Peter Kent - Cryptocurrency All-in-One For Dummies

At that time, there was a fierce debate about the Bitcoin network being “bloated” by lots of low-value transactions from applications securing themselves against Bitcoin. The main concerns were that additional applications, built on the Bitcoin protocol, would have problems scaling in volume. Also, at that time there was not the ability to do scripting to allow for things like smart contracts. Bitcoin was not built to handle the number of transactions needed by the applications. Vitalik and many others saw that in order for people to build decentralized applications in the Bitcoin blockchain, either the blockchain would need a massive code overhaul or they would need to build a new blockchain altogether.

Bitcoin had already been well established at that point. It was clear that the kinds of upgrades to core code that were needed were well beyond what was realistically possible. The politics of Bitcoin would stall any changes to the network. Vitalik and his team established the Ethereum foundation in early 2014 to raise funds to build a blockchain network with a programming language built within it. Vitalik hoped to create a network that would allow him to build blockchain-secured applications.

The initial development was funded by an online public crowd sale during July and August of 2014. The foundation initially raised a record $18 million through the sale of its cryptocurrency token called Ether. People have passionately debated whether this sort of crowd sale is illegal because it may constitute an unlicensed security offering.

The regulatory gray zone has not hindered the project. If anything, the cutting-edge nature of the project has attracted more attention and talent to the foundation. Discontented and disenfranchised developers and entrepreneurs from around the world have flocked to the project. Decentralization is seen as the perfect solution to corrupt and oppressive central authorities.

The $18 million raised in the token sale gave the foundation the funds it needed to hire a large development team to build Ethereum. Ethereum Frontier, the first release of the Ethereum network, went live to the public in July 2015. It was a bare-bones software release that only the more technically savvy could use to build their applications.

Homestead, the current Ethereum software release, was made available in 2016. It’s much more user-friendly. Almost anyone can utilize the application template available on it. It has intuitive and easy-to-use interfaces and a large, devoted development community.

Metropolis is the next planned Ethereum release. The main difference will be that applications will be fully developed and well tested. It will also feature even easier-to-use applications and have a larger market appeal where even nontechnical people will feel comfortable using it.

Serenity is the last planned phase of Ethereum development. It’s where Ethereum will move from a proof of work (PoW) consensus (in which miners compete to create the next block) to a proof of stake (PoS) model, in which nodes are chosen pseudo-randomly with the possibility of being selected increasing based on their stake in the network. Their stake is measured by the amount of cryptocurrency in their possession. The main benefit of the change will be the reduction in the cost of energy associated with proof of work. This may make it more attractive for individuals to run nodes in the network, which would increase decentralization and increase security. Book 6, Chapter 2further explains the PoW and PoS models.

Ethereum may be one of the most complex blockchains ever built. It has several of its own Turing-complete programming languages (full-functioning programming languages that allow developers to create any application). These new programming languages closely resemble popular programming languages such as JavaScript and Python. The Ethereum protocol can do just about anything that your regular programming languages can do. The exception is that the code is written to the Ethereum blockchain and has the added benefits and security that come with that. If you can imagine a software project, it can be built on Ethereum.

The Ethereum ecosystem is currently the best place to build decentralized applications. It has lovely documentation and user-friendly interfaces that get you up and running quickly. Rapid development time, security for small applications, and the ability for applications to easily interact with one another are key characteristics of this system.

The Turing-complete programming languages are the main feature that makes the Ethereum blockchain vastly more potent than the Bitcoin blockchain for building new programs. Ethereum’s scripting language makes programs like Twitter applications possible in a few lines of code, as well as extremely secure.

Smart contracts, like the one you create in Chapter 3of this minibook, can also be built on Ethereum. (You can find out even more about smart contracts in Book 4, Chapters 7and 8.) The Ethereum protocol has opened up a whole new genre of applications. You can take just about any business, government, or organization’s processes and build a digital representation of it inside of Ethereum. Currently, Ethereum’s platform is being used to manage digital assets (a new class of asset that lives online and may represent a whole digital asset such as a Bitcoin token or a digital representation of a real-world asset such as corn commodities), financial instruments (like mortgage-backed securities), records of ownership of assets such as land, and decentralized autonomous organizations (DAOs).

Ethereum has also sparked a major global fundraising effort by start-ups that used the ERC token standard to raise capital to build their innovations. Ethereum has opened a new way of organizing business, nonprofit, and government. It has made it possible to hold, share, and trade value without ever meeting the other party or using a third party to facilitate. The code does the work.

The most revolutionary and controversial manifestation of Ethereum is the self-governing and decentralized application (dApp). dApps can manage things like digital assets and DAOs.

dApps were created to replace centralized management of assets and organizations. This structure has a lot of appeal because many people believe that absolute power corrupts absolutely. For those who are fearful of losing control, this type of structure has massive implications.

New dApps are popping up every day. You can explore and discover new dApps built on Ethereum by going to https://dappradar.com . DappRadar updates a list of all the latest Ethereum dApps and gives you a preview of what they do. One of the first ever created was Etheria (see Figure 5-1).

FIGURE 5-1:The world’s first immortal digital game, Etheria.

DAOs are a type of Ethereum application that represents a virtual entity within Ethereum. When you create a DAO, you can invite others to participate in the governance of the organization. The participants can remain anonymous and never meet, which could trigger Know Your Customer (KYC) rules (the process a business must go through to verify the identity of its clients) and anti-money-laundering (AML; the laws and regulations designed to stop the practice of generating income through illegal means) compliance issues.

DAOs have been created for raising funds for investing, but they could also be designed for civic or nonprofit purposes. Ethereum gives you a basic framework for governance. It’s up to the organizers to determine what’s being governed. Ethereum has created templates for you to help in the creation of DAOs.