Whereas Satoshi Nakamoto’s Bitcoin Whitepaper is often credited as a catalyst to the current blockchain revolution, the Ethereum Whitepaper was a dramatic breakthrough in unlocking the power of decentralized technologies. This guide is designed to introduce you to Ethereum, which was introduced to the world in 2013 by Vitalik Buterin. Ethereum is the second largest blockchain protocol in the world, behind only Bitcoin. Any person attempting to understand how future applications will sit atop of blockchain protocols should start with understanding Ethereum. To make that easier, we have created this guide to help you understand the Ethereum whitepaper.
Throughout history, banks and third-party institutions have existed to provide trust between multiple parties of a transaction. Bitcoin radically changed this construct, allowing transactions to take place within a protocol, without the need to depend on third-party entities (to read more about Satoshi’s Whitepaper on Bitcoin, click here). By moving trust from the intermediary to the protocol, Bitcoin changed the way money flows and set the stage for the Internet of Value. All the Blockchain initiatives we talk about today, including Ethereum, are a result of Bitcoin.
As world-changing as Bitcoin is, it does not allow for easy repurposing of the Bitcoin protocol for alternative blockchain applications. Developers were faced with a tough choice – go through the labor intensive process of creating a completely new blockchain, or attempt to expand past the limitations of the current protocol.
Whereas Bitcoin was specifically constructed to administer a specific use of blockchain technology, Ethereum was created to provide a framework to run all decentralized applications. Ethereum includes a Turing-complete programming language for users to create “smart contracts”, or arbitrary rules that dictate the execution of actions. The breakthrough lies in the inclusion of a complete programming language, empowering complete freedom for developers to build any application they wish.
Below is a brief outline explaining how the Ethereum blockchain works:
1. New transactions are sent to the nodes within the network
2. Nodes compile and store these transactions within a block
3. Each nodes works to solve an energy and computing intensive Proof-of-Work (PoW)
4. The node that first finds a solution broadcasts it to the rest of the network
5. Nodes accept the solution if it is valid
6. Nodes show acceptance by beginning to work on the following block
The process is extremely similar to Bitcoin. Algorithms regulate the difficulty of the PoW puzzles to maintain a constant frequency of block creation (about every 12-15 seconds). The winning miner is rewarded with 5 ether. This process has two main functions – it allows new Ether to be circulated without a central authority and it validates transactions in a decentralized manner. The mining process makes hacking nearly impossible, due to the sheer computing power that would be required to reverse prior transactions. However, we must note that Ethereum is planning to begin the transition an alternative mining process, Proof-of-stake. To learn more about Proof of Stake, here are a few good resources:
Most people know about Ethereum because of the Ether (ETH) token. With a market cap of ~$36B (as of 8/31), ETH has cemented itself as the second most valuable cryptocurrency, trailing only Bitcoin (BTC) in value (~$77B).
Although Bitcoin may be more well known, Bitcoin exists primarily as digital gold. Meanwhile Ethereum has become a platform for distributed computing, distributed applications, and digital tokens. In Vitalik’s words, Ethereum is “a fundamentally new class of cryptoeconomic organisms — decentralized, jurisdiction-less entities that exist entirely in cyberspace, maintained by a combination of cryptography, economics and social consensus.” In other words, it represents a whole new way thinking about and building systems.
Ethereum has largely been responsible for the proliferation of Initial Coin Offerings (ICOs) in the past year. Just in the past two months, these ICOs have surpassed early stage venture funding in dollars raised by startups. Whether or not the explosion in ICOs has created a bubble is up for debate, but the revolutionary effect of Ethereum as a catalyst for new blockchain applications is not. To date, over 850 currencies representing $44B in digital assets have been created since Ethereum set the stage. Many believe the ICO tokens are Ethereum’s ‘killer app.’ Now, any innovative development team can create and program their own unique cryptographically secure financial system with unique economic principles for incentivising behavior. To make things even more interesting, the tokens used can be fractionalized to support any level of micro-payment needed. The container of the current banking system can’t dream of doing that. It’s not just that you can build a new economic system, it’s that you can design it to out-perform any existing system on the planet. And, as a result, before our very eyes, we are watching as entrepreneurs change the way currency flows. Get ready…
At Hashed, we are very excited about what Ethereum has accomplished and the potential it holds for healthcare. We are using Ethereum and related technologies to build out various use cases and concepts. Smart contracts are fairly immature, but are showing tremendous promise in automating business processes and programming value exchange in our healthcare use cases. This will be an amazing 3 years for some of our favorite projects such as payments and care coordination.
Healthcare has seen its first ICO and we’ll see many more in the future. Personally we know at least four healthcare ICOs planned for later this year. If done correctly, the ICO model has the potential to help us tackle large, systemic problems that could not be accomplished through traditional means. If done incorrectly, the ICO model may actually stifle innovation and set back the industry. Let’s hope we do it right, because we have an amazing opportunity to help a lot of people.