What is Ethereum?
Ethereum is an open source platform to build, distribute next-generation decentralized applications. That is, applications that have no middlemen where users interact with social systems, financial systems, gaming interfaces all in a peer to peer fashion. Because the ethereum network will be distributed on hundreds of thousands of computers around the globe this all takes place on a censorship proof foundation.
In short, their mission is to open up the floodgates of decentralized application development. They’re worked well into their development process and launched a live version of the network in the year 2015.
“I thought [those in the Bitcoin community] weren’t approaching the problem in the right way. I thought they were going after individual applications; they were trying to kind of explicitly support each [use case] in a sort of Swiss Army knife protocol.” Vitalik Buterin, inventor of Ethereum
Most of the services you use today have one thing in common: they’re centralized. So for example you trust your bank to keep your money safe, to be independently audited, and to be honest. The same is true with Facebook, when you upload a picture of yourself, when you push a document to Dropbox or even when you go to your medical practice and provide them with your personal medical information.
As a developer you need to submit your application to an App Store and risk having it removed for the most far-fetched of reasons. History has proven time and time again that this model is flawed but necessary as so-called trustless operations have so far been both unprofitable and too complex to implement.
Remember that everything that is centralized makes it easy to attack because it offers a single point of failure like the firewall of a website.
Applications built on ethereum do not require their users to trust the developers with personal information or funds. On ethereum, your personal information stays yours, your funds stays yours, your content stays, your content stays yours.
Ethereum is an application programming platform so what can be built on ethereum is only limited by the creativity of their developers. That said, such technology has three types of applications that immediately comes to mind.
The first are individual currencies. Imagine if you’re an artist and you want to support yourself by issuing a brand new currency. If you want to support this artist, you’d purchase that currency, technically investing in their own personal IPO.
And as those millions of currencies are traded on decentralized exchanges currency itself becomes a representation of your values and not just a means of exchange.
Ethereum makes it straightforward to issue your own tokens of value. So you can reward your users for actions that they take even outside of the network. Such as a Foursquare checking, for example or participating in a grid computing project. Imagine how the relationship between consumers and retailers would change if instead of issuing loyalty points. Retailers would issue crypto tokens of value that could be then exchanged for goods and services on decentralized markets or even other tokens of value such as air-miles.
Another interesting application of this concept is that today on Facebook if you help identify artists to subsequently become successful by pressing the like button, that value goes to Facebook advertisers not the content producers, not you!
On ethereum on the other hand, both the content creator and the early adopters would be rewarded for identifying that artist. It’s a brand new revenue model! That’s never been seen before and it could completely revolutionize the way we think about revenue on the Internet today.
The second type of application that we foresee as being very successful on ethereum are applications that currently require a middleman. Users are tired of paying exorbitant fees to companies such as Ebay, Kickstarter or Airbnb.
On a peer to peer network, the existence of a middleman is limited to bringing true value-add such as insurance. For example, rather than just putting two people in contact with each other and for a decentralized Kickstarter. Instead of receiving a pre-order product that quickly becomes obsolete or just a t-shirt instead, users could be rewarded with tokens of value into the startups that they invest in.
The third type of applications are financial ones. There’s this concept of the village where if you were to take a loan and default on it, you’d be banished. In short you’re backing loans with reputations rather than with physical assets.
Now this is a successful concept in the developing world where microfinance companies have experienced very low default rates. But it’s not new and it’s never scaled past a small group of individuals. With ethereum, you can scale reputation to millions of individuals. So, we foresee disruption not just in the developing world but also much closer to home.
And this wouldn’t be limited to credit as on ethereum. Any user can issue and trade stocks, bonds, derivatives and even contracts for differences. It may even be that the ethereum applications that will have the most impact on the world haven’t been invented yet. Just like it took four years for social networks to appear on the web and a couple more years to see them diversify and invent novel applications such as micro-blogging.
How Does It Work?
At the core of ethereum, you’re going to find blockchain technology. If you look at centralized applications, you’ll find they reach trust by being closed firewalls and security teams that you have to trust, and trust to do their job well.
Blockchain technology on the other hand uses a different model. One by which trust can be reached on an open network. Bitcoin is a currency that was the first and currently best-known application of blockchain technology.
Ethereum make this technology applicable to just about anything else. Anything that can be mathematically represented, can be modeled, secured and traded and just like in bitcoin. Where you do not need to trust into a bank or a central authority to keep your funds safe. On ethereum, your personal information, your identity and your funds stay under your control at all times.
On ethereum, developers write business logic into what we call contracts. Contract are programs that follow a series of steps every time they receive a message called a transaction.
Contracts can store data, send and receive transactions and even interact with other contracts independently of any control. They are maintained by the network and they are written in a programming language that will be instantly familiar to any developer.
Because the interfaces to the contracts that live on the ethereum network are also decentralized. As an application developer you will need zero infrastructure to deploy and distribute your applications. In fact, because an incentivization framework is inherent to the protocol your applications will also be impervious to denial-of-service attacks.
A future application of ethereum are DAOs, or decentralized autonomous organisations. A DAO consists of one or more contracts and could be funded by a group of like-minded individuals.
A DAO operates completely transparently and completely independently of any human intervention including its original creators. It will stay on the network for as long as it covers its survival costs and provides a useful service to its customer base.
You can think of ethereum as a programmable, distributed network. The fact that ethereum is by its very design both fraud and tempering resistant means that it offers a new range of solutions. To everyday problems that are currently solved at great expense.
Voting machines, domain name registration, registration of legal documents, medical software. Transfer of goods, of services, of smart property between individuals, contracts between individuals, reputation systems and financial derivatives. All those applications can be build on a network where users stay in control their funds and their personal information. At all times!
Ultimately, ethereum is not here to undermine or to strengthen any existing system it’s a third way. Beyond voice versus exit. There are of course challenges ahead of such an ambitious project. That’s why they’ve assembled a team of world-renowned experts to build ethereum. Including Neil Koblitz the co-creator of the elliptic curve cryptography used in bitcoin. As well as Ralph Merkle, one of the inventors of public key cryptography.