Last week I had an opportunity to participate in one of the remarkable annual events that takes place in San Francisco: Techcrunch Disrupt SF 2017. It was particularly interesting to participate in a conversation with the founder of Ethereum Vitalik Buterin who shared his insights about the core functions of Ethereum and its potential in the future.
The Roots of Crypto-currencies
Assume that you have a 100 of digital coins and you send that 100 to Adam and the same 100 to Ben. There are two transactions, either of them are legal by itself. Yet, both of them are illegal in combination, because they turn 100 units of digital cash into 200.
This is so-called problem of double spending and in order to solve it, it is necessary to have some kind of system that keeps track whether those coins have already been spent, how much money a person has and how much money can one actually spend at any given time.
Such a tracking system could be easily achieved by means of a centralized server. However, centralized monitoring systems are subject to such problems as censorship, insecurity and abuse. Therefore, for quite a while online community has been trying to develop various decentralized systems for the exchange of information (early examples could be Torrent sites).
Vitalik explained that he got the idea of Ethereum from what he calls “crypto-economics”: a combination of cryptographic algorithms (e.g., digital signatures) and economic incentives which he employed to create decentralized networks with memories.
Around 2013 people started realizing that peer-to-peer networks could be used to many more applications than digital currency. The first major thing aside of Bitcoin was Namecoin, and various other applications for entering into digital contracts, executing financial agreements, creating registries of identity, etc.
However, building a blockchain for each one of those applications does not really work. So the core idea behind Ethereum is that there is a general purpose blockchain which understands general purpose programming language. In other words, think of Ethereum as your iPhone which runs iOS, which allows anyone to build an app and launch it on your iPhone.
Future Applications of Ethereum and Smart Contracts
Vitalik highlighted several areas in which blockchain and Ethereum will play a major role in the future. Generally speaking, a blockchain application could be built for anything that: (i) needs some sort of decentralization and (ii) needs some sort of shared memory.
“Blockchain is a decentralized system that contains some kind of shared memory. In the case of Bitcoin, the shared memory is the information how many Bitcoins somebody has at a given time.” (V. Buterin)
The first possible application relates to the operation of currency itself. Once we are able to have decentralized cryptocurrencies, a vast number of other possibilities become available.
Again, one simple analogy for decentralized cryptocurrency system could be a water vending machine. You can set that vending machine that if you put $2, the bottle of water comes out. If you do not put $2, the water does not come out. But if you do not put $2, and water comes out, that is bad.
It is possible to apply this analogy much further in the digital environment. Sellers of digital assets can determine the terms of transactions and leave the enforcement of such terms to computer programs (this is called “smart contracts”).
In other words, the key point about smart contracts is that a computer program controls directly controls digital assets. It is important to emphasize the fact that computer program actually controls those digital assets directly (rather than merely making recommendations to the owner how that owner should control those assets).
On Ethereum, it is possible to send a bunch of Ether to a computer program which then has unilateral ability to control where the money goes. If the computer program sends the money to Address A, the money goes to Address A, and if the computer program sends the money to Address B, the money goes to Address B.
Smart contracts can be used in any self-executing contract setting (e.g., insurance, financial transactions, auctions, etc.). Smart contracts could help reduce risk and possibility of error.
Scaling Problems: When Will Ethereum Replace VISA? (yes, very soon!)
Bitcoin currently runs something like 3 transactions per second; Ethereum is processing 5 transactions per second. In comparison, Uber conducts 12 rides per second, Paypal — several hundreds, VISA — several thousands, whereas major stock exchanges process hundreds of thousands of transactions per second.
Vitalik noted that even though there is a lot of institutional hype about blockchain nowadays, there are quite a few technological issues that prevent blockchain from becoming mainstream. Ethereum team is working on a great variety of technical solutions and the future looks very promising.
Can Blockchain replace VISA? Vitalik was optimistic enough to suggest that blockchain will replace VISA in a couple of years. He predicts that within the coming year we will start seeing first attempts where large organizations are trying to undertake proof of concept projects, and a couple of more years for those solutions to hit the mainstream.
Can Blockchain replace Amazon Web Services? Although there are reasons why decentralized blockchains can not fully replace centralized cloud computing, mainly because (i) there are computations that are intensive and are hard to paralyze, and (ii) privacy. When it comes privacy, if you have computations of private data, those computations are either done on the hardware that is trustworthy, or using fancy cryptography.
How Ethereum Helps Solve Major Social Problems
Looking into the future of Ethereum, it is important to bear in mind that Ethereum has no features (i.t., Ethereum is not prone to support certain applications). This is so because of two reasons. First, the aim of Vitalik is to keep the Ethereum relatively simple. The more consensus code there is the protocol rules, the more likely it is that Ethereum has more implementations. Second, nobody knows what blockchains will be used in 5 or 10 years from now.
Obviously, blockchain and cryptocurrency has received much attention because people are able to make money out of it. At the same time, there is another side of the coin: there is much potential for socially beneficial activities. Socially important projects usually face the problem of funding and lack of infrastructure. In the world of cryptocurrency there is a lot of money, and at least this problem can be solved.
Cryptocurrency and economic incentives associated with it can unite people in the way that politics can not. Mathematical incentives play the crucial role in making the cryptocurrency system which is secured by combining cryptography and mathematical proofs and game theory.
How States Are Going to Approach Cryptocurrencies?
In September China has declared initial coin offerings (ICOs) illegal. The way how traditional economic powers are going to approach blockchain in the future will certainly be part of the story. Ultimately, blockchain disrupts traditional power structures whether it is Washington, Shanghai, Tokyo or Silicon Valley.
However, ideas of disruption usually are met with opposition and fear. So we are certainly going to witness many interesting changes that blockchain is going to bring about in the future.
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