The invention of the blockchain is like the invention of the laser: at first a neat thing looking for a useful application. The blockchain is also like a living organism: once birthed it will live and grow in its environment independent of human action. The blockchain is a tool to transmit scare value (such as property rights in the broadest sense) securely, quickly, and at a low cost. The Bitcoin network was the first and is the proof of concept that it works. The Bitcoin Blockchain eliminates the need for a trusted third party to legitimate transactions by decentralizing and algorithmizing consensus to determine the true set of transactions and their order. The Ethereum Blockchain does this plus allows for anything property to be transacted.
In its simplest form a blockchain takes an initial given state of the world provides a procedure to update changes and records a new state of the world in a public ledger and then repeats the process. The given state of the world can be anything that one would wish to encode and record thereby creating a history, a running total or ledger. The Bitcoin blockchain is perfectly designed to enable unstoppable, unmediated, digital transfer of an initially valueless token, a bitcoin, as a proof of concept.
Many saw the shortcomings of Bitcoin and advanced alternatives. In 2014 Vitalik Buterin published his “Ethereum White Paper, A Next Generation Smart Contract & Decentralized Application Platform” in which he gave his vision for taking blockchain technology to the next level. “The intent of Ethereum is to merge together and improve upon the concepts of scripting, altcoins and on-chain meta-protocols and allow developers to create arbitrary consensus-based applications that have the scalability, standardization, feature-completeness, ease of development and interoperability offered by these different paradigms all at the same time.” Today after just three years it is number two behind Bitcoin in terms of number of nodes and market capitalization. It is already number one in terms of the number of programs and programmers on it.
The Bitcoin network does not need four powers to do what it does but Ethereum would need these four powers to make a blockchain work with real things and not just a made-up currency. The four powers are 1) a Turing-complete scripting language: Turing-complete means that you have the tools to program any imaginable calculation. A scripting language means a computer language that is safe and cannot break or crash a computer (because it is interpreted not compiled). 2) Value awareness: Bitcoin, designed to transfer only bitcoin, is value-blind. Smart contracts on Ethereum can distinguish between value types thus it is possible to send Ether for electricity and not mix them up. 3) Expanded State: Bitcoin transactions can only exist in one of two states: spent or unspent. Ethereum allows for more states such as escrow, conditional etc. This means that complex smart contracts that could take many steps over many years to execute become possible. 4) blockchain-awareness, in Bitcoin once a transaction is complete there is no need for a new transaction to reference it and so Bitcoin’s Turing-incomplete scripting language is blockchain-blind, that is it cannot view past states of the block chain. Ethereum’s Solidity can reference and check the blockchain.
Ethereum is “the ultimate abstract foundation layer: a blockchain … allowing anyone to write smart contracts and decentralized applications where they can create their own arbitrary rules for ownership, transaction formats and state transitions functions.”
This last sentence demonstrates the capabilities of the Ethereum blockchain: the ability to redefine the rules of ownership and ownership transfer: arbitrarily, autonomously, and without the need for trust manufacturing third party.
Ethereum has expanded the possibilities of computer applications. Some are new and better ways of doing old things such as crowdfunding, financial transactions, insurance contracts, cloud computing, prediction markets, and voting. Some new possibilities are entirely new such as direct peer-to-peer transfers without a trusted third party, smart contracts, distributed networks, distributed organizations, distributed autonomous organizations, decentralized data feeds, decentralized data storage, and smart multi-signature escrow.
Cryptoeconomics
The blockchain concept has created a new branch of study called cryptoeconomics which is defined as “the study of economic activity conducted across network protocols in an adversarial environment.” It is mixture of game theory, behavioural economics and computer cryptography with the goal of explaining and devising incentives to protect and disincentives to attack a blockchain platform. The blockchain network it its practical application. “…applied cryptoeconomics is about engineering a layer of defense between public networks and attackers of all sizes.”
Among the tools and technique it uses are 1) online trust (ironically); 2) online reputation 3) payment & reward schemes; 4) as well as actual coding techniques for new concepts such as decentralized applications and smart contracts.