“What’s a Blockchain or what is Ethereum?” Is this question suffocating your mind?
Is it happening to you? Do you have to listen to your friends and acquaintances every day talking and talking about their investments in Bitcoin and Ethereum, or about Smart Contracts? Do you wish to finally know what all this is? Excellent! This article is for you! Whether you have some knowledge about Blockchain and Cryptocurrencies, or even if this is your first reading, do not worry! We’ll start from scratch. With this article, you will understand well why Blockchain and Cryptocurrencies technologies are such a revolutionary topic.
The goal here is, then, for this article to become the first lesson for any beginner who needs to understand the basic concepts of the Ethereum Network and Smart Contracts. We’ll mention Bitcoin too; nonetheless, this article intends to cover the most fundamental technicalities one would need to understand Blockchain, Coins, Tokens and Smart Contracts as they are in Ethereum. For anyone who has never learned about these technologies, this text could be helpful. Also those who want to review fundamental concepts might find a valuable lesson here.
It is a consensually accepted fact that the beginning of the recent decentralized censorship-resistant Blockchain technologies – where we now program coins, tokens, smart contracts, databases and many other kinds of distributed software – was the birth of the grandfather of all cryptos, Bitcoin. BTC turned into a revolutionary technological marvel that gave us back the possibility of storing value and transferring it directly from peer to peer (P2P), or, in other words, without the assistance of third parties, as it had been in old times thanks to gold.
Gold has always been sound value. You don’t need a government or a bank to enforce its value. Any two people in the world can transact in a P2P manner with gold without the need for authorities or institutions to intermediate. With regular money – Fiat money – this is not possible, since national currencies are issued and controlled by governments and organizations. National currencies are part of the surveillance systems that keep track of people’s decisions and actions.
Bitcoin is considered a new type of gold. It is called by its users “digital gold” or “gold 2.0”, since it is scarce and valuable like physical gold, and also because you can transact with it in a P2P way. You may know that Bitcoin is money. However, the legacy of Bitcoin for humanity was not primarily its intangible and invisible currency – even if keep hearing many people talking about its price -, but the Blockchain technology that stores the coins, because this is the technology that turned us into shareholders of a totally new type of computing system: decentralized computing and decentralized data storage.
In 2013, a brilliant young man named Vitalik Buterin who had studied the mathematical and technological bases of Bitcoin, proposed a new breakthrough: why not create a new type of Blockchain that could also run virtually any type of computer programs within the decentralized network, as opposed to Bitcoin that was capable of running only one program in particular? Vitalik wanted to use the Blockchain for a different purpose. In his mind, Bitcoin was an ideal new global currency. Nonetheless, he found value in decentralizing computation too, so that an infinite number of sorts of distributed programs were possible. He proposed the limitlessly programmable Blockchain.
Bitcoin was a Blockchain built with the purpose to acquire maximum security for gold 2.0. However, the idea of Vitalik led to the creation of the first Blockchain capable of running all types of computer programs (applications) from the inside of the decentralized network. Vitalik named this new unprecedented Blockchain “Ethereum”. The new creation has turned into a huge ecosystem of computers that operates as a global supercomputer at the service of anyone who needs computing power in order to conduct businesses and transactions without the interference of third parties. Ethereum inherited most of the paradigm-shifting properties of Bitcoin Blockchain: borderlessness, openness, publicness, neutrality, decentralization and censorship-resistance.
With Ethereum we learned that a Blockchain is more than a data structure used to run a coin. A Blockchain can be a supercomputer whose hardware is alive and can evolve to a size thousands of times bigger and more powerful than Google, Facebook or any other machine on the planet. Without even being in one specific geographical location, jurisdiction, or country, or, in precise terms, by being distributed all over the world, the Blockchain manages to be everywhere by not being anywhere. The Blockchain exists in the form of a planetary-scale network of even millions of computers: it has the structure of an infinite number of interconnected nodes that are scattered throughout the countries of the world. In the words of Vitalik, the “Ethereum network is the fabric for a kind of new Internet infrastructure”.
Let’s keep in mind one practical definition: we call “transaction” any kind of action that moves money or modifies data on the Blockchain. Transactions are the most fundamental actions of the Blockchain. Every single change or modification of the state of the Blockchain is done through transactions. A payment, an act of voting in an election, or the signing of a contract are actions that one performs through transactions. All the work necessary to keep the Blockchain working is performed as transactions. Each node of a Blockchain is a computer capable of performing transactions including storing information and certifying the validity and legitimacy of other transactions. This is an ingenious way that requires that, for a transaction to be accepted as valid on the network, many nodes around the world must confirm the transaction.
No central authority, then, dictates the truth. Management is conducted through decentralized transactions. And each transaction must be reviewed by all existing nodes. Each node runs invincible algorithms that make insanely expensive to even try to break security and print false information. To hack such a system, one would have to defeat thousands or even millions of independent nodes around the planet by overtaking their power. For most people, it is absolutely unaffordable. It is practically impossible, then, to print a lie on the Blockchain. And, it is totally impossible to print a lie and to keep it a secret. Even if someone is willing to waste millions of dollars in creating the power to cheat, instantaneously, after the lie is spread to many nodes, the rest of the nodes can detect the lie.
Decentralized computing became possible thanks to a new and incredible type of supercomputing systems that are not under the ownership and control of a company or a central organization. Bitcoin, Ethereum and all decentralized Blockchains are not owned companies like Facebook or Amazon. Bitcoin and Ethereum are software systems distributed in networks of millions of computers disseminated throughout the entire world. Blockchain-based computing power, thanks to modern algorithms, is so powerful that it could even begin to perform some of the tasks that governments and organizations do, without having a central authority. Blockchain could make some institutions and banks unnecessary in the near future.
By implementing decentralized computing power in the real world – as opposed to the common centralized databases -, Ethereum gave rise to a kind of distributed software that could be used to manage small, medium and large organizations without the need for any kind of central authority. The key to this decentralized kind of governance are Smart Contracts. These are computer programs that can be in charge of agreements and businesses between any two parties, being impartial and totally honest for both sides. Even a totally decentralized organization is runnable thanks to Smart Contracts.
Ethereum believes that these organizations will be part of a new world order in the future. They are called DAO – Decentralized Autonomous Organizations -. A DAO can be a company of even a public institution. In a DAO, no human board would be in charge. In the case of a complex DAO, one smart contract may be in charge of a voting system, one could be used to control accounting, another one could be managing the production, while a set of more contracts are in charge of all the processes and procedures of the organization. In the end, no human being would be controlling the structure. In terms of software, a DAO is a set of intelligent programs – “contracts” – that control all decision making, more or less like a modern cognitive computing system.
We must understand that a Smart Contrast is a computer program that is not stored in a particular computer or in a centralized database. It is stored in the Blockchain as inmutable and unstoppable code. A Smart Contract is capable of computing any type of commonly known functions that we see in applications in computers, smartphones or tablets. However, since running a program from the Blockchain requires to pay fees for each transaction, and since fees are not cheap, Smart Contracts are mainly used to function as arbitrators between parties who wish to transact with each other through immutable unstoppable software. Smart Contracts are especially efficient for those cases in which the transaction or agreement involves payments, transfer of value or trust between people, or when parties depend of trust.
A Smart Contract is simply software that lives within the Blockchain and that can do the work of the managers of a company, or the work of decision makers in a bank or even the work of a government, eliminating the subjectivity and lack of transparency of trusted third parties. Nowadays, Smart Contracts are normally used to exchange money, stocks or anything of value. Even legal ownership is being recorded on the Blockchain thanks to Smart Contracts. It is also foreseeable, for many experts, that, in the medium and long terms, larger companies could be operated by sets of interconnected Smart Contracts functioning as artificial intelligence.
The name of the supercomputer – or Blockchain – is Ethereum. The name of the currency that serves to keep this particular Blockchain alive is Ether. Ether is used to pay to nodes that validate transactions around the world, because they lend their computing power to contribute with the operation of the global network. Ether is also used to pay each time a Smart Contract is executed to carry out transactions like payments, commercial exchanges or asset transfers. When Ether is used to pay for the execution of any transaction, we called it “gas”. Gas payments are an efficient incentive for people around the globe to provide help to support the decentralized network.
Anybody can create and deploy on top of Ethereum a computer program that implements the creation of a cryptocurrency. This program can also implement rules for the execution of transactions with this new cryptocurrency. This is how a “token” is born. A token can be seen and used as a “currency” in everyday life. But it is not exactly like Bitcoin or Ethereum. A token is a program or a Smart Contract that depends on an existing Blockchain and on another coin. In Ethereum, a token pays gas in Ether every time one transacts with the token. This represents a high level of dependency for the token. A token is a Smart Contract running on the Ethereum supercomputer. Tokens are very convenient when they are used to fuel one specific business activity, since they operate like the millage system of an airline. Tokens are good to fuel all sorts of special applications.
As a developer, you have many options in Ethereum. For example, you may create an application that runs on your own computer, or on your smartphone or tablet, and that can also interact with Smart Contracts that run on the Blockchain. An application of this type is what we call a “Decentralized Application” or a “DApp”. In this way, you can have, for example, a Smart Contract that controls an entire business – maybe someday, even a large company – automatically and autonomously from inside Ethereum Blockchain. And you can have thousands of people who use a DApp that connects to the Smart Contract, in order to participate in the business directly without third parties in the middle.
The Smart Contract would encapsulate the business logic and the rules to express correct, transparent and totally objective business behavior. The DApp would be the user interface for anyone to connect to the Blockchain and be part of the business if the conditions to participate are met. While Smart Contracts are usually static and are expected to be immutable for the sake of transparency and security; on the other hand, DApps that connect to Smart Contracts – actually all DApps that connect to the Ethereum Network – are totally capable of evolving to offer new attractive features and functions. A common type of DApp are the so-called “wallets”. Typically, wallets are used to manage one’s savings and to transact with Ether or tokens among users.
Here, we have explored all the basic differences between Bitcoin and Ethereum and what makes Ethereum special. Bitcoin was born to be a decentralized universal super currency or gold 2.0. Ethereum was born to be a decentralized global supercomputer. This supercomputer does not store information in databases as normal computers and supercomputers do in the centralized world. The Ethereum network stores its information in a distributed way in its nodes throughout the planet in the form of data packages called “blocks”. This information specifies how much money belongs to each holder of Ether or tokens around the world, and also maintains a detailed and immutable record of all transaction history since the Ethereum network was born.
The Blockchain exists as a means to create organizations and institutions whose most basic rules of operation are not manipulated by human beings according to their biases and preferences. Instead of humans, Math and computational algorithms are in control. The Blockchain does not differentiate between the rich and the poor. The Blockchain is unstoppable and impartial. No human or technological force can modify the history of transactions, since it is replicated in millions and millions of nodes throughout the planet. The data is also protected by the power of mathematical algorithms, as well as by the size of the network. For all these reasons, we say that the data stored in the Blockchain are authoritative, non-hackable, non-repudiable, perpetual and transparent.