In an attempt to cash in on the recent popularity and prevalence of bitcoin, inventors have launched a good number (i.e. hundreds) of cryptocurrencies. What they have in common is that all of them are based on the pioneering bitcoin technology, except that some of them (e.g. litecoin) also involve meaningful developments. However, the majority do not add anything of significance to the technology. At the same time, all of the developers got bogged down with the original bitcoin concept, of creating a unit of account, which is then stored in virtual wallets and can be transferred between users. To be sure, this is highly exciting because the currencies work reliably without a central server, a clearing house, control or supervision, which could not be achieved previously. That’s “all” they can do, though: besides recording in wallets and making transfers, they aren’t good for anything.
However, now something new is taking shape, an enhancement on the concept called Ethereum. A team of serious programmers are working on it, and although they aren’t done yet, many geeks look forward to the end of the year when it is slated to be launched.
But what will it be able do—what’s the big deal? Building on bitcoin’s block chain technology, Ethereum will also be a decentralised system operating on a distributed network, while its developers are trying to eliminate bitcoin’s weaknesses and integrate more cutting edge and elaborate solutions. Similarly to bitcoin, once it’s launched it will work according to its own rules, allowing no one (not even the programmers creating Ethereum) to tamper with it.
Ethereum will have its own cryptocurrency called ether (ETH), which will be included in the system by default. Ether got its name from an intangible material, which, according to a long-discredited theory of physics, fills the universe. Ethereum is intended by its creators to fill cyberspace in a similar manner, permeating the digital universe.
Indeed, Ethereum offers a lot more than cryptocurrencies, and could become the foundation of a new world. This world may then be populated following the launch of the system by allowing anyone to add their own content to the new universe. But how?
Ethereum will have its own programming language. Essentially, programs written in that language will allow content to be added and Ethereum’s world to be shaped (obviously, sooner or later there will also be a simpler and user-friendly way about it). What can users do in this world?
Anyone will be able to create a new “currency”, a new unit of account, and define rules for the value (creation) of that “currency”. In fact, that is equivalent to defining what the units of the “currency” represent. Subsequently, no one can change the rules, not even their original creator. “Currency” is written in quotes because it will not necessarily mean currency in the traditional sense, but anything with a value that can be represented digitally.
Suppose I was a musician of ordinary repute—then I could create a currency called “David’s New Album”, which would represent the value of my new album to be finished soon. I could create 1,000 units of it, a quantity that cannot be changed later, not even by myself. Obviously, first off I would put all of the units in my own wallet. Very neat—but what will I do with all this?
The building blocks of the Ethereum universe will be the contracts written in its own programming language. Such contracts can also be created by anyone and will constitute rule sets that specifically define the way to trade all kinds of things in the Ethereum universe. The contracts can incorporate a variety of rules, which can be embedded into and referenced by one another.
Suppose that I, the musician of ordinary repute, get a promise from a label that if I entrust them with the distribution of my music, a clever advertising campaign will attract at least 50,000 people to download and pay for my new album. The label’s offer is that if the target of 50,000 downloads is not met, they will not ask for any money. Conversely, if the target is met, they get 30% of the sales and I get the rest. Today, a deal like this can be arranged through a contract with the label, but even that requires me to trust them as they will collect the money, and I can’t see the number of downloads anyway so I could easily get ripped off.
Ethereum provides a solution to allow users wishing to deal with one another via the internet to do so in a highly secure manner. To ensure that no one has an opportunity to con the other party, even where the users entering into a business relationship don’t know each other. All this—and that’s the whole point, that’s what we haven’t been able to do until now—without having to engage a third party as an intermediary that is trusted by both parties, which is frequently irksome and often expensive.
Using the previous example, I don’t even have to meet the label; it will be sufficient to code the agreed terms of profit sharing into an Ethereum contract, which will be signed digitally by both the label and myself. From then on, it will be difficult to breach that contract, as Ethereum’s system will not make it possible. Obviously, payments for the downloads will have to be made in ethers (if someone doesn’t have any, there will be providers offering an option to pay in ethers in exchange for dollars). Sales will be distributed (or blocked temporarily) by the system according to the contract. Swindles are out of the question, which will save us the trouble of pursuing our case in years of litigation. And let’s not forget: Ethereum is decentralised and operates without any human intervention, which means that no politician or financier will be able engage in corrupt practices in this world.
Back to the currency called “David’s New Album”. Why have I created it? Obviously to sell its units. I’m worried that my album will not generate enough sales, so I put up 400 out of the 1,000 units for sale. I draw up an Ethereum contract stipulating that all of the proceeds from the downloads of my new album should be distributed proportionally between holders of the currency called “David’s New Album”. In this contract, I must reference my other contract with the label. Apparently, “David’s New Album” is in fact much more of a packet of shares than currency, and I have actually created shares in my new album. I want to sell these, even before the album is released. My fans, who believe in my talent and expect me to make a hit and my work to sell like hot cakes, will obviously buy the shares. I have no means to rip them off: the contract cannot be breached, and they will get the money that is due to them—Ethereum’s system automatically guarantees that. In turn, I can take comfort from the knowledge that in the event of my success, I’ll go on making good money on the 600 units of the “David’s New Album” share which I have retained, while I have also secured sufficient revenues in case the album is a failure.
The above example may seem a bit artificial, and rightly so—Ethereum doesn’t exist yet, and no one knows what it will actually be used for. Maybe nothing. Ethereum’s potential field of application is, however, extremely broad, and it offers a multitude of opportunities, making it impossible to predict the optimum use human creativity will ultimately find for it. For instance, we use intermediaries in many walks of life, who often make more money on us than would be absolutely necessary, and Ethereum could help eliminate them. The system could also be used to organise games of chance, to issue coupons, for crowdfunding, for voting systems, to create exchanges and investment funds, and a whole lot more.
The charm of it all is in the fact that bets on Ethereum’s success can be placed now (but you’d better hurry). Indeed, one of the things bitcoin has been blamed for was that in the years following its launch in 2009, an extremely small group of users mined bitcoins or knew about their existence in the first place, and by the time it had become more widely known, the majority of bitcoins were concentrated in the hands of only a few people. Not only is that unfair, it is also dangerous, making it possible for even a single person to manipulate the bitcoin market. Ethereum’s programmers are eliminating this problem, while also raising the funds for development by selling ethers, to be created upon the future launch of the system, as part of a sale lasting a few weeks (closing today). In this way, they get paid for their work already at this point, while ensuring that ethers are not concentrated in the hands of only a few people even for a single moment. Of course, ethers can be bought for bitcoins, what else.
Obviously, no one knows the real value of the ether. If the system works badly or fails, it will clearly be zero. If it works well and people get to use it, then on the basis of bitcoin’s current market capitalisation (a comparison resting on rather weak foundations), calculating with the 60 million ethers expected to be issued initially, 1 ether is worth about 100 dollars. It seems like a rather good deal to buy it now as it is sold for 36 cent’s worth of bitcoins.
Before you rush to buy ethers, think about what you’re buying. We get a promise from Ethereum’s designers and programmers that once their system is finished, the ethers promised to us will be recorded in our wallets in the very first block called Genesis Block—the only one in which human beings (the designers) can code arbitrarily allocated units of ether. That is, we’re buying something that doesn’t exist yet, but even when it will, it won’t become much less intangible than it is now. Every enthusiast should bear this in mind.
Original date of Hungarian publication: 02 september 2014