Ethereum is a worldwide network of interconnected computers (nodes) that enforce, execute and validate programs in a decentralized manner without requiring a server, memory, CPU power, or any other computing function, as it is all provided by thousands of ethereum nodes scattered across the world. In short, ethereum is a global computer.
It further ensures the operation of ETH – ethereum’s digital currency which turns money into pure code - opening many new opportunities, including machine to machine payments, one click online commerce, decentralized autonomous organizations as well as completely new business models.
The platform has attracted significant interest by many household brands which are positioning for what some have called a fourth industrial revolution.
The reasons might become apparent as you read this article which is mainly concerned with high-level concepts. You might find some parts to be far too advanced or far too simple. That is because this introduction tries to provide a holistic answer to the title's question. As such, some parts might be useful even for experts.
To aid you in finding potential sections you might wish to skip, the decentralized digital currency is firstly introduced in some detail, explaining Nakamoto's consensus and chain splits in their own subsections. You might find more interesting one specific aspect of the digital currency, codable money, which has a section of its own. That is followed by explaining ethereum's potential role in bringing a future where machines can act by holding, transferring and accepting value, giving them a very primitive level of intelligence.
ETH – The Decentralized Digital Currency
ETH is a new decentralized digital currency backed by the free market. Unlike currencies issued by a central bank (such as dollars or pounds), or a central private company (none exist), ethereum is issued through open-source code executed in a decentralized fashion on thousands of nodes. That code determines which node gets eth based on a number of calculations called proof of work - code based solutions to useless math problems that aim to just prove work was done by hardware such as GPUs, better known as “miners” for their "digging" through the useless code, waiting to strike gold (the 5 eth reward).
The more hashrate (hardware) share of the total network a node has, the more often they earn the reward, which is currently valued at around $60 dollars and is automatically given to only one miner every ~17 seconds.
There are massive mining facilities stacked with hardware that only performs the "digging" function. Soon, that will change. All one will require to "digg" is the running of a node (just a downloadable software program) and the locking of a certain amount of eth in a saving account like manner to secure more than 85 million eth, currently worth $1.1 billion.
For now, as “mining” requires much upfront capital investment and has some inherent risks due to its zero-sum game function, most tend to directly purchase eth on exchanges such as Coinbase. Once purchased, the currency can be sent to anyone through ethereum’s decentralized network which uses a blockchain - a chain of transactions showing Alice paid you and was in turn paid by Bob, who, in turn, was paid by Carl and so on, until it reaches one of the many issuing miners that created the eth through the "digging" process.
Although the blockchain ledger is fully public, it contains no names. Instead, it is made of random letters and numbers called a public address. If ownership of the addresses is revealed, it is possible to see who is paying who, but the network itself does not reveal such ownership. It is therefore pseudo-anonymous, comparable to an online nickname. If people learn your nickname, they can attribute to you all the comments you have previously made, otherwise it is just a random person making comments online. Equally, if people learn your public eth address, they can see what transactions you have made, otherwise, it is a random address making transactions.
The Nakamoto Consensus
The final point in regards to the currency aspect is its decentralized nature which was previously thought to be impossible due to the double spending problem as anyone can copy and paste some code. Nakamoto proved eight years ago that a currency can be decentralized by ensuring such code could not be copied through the use of cryptography. There are three main elements, a private key that corresponds to a public key (address), proof of work which validates transactions in a non fakable manner and, most importantly, what we now call the Nakamoto consensus.
The Nakamoto consensus is a solution to a problem in computer science illustrated by the tale of the two byzantine generals. It tries to establish how agreement can be reached while communicating through potentially malicious and hostile network actors who may betray the generals and thus inform the king or enemy of their planned action, leading to failure. As far as the code itself is concerned, Nakamoto described the solution thus:
"They use a proof-of-work chain to solve the problem. Once each general receives whatever attack time he hears first, he sets his computer to solve an extremely difficult proof-of-work problem that includes the attack time in its hash. The proof-of-work is so difficult, it's expected to take 10 minutes [~17 seconds for eth] of them all working at once before one of them finds a solution. Once one of the generals finds a proof-of-work, he broadcasts it to the network, and everyone changes their current proof-of-work computation to include that proof-of-work in the hash they're working on. If anyone was working on a different attack time, they switch to this one, because its proof-of-work chain is now longer."
The above describes how the code itself works, simplified to 51% of miners decide, but it is limited to only protecting from double spending and other malicious or objectively dishonest behavior. It does not assist in circumstances where there is a genuine requirement to upgrade the network and thus change the rules.
In those situations, everyone often agrees because of clear benefits - say, it allows you to download the node faster with no downtime - but, sometimes, there is a genuine dispute on whether an upgrade should or should not occur - say whether to prevent a massive theft. Here, Nakamoto's consensus does not assist because it is only concerned with preventing double spending.
Where there is a genuine dispute - so far we have only seen 80/20 splits in opinion - one needs to bear in mind that it is people who run nodes, and it is people who run miners. Those individuals who disagree with an upgrade can and have split, creating their own blockchain and currency.
The interesting quality here is that everyone who holds eth before the split into two blockchains has an equal amount on both chains. In these situations, people can directly "vote" by selling their eth on one of the blockchains.
It's useful to bear in mind that these splits can happen by anyone, at any time, for any reason or no reason. Upon deeper consideration, the implications here can be revolutionary in concept because it is the ultimate guarantor of the decentralized function of public blockchains. No one can impose their will on anyone. No one can order anyone. All are fully free to decide their own rules.
Whether anyone actually cares about their rules is a different question. Here, thus, lies the empowering function of public blockchains. Although the code might say it is 51% of miners or nodes, in practice and reality, it is actually 51% of people who we must assume are honest.
We can, therefore, discern a rule. Where, objectively, there is malicious or dishonest behavior, such as an attempt to double spend, Nakamoto's consensus fully and successfully prevents it by cutting off the malicious actor from the network for the code validates and applies the honest rules.
Where there is an honest and genuine dispute regarding what rules should apply in the first place, Nakamoto's consensus does not assist as it applies only within one blockchain, not to a decision between two blockchains where one of them is intentionally, rather than accidentally, split.
This is a very complicated area, not yet fully experimentally understood, and currently under development. In a sketch-like manner, we can say the initial decision on whether to offer the option of two rules relies on the coder/s. There must be an initiator who offers the two options. If one does, then the miners decision is highly influential - although whether more so than the initiator depends on the specifics of the proposed rule change - because they protect the within-chain function of ensuring there is no double spend.
Logically, to have an initiator and miners agree suggests their chain will be dominant - although the other chain can continue in, perhaps, a less relevant manner as far as most are concerned - but whether that would actually be the case depends on the specifics of the proposed rule change and the surrounding circumstances.
Ultimately, the final decision is a sort of referendum where the value holders decide to sell or buy one chain or be absent from making a decision.
The interesting part here is that despite all of these steps, the minority chain can continue to operate and have value. This function is an underestimated quality of public blockchains, even by some individuals within the public blockchain space, because they miss the philosophical basis of blockchain's creation.
Despite what some may have previously said in the blockchain's early days, the foundations of ethereum, the currency, are not based on fringe thoughts, but on the mainstream insights of a Nobel prize winner, Friedrich August Hayek, who spent much of his life studying money. He states in The Denationalization of Money:
“The past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process… only competition in a free market can take account of all the circumstances which ought to be taken account of.”
The genius of Nakamoto was to force the creation of free market money through a decentralized mechanism, thus making a checkmate move as it can not be shut down save for by the judgement of the market. By it's judgement alone eth lives or dies and if some parts of the market think it should split, the best-managed currency rises through market competition, or, alternatively, its mismanagement or lower quality courts the market's punishment.
That's just one aspect, because ethereum is not just money. It is an upgrade of money as it turns paper into pure code. Code we can modify, order around through ifs, thens, while loops. Code we can incorporate into our websites, into our videos, our games, our cars, airoplanes, trains, smartphones, fridges.
The potentials here we can not quite comprehend. So much will be automated. So much value will be exchanged with no human oversight or action. There will be deep webs of algorithms, too complicated for anyone to understand. Machines moving around on their own, based on if, thens, exchanging value based on our code orders. Cars driving themselves, automatically paying the charging station.
The efficiency gains might be higher than ever in history. Man, perhaps, will finally be freed. Yet, we pray, he is not instead fully enslaved.
Ethereum – The Codable Money
A somewhat simple example is flightdelay. This is an ordinary website on the surface, but on the background - through Metamask - it uses the blockchain to access flightdelay’s smart contract which is just if/then, else, while, etc. code. What is unique is that this code does not have a centralized server, therefore does not require anyone’s permission to run. As such, it can be fully automatic, allowing machines or other unrelated code to directly communicate with the smart contract and automatically transfer or receive value. As this code is held and validated/executed in thousands of machines, it is as good as impossible to tamper with or change in any way, making it far more secure than a centralized database where one administrator can change data at will.
In this example, the smart contract gets a data feed for flights and, based on mathematical algorithms set by coders, it determines the amount of eth you will receive if the flight is delayed or canceled. It all runs on its own. There are no employees, administrators, there are no accounts, no registration, no third party at all, just some code that does it all.
Another use of Ethereum’s blockchain and smart contracts may be authentication. By tagging sneakers, for example, or by scanning high-end dresses, blockchain technology can allow owners to verify the authenticity and genuineness of a product, as well as enter ownership details and perhaps even custom messages, tackling fake goods trade and increasing enforceability of property rights.
It further allows for the creation of completely new business structures, such as Decentralized Autonomous Organizations or DAOs. As the smart contract can hold funds, investors need not transfer money upfront to the management class, but can instead vote on the release of a specified amount of money dependent on results. Replacing CEOs and board of directors.
This is done through tokens. Ethereum, being Turing complete, allows for the creation of new currencies (tokens) on top of ethereum’s network. Entrepreneurs can and do issue tokens in return for eth to create new projects ranging from music and other intellectual rights, fantasy sport, decentralized supercomputers, social networks, stable currencies, derivative and hedging products, automatic machine payments, as well as countless of other innovative projects that are daily announced.
Ethereum - The Internet of Things
As money is transformed into truly digital – that is, literally code – a number of activities that previously could not be undertaken become possible. The most promising is machine to machine payments, better known as IoT.
The current monetary system requires bank accounts with authentication and verification through centralized third parties which dependent on pins or other such devices for security. Ethereum requires no accounts, just a public address or a smart contract address. It requires no third party and, more interestingly, while humans need a private key to authenticate and verify public addresses, machines – that is smart contracts – are automatically authenticated and verified by ethereum’s global node network.
They have a public address, thus anyone can send any amount of eth to the smart contract or the machine, but they need no private key nor require any external or input method to prove ownership of their eth for the network knows the rules of that specific code, knows the amount of eth it has, and knows whether its transfer is within its own rules.
As such, it is impossible to steal the machine's money, or cheat them, as the smart contract responds only to its own code which needs to be verified by thousands of nodes, making it fully secure (unless, of course, the coder has made some mistake).
This opens many new opportunities. Machines can now hold and exchange value. In combination with sensors, cloud computing, data analytics, wireless technology and other advances in computer science, it is now possible for your fridge, for example, to realize you have run out of milk, thus automatically place an order with your local supermarket and pay them 0.1 eth. The supermarket’s machines, in turn, once time for delivery is reached, can automatically order and pay a delivery car. On the way, the car may stop at the gas station where payment is automatically exchanged based on the level of gas or electricity it may need, with the milk in front of your door by the time you arrive home.
This, in effect, gives machines a very primitive level of intelligence as they can think – albeit what we have told them to think through the smart contract code – have memory through the decentralized eth nodes or cloud computing, can communicate through wireless technology and sensors and can act by ordering and making or receiving payments.
All this is at a very early stage, but the many new opportunities ethereum opens has ignited imagination with thousands of developers working on numerous eth based and more widely blockchain based projects.
Through Decentralized Autonomous Organizations, for example, it is possible to create a way of organizing without needing a CEO or board of directors, employing instead decentralized voting in what could be a new invention, and by itself highly transformative, in how labor co-ordinates.
Through just a plugging (MetaMask), it is now possible to pay a newspaper 5 cents with no more than one click. Through just some code, numerous intermediaries that require huge resources in money and labor can be replaced with far more efficient and way cheaper systems.
While previously there was much debate on blockchain technology and, by association, ethereum, the transformative nature of this new invention has now been recognized at all levels of society, from the Fed, to the former presidential candidate with the Trump Administration having many eth/blockchain supporters in its personnel.
Ethereum, specifically, opens a new frontier due to its smart contracts functionality. This has made them the platform of choice for many household brands, including tech companies such as Microsoft and financial institutions such as JP Morgan, which modify ethereum's code for use in private blockchains (comparable to the intranet vs internet in their relationship to public blockchains).
Although it remains too early to say, most private blockchains seem to be based on ethereum primarely because of its higher security as the public blockchain is tested daily, proving its robust security.
No one quite knows how the relationship between private and public blockchains will develop, but it appears reasonable to think that businesses will find it desirable to move from private to public blockchain as required. It is probable, therefore, that a web of mutated private blockchains will communicate with the public blockchain while all use one core code or, to continue the metaphor, share one DNA.
All that is left to be said is a note of caution. Although this space has significantly matured since its early days, amateur elements remain. Much of what everyone is doing is utterly new. Things are expected to sometimes go wrong.
This space is at the bleeding edge, soon to move to the cutting edge. It is not quite ready for your parents yet, but it has attracted many very smart kids.
They believe eth like functionalities are the future as certain new things made possible by eth have clear benefits. It thus appears reasonable to state that soon, all money, whether centrally issued or otherwise, whether dollar or pound, will be turned into pure code.
As such, everyone seems to be positioning themselves to take advantage or prepare for this new world.
Image from Ethereum.