracts written by lawyers and enforced in a court of law if either party breaks the agreement. Each of these actors takes a fee for their services. With Ethereum smart contracts and the digitization of real world assets, those players become obsolete. Imagine that I have an apartment for rent. I use a DApp to create a smart contract with all the terms of the rental. I deploy this smart contract and transfer the digital key for the apartment to the smart contract. You come along and want to rent the apartment. You first transfer your payment to the contract. The contract executes and sends the key code to your phone. In the future, you will likely have a scanner on that door that reads the digital key on your phone. Viola! If you stop paying the rent, the code and ownership is transferred back to me. No work on your end needed. No lawyers, brokers, creditors, or real estate agents needed, and you can finally explore the Alaskan backcountry without needing to climb mountains to find that cell service.
So what is Ether?
Ether is Pho Real’s X Coin, but for Ethereum. Any interaction with the Ethereum blockchain costs a fee. That fee is paid in its native token: ether. This includes sending ether to other people or interacting with an Ethereum smart contract. You know how your inbox is full of emails promising “Penis Enlargement” and “Russian Dates?” — ok, maybe they’re just targeting me. But regardless, if it cost a penny to send an email, spam would likely cease to exist. With Ethereum, it works the same way. Because the Ethereum blockchain uses the same mining principals of bitcoin, the speed with which it can process transactions is limited. Thus, to cut down on “spam” transactions that just bog down the network, a fee is charged. This fee also rewards miners on the network, just like with Bitcoin! Thus, the more DApps and users that utilize the Ethereum blockchain, the more demand there will be for ether, and the higher the price will rise.
“Ethereum has taken what was a four-function calculator of a programming language in Bitcoin and turned it into a full-fledged computer.” — Fred Ehrsam, Cofounder of Coinbase
If you feel like technology just slapped you in the face, welcome to the blockchain world. Welcome to the Internet 3.0. It’s only going to get crazier from here.What people fail to realize about Bitcoin, is that it was simply the messenger for this technology. While Bitcoin very well might be the single greatest investment of the 21st century, it was Bitcoin’s ability to create digital scarcity and a decentralized security system that was revolutionary. Blockchain, smart contracts, and digital assets could disrupt entire industries. As Uber disrupted the taxi industry, Apple the cell phone market, and top ramen beat out every other food option for college students, Ethereum could do the same for finance, online shopping, micro-lending, and ownership.
Now you’ve just finished your third article. Too bad Thanksgiving is gone and you missed your chance to talk about Ethereum. Well Christmas and Hanukkah are right around the corner and I’m sure your family would appreciate some Ethereum-small-talk. So brush up on your lingo, ask lots of questions, and prepare to blow away your tech savvy Uncle Steve.
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Disclaimer: This is not investment advice. Do your own research.
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