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Into the Ether

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For those who are new, my name is Jeremiah. I’m not a cryptocurrency expert, nor am I an economist. I
 

The Block

November 29 · Issue #3 · View online
Weekly curated #cryptocurrency news and commentary.

For those who are new, my name is Jeremiah. I’m not a cryptocurrency expert, nor am I an economist. I am an enthusiast who believes that cryptocurrency and its attendant technologies are the prelude to a Cambrian explosion of innovation in “real/cyber-space,” where the digital and physical worlds meet.
This is a weekly email digest comprising a short topical essay about the crypto-space, followed by a manageable collection of curated links.
If you know anyone who’d be interested in this kind of content, they can subscribe here. I’ll be playing around with the format from week to week to see what I like best, and I love feedback, so don’t hesitate to email me

Looking at the above chart, you’ll see Bitcoin still has a long way to go. Alternative cryptocurrencies are even further behind. We aren’t even close to the ceiling. We’re still crawling around on the floor.
But First, Some Definitions
The rise of cryptocurrency has brought with it the headache all new technology brings, which is a new lexicon. Knowing these terms is fundamental to your understanding of the greater cryptocurrency ecosystem. So I thought it would be good to throw a few words and definitions your way so you can know what the heck everyone is even talking about.
Software Wallet - This is the digital interface/application/client/holder that you use to manage your account(s).
Hardware Wallet - This is a piece of hardware, such as an encrypted hard drive or flash drive, which holds your private key(s).
Account - A combination of a public address and private key that “reports” your cryptocurrency funds which are stored on the blockchain.
Public Key - Your address which you use to receive funds.
Private Key - Used to send funds from an account. This is and should always be kept secret.
Keystore File - This is an encrypted version of your private key in JSON format (don’t worry about what JSON is). It is protected by a password of your choosing. It’s safer than simply an unencrypted copy of the private key, since you need the password to access it.
Mnemonic Phrase - This is another encrypted version of your private key, and in fact can be used to derive multiple private keys. Typically a 12 to 24-word phrase that allows you to access your accounts.
Smart Contract - A contract that is written in code and executed on the blockchain. When a smart contract is executed, every node on the network runs it; it is public, and therefore tamper-proof (a smart contract must also be vetted to ensure no bugs exist within the logic of the contract itself).
Ethereum Is and Isn't a Cryptocurrency
I’ve mentioned Ethereum in previous issues, and I wanted to delve a bit more into this topic, since it is arguably one of the more important innovations in the cryptocurrency industry, second only to the invention of Bitcoin and the blockchain. I should note that these are only my opinions. I encourage you to research this topic yourself to come to your own conclusions about this technology.
If Bitcoin is the load-bearing member of the house of crypto, Ethereum is the remaining timbers, the roof and floor, and the blueprints for a brand new addition. It is an alternate currency to Bitcoin, but it is also so much more than an altcoin. 
DApps (Decentralized Applications)
Open-source software that leverage on the blockchain technology are called DApps (Decentralized applications) and they all share common characteristics, namely:
  • Decentralized - Must be stored on the public blockchain in order to avoid pitfalls of centralization (ie, single source authority)
  • Open Source - Available for public scrutiny on a public blockchain, voted on and implemented by a majority of its users.
  • Incentivized - Validators of the protocol should be incentivized to verify the blockchain
  • Protocol - Built utilizing a community-agreed protocol that utilizes an cryptographic algorithm to show proof of value.
Here are two more explanations of DApps that you may want to read, if you need clarification.
With that in mind, it should be obvious that Bitcoin was, itself, the first DApp. While Bitcoin is, more or less, a single-use DApp (its purpose is purely transactional), Ethereum is more akin to a global computing platform, upon which multiple (potentially unlimited) applications that depend on and utilize the blockchain, are built.
The Decentralized portion of DApps is the key component in this innovation. Historically, legal transactions have required a third party intermediary, such as a bank, to authorize and validate them. This is because money, especially in digital form as zeros and ones, could be easily copied and reused without a mechanism in place to prevent it. Hence, a central authority will validate and protect transactions so that funds aren’t copied, and ensures transactions can’t be undone arbitrarily or maliciously. Banks charge a fee for this service, and users are locked into those fees, whether they are fair or not.
In a decentralized system, there is no authority to avoid these problems. Rather, cryptocurrencies utilize the public ledger validation of the blockchain to avoid problems like double-spending and to bypass the traditional centralized systems of authority. Without the validation mechanism built into the blockchain, cryptocurrency would be worthless. Blockchains allow for peer-to-peer transactions to occur in a protected, secure environment that is simultaneously public and anonymous.
Bitcoin is purely intended to be a digital currency, to function as a means of payment. Ethereum, however, is a platform that allows people to create and run decentralized applications and smart contracts, utilizing a Store of Value, known as Ether, to “fund” transactions, similar to Bitcoin. Ethereum also utilizes an internal pricing mechanism, called “gas,” to determine how and when a transaction or contract is run.
How Ethereum Works
The Ethereum Virtual Machine (EVM) is the environment where smart contract code and other operations can be executed. Every node in the Ethereum network executes operations within the EVM to ensure correct execution (with redundant validation) and relies on consensus to agree on the answer.
Since every program on Ethereum uses a unique amount of processing power, and since the program must be run by all the nodes of the Ethereum network, it is important to keep superfluous activity to a minimum. As a result, every contract and DApp is given an internal cost in “gas.” Gas is the measurement of how much processing power the program will require. The higher the gas requirement, the more Ether tokens the user will need to spend to execute the program.
For example, a simple operation like if(var > 1) may cost 1 gas, but a more complex operation to store a variable could cost 100 gas. The cumulative sum of all the operations is the total gas cost for the transaction.
Smart Contracts
A smart contract can be simplistically thought of as IF-THEN statements. IF a condition is met, THEN the program carries out the terms of the contract.
One oft-cited advantage of smart contracts is they remove the need for third-party intermediaries. Theoretically, this means you can carry out transactions without paying fees to an intermediary, such as a lawyer or a notary, which would be particularly useful for people living in regions where the government and local officials are corrupt or inefficient.
As an example, a smart contract might stipulate that Bob sends Jane a new bottle of wine each month, provided Jane sends Bob a certain amount of Ether from her account. If the transaction takes place but Jane’s account does not have the required amount, no bottle is sent and Jane’s Ether is refunded to her. Either way, the transaction is run automatically and validated by the system without further input from either party.
In a slightly different scenario:
  • Bob wants to bet Jane 50 Ether (ETH) that the price of ETH will be above $1,000 on July 31th, 2018.
  • They agree on a data feed to be used to determine the ETH price (this would likely be from a public currency exchange).
  • They each escrow 50 ETH to a smart contract, with the winner taking the full 100 ETH.
  • On July 31th, 2018 the data feed is queried and the contract immediately executes, sending money to the winner.
As you can see, the smart contract removes the need for Jim and Sarah to trust each other. In fact, they may not even know each other! They just have to trust the data feed.
These are two extremely simple examples of smart contracts. Many smart contracts are extremely complex, such as determining insurance payouts, wills, and gambling.
Okay, So What Does All This Mean?
The usage implications of Ethereum are staggering. Without mentioning ICOs and alternative token creation (which we’ll get into next week), here are a few ideas for potential development of decentralized apps and services on the Ethereum protocol:
  • Financial Derivatives
  • Identity and Reputation Systems
  • File Storage
  • Banking
  • Centralized Autonomous Organizations
  • Insurance
  • Data Feeds
  • Cloud Computing
  • Prediction Markets
There are hundreds–thousands–possibly unlimited use case possibilities. If you can see the potential of this, not just in terms of financial repercussions, but also in terms of how society could be reshaped, how business could be transformed, and how even governments operate could undergo a sea change, then you can understand why people are so excited about Ethereum.
This just scratches the surface of Ethereum. I hope you’ll investigate on your own and draw your own conclusions. If you want to get super nerdy, check out the Ethereum whitepaper.
Links of Note
What is Ethereum?
Why The Price Of Ethereum Has Risen by 5,700% During 2017
How blockchain will change major industries
Trust No One: Ethereum Smart Contract Security Is Advancing
The Future of Ethereum
The end of Big Data: a reasonable Internet of Things
These Doomsday Preppers Are Starting To Switch From Gold to Bitcoin
4 Million Bitcoins Gone Forever
Wrap up
If you want to get started with Bitcoin or one of the two major altcoins (Ethereum and Litecoin), sign up for a free account on Coinbase. Once you buy or sell $100 or more of digital currency, you’ll get $10 of free Bitcoin.*
That’s all for this week. Thank you again for reading. Please send me any articles you think would be good for future newsletters. If you have any questions you’d like addressed, feel free to contact me. I do respond to everyone who writes me.
* This is a referral link, so I’ll also get $10 for any eligible signups.
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