Industry

Explaining Ethereum

With the Ethereum pre-sale now live and on track to raise tens of millions of dollars, it seems like a good a time to step back and explain what Ethereum is and why so many people are excited about its potential.

Ethereum is generalized Bitcoin.

If Bitcoin is a block chain platform for transacting virtual currency, then Ethereum is a block chain platform for transacting anything at all. If Bitcoin allows you to send money to anyone without a central authority, then Ethereum allows you to transact in any way with anyone without a central authority.

If Bitcoin is like email, then Ethereum is like the web.

What sorts of services might be powered by a decentralized, general purpose block chain like Ethereum? Everything from voting systems to data storage, from prediction markets to exchanges, from name servers to legal docs.

How did Ethereum achieve this? By replacing a currency unit, like bitcoin, with a programmable unit, called a smart contract [1]. Like real world contracts, smart contracts are the rules parties agree to which govern outcomes. Unlike real world contracts, smart contracts are not enforced by courts, but by the Ethereum network itself, and can interact with other smart contracts to construct increasingly complex applications [2].

And just like you can’t cheat and double spend bitcoin because transactions are confirmed by a time-stamped block chain, you can’t break the rules in a smart contract for the same reason.

But this comes at a price. As we know from Bitcoin mining, it requires significant computational effort to process transactions in a distributed network. In Ethereum, contracts pay a fee for using the network; the more complex the contract, the higher the fee. The fee paid to Ethereum miners is called the gas price, and the currency used to pay the fee is called ether [3]. Ether is being pre-sold at a pre-determined, sliding exchange rate to bitcoin (the proceeds from which are funding the project itself). The exchange rate with bitcoin and other currencies will float once Ethereum’s genesis block is created and mining begins (i.e., the official launch of the platform which is planned for Winter 2014/2015).

Since running smart contracts costs money, not all software will run on a decentralized block chain. Databases are far less expensive by comparison and thus still the best solution for most problems. Instead, some parts of applications (i.e., the transactions layer) may become decentralized. And viewed from a different perspective, smart contracts will be a far cheaper alternative to writing and enforcing real world contracts, or in many cases will be the only alternative in countries with weak or abusive rule of law.

Ethereum is an open-source project, and unlike Bitcoin, society knows who the founders are.

Our mission at Chain is to help enable a world of decentralized applications. Watch this space closely for announcements about how we will be helping developers build applications with Bitcoin, Ethereum and other smart contract block chains.

Further reading:

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[1] More precisely, the currency is replaced by an account, which includes the smart contract code, some storage space, the balance of the account, and a nonce.

[2] This is why it is said that smart contracts are “first class citizens” in Ethereum, having equal powers to external accounts transacting on the network

[3] Ether is like digital oil which keeps the peer-to-peer machine running smoothly. In this way, Ethereum has paired an economic incentive with a decentralized network, something protocols like email and Tor have sorely needed.


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