WEB 3.0 – Ethereum Part 1

posted in: BTA blog, Physicist | 0

sup_bannerA good one and a half years ago, in summer 2014, I was psyched to learn about the concept of Ethereum. I found it a brilliant idea, and kept fingers crossed for the success of its implementation. I also posted an article about it on my blog.

Given my excitement, I spent an extraneous amount of time writing, which was a great deal of sweat and toil. That said, it was probably my greatest failure in writing ever, and I am not saying that out of false modesty. Why?

Despite all the effort, it was clear to me that I was unable to expound properly on the brilliance of the idea. I simply could not give a plain description of the point. I tried to use a realistic example to illustrate the abstract concept, but even after endless speculation, a lifeless, uninteresting case was all I could come up with. Today I know where I failed.

I was in the same situation as I would have been in 1975, forced to address the concept of the personal computer, without any chance of an understanding about what we would use PCs decades later. I could obviously list vague directions of development, but I have no chance of providing the details of specific, clear and useful innovations. That would require me to invent the feats built on the feats built on the unknown feats that do not yet exist. From within the confines of a command-line world, I should be able to foresee what is possible on a graphical interface driven by a mouse. In retrospect, how easy it appears: all I need to do is take a look at the icons lined up on my screen.

The point in the core concept of the PC is that it is a universal machine capable of solving any task that can be described by an algorithm. In the theory of computation, this is referred to as Turing completeness, which is a very strong characteristic. For instance, calculators and (not smart) phones are not universal machines, as their structures do not allow running the code of a program that can solve any algorithmic task. They are capable of addition and multiplication, or respectively, the initiation and receipt of calls, and a few other operations, but the tasks which they can carry out is severely limited.

By contrast, Ethereum is a single large universal ‘world computer’, with a built in Turing complete programming language. All this is run by a decentralised network, which can be joined by anyone on a voluntary basis. Similarly to the bitcoin system, such volunteers are called miners, and there are thousands of them today. In exchange for the computing capacity and work offered, they get ether, Ethereum’s own currency.

Our world computer runs in a way that prevents unauthorised parties from tampering with the programs it runs. We can rest assured that they will run properly without any manipulation. The design of the system makes fraud impossible, and that is on ice, in the bag, dead certain. What program should be run on a world computer like that? For that, we need to consider what situations there are in which all of the parties could benefit from something being executed according to the rules set, without the possibility of subsequent tricks.

Suppose that I place an order with my brokerage firm to buy some shares using the funds I deposited with them. The brokerage firm claims to have made the purchase, but it is found later that they simply ripped me off. Despite a contract between us, a brokerage firm acting in bad faith can cheat me. Or suppose that I want to purchase a home and make a down payment, but the seller changes his mind and refuses to return the amount paid. Forget the signed paper, I am in for a court case that takes years. Suppose that I have arranged for the gas man to visit at 10 a.m., and he said yesterday on the phone this was ‘guaranteed’, yet he fails to come—never mind my waiting all day.

In such situations, I would benefit from the ability to enter into agreements that are implemented automatically according to a predefined set of rules. Then, my brokerage firm could only touch my funds when I give a specific order for them to do so, and should also replace them with the shares purchased. The seller of the home would be denied access to the down payment until the purchase is completed. I have no means to force the gas man to arrive on time, but he could deposit a security with his promise, which will be mine if he fails to turn up by noon.

Meanwhile, the agreements also protect the other party, not only me. The brokerage firm is sure to receive the amount due for its service, the down payment will be due to the seller if I fail to pay for the home in due time, and I also deposit the gas man’s charge, which I will lose if I fail to be at home at the arranged time.

The brilliant core idea about Ethereum is that the world computer should run programs coding smart contracts. When two or more parties agree on something, all of them add their digital signatures to the program declaring their agreement, which will be executed automatically from that point onwards. A smart contract cannot be tampered with or cancelled subsequently: the agreement contained in it will be implemented automatically and ruthlessly.

As the above examples suggest, one of the key difficulties concerns how Ethereum should be informed from a reliable source about the events of the real world. How should the world computer know whether the gas man turned up on time? With operations that are carried out in virtual space even today, such as transactions on a securities account, this can be done relatively easily. It is also viable in a number of other cases, e.g. sports betting contracts can be made by channeling in sports results. And the world computer will never be informed about certain events, which means that it obviously cannot provide a solution to all types of agreements. That said, the range of possible applications remains wide enough.

There are a myriad of possibilities, but about what exactly Ethereum will be used for I am not much more certain than I was one and a half years ago. I am in the same position as I would have been in 1981 concerning the PC. Ethereum has been created, it works, and offers infinite potential, but programmers are only starting to throw themselves into it on a massive scale, each incorporating their own knowledge, creativity and ideas so as to write all sorts of sophisticated programs to make life more convenient, more efficient and more fun for all of us over the decades to come. All we have is faint ideas about what will come of all this. Regarding the PC, there were people who thought that only a negligible fragment of users would need a superfast calculator, and it therefore could not be successful. They were wrong. They were wrong because they failed to understand that the PC was an unthinkably versatile tool. It was universal and Turing complete. Just like Ethereum.

In terms of the fields of its use, some directions are emerging. One is the possibility to eliminate intermediaries in business. When two parties do not know or trust each other, today the simplest trade will call for an intermediary. A third party trusted by both the seller and the buyer, who is only needed to ensure that the object of the trade and the consideration are exchanged. Without the intermediary, neither of the parties would be confident enough to send money or goods to the other.

Today, I can only buy shares by relying on a whole series of intermediaries, including a brokerage firm, a stock exchange, and a clearing house. Ethereum eliminates the need for all of them, enabling the transaction to be carried out directly, faster, cheaper and risk free by means of a smart contract with the seller. And I am also not taking the risk of the intermediaries in the process. Following the scandals around the brokerage firms, everyone can appreciate this much more today.

Business is based on trust. In the course of cooperation the parties are, to a certain degree, exposed to each other; therefore, no one is keen on entering into an agreement with a party without trusting that party. Business is smooth when contracts are honoured. Yet they are often disregarded out of negligence or for inability to resist the temptation of momentary gains.

Consequently, everyone who can do so will select partners carefully, and work with only those that have their absolute trust. Those who have no means to do so remain exposed to their partners. Due to distrust, many mutually beneficial agreements are not even made. Exposure causes an enormous amount of damage. The smart contracts made in Ethereum eliminate both problems.

In retrospect, the internet as we knew it at the beginning was named Web 1.0. We learned to visit websites, use e-mail, and browse for information. Social networks such Facebook and LinkedIn brought about the era of Web 2.0.

There is no exact definition for Web 3.0. However, with its direct and unique smart contracts Ethereum may transform the network of business connections in such a significant way, and may place it to virtual space to such an unprecedented extent that it might go down in history as the birth of Web 3.0.