Hello fellow readers – long time no hear!
Yeah it’s been a while but now I am back with a brand new and hot topic. So without further ado, let’s get to it!
I based quite some of my last articles on bitcoin and the blockchain technology. We are going to deal with blockchain in this article too, but not really with bitcoin. Who assumes, that Bitcoin is the only important cryptocurrency (in the following referred to as: CC / CC’s) out there couldn’t be more wrong. In fact, there are over a hundred different CC’s available on the market. The top three CC’s, Bitcoin, Ethereum and Ripple, together generate roughly 83% (about 72 billion $) of the total CC market capitalization.
One of them I am going to pick out here for this article: Ethereum. What is Ethereum? Well, yeah, obviously it is another CC but what makes it so special? Let us start from the beginning.
The story behind Ethereum is strongly interlinked with the impressive story of Vitalik Buterin. Buterin described a white paper of the Etherum blockchain in 2013 at the age of 19. Yep. What did you do with 19? 😉
Being an intellectually gifted child, Buterin had an affinity to mathematics and information technology ever since and eventually dropped out of college in 2014 to pursue Ethereum.
Precisely a year ago, one Ether (the name of the CC by Ethereum) noted at about 13$ per Unit. As of today, one Ether is worth about 260$. What a development! Of course one can now argue, as with every CC, that it has no substantial value, is highly volatile and speculative and so on – and that’s true. But nonetheless the development creates trust and acceptance while the technological aspect opens tremendous opportunities for businesses and the whole world – for example in terms of contract management.
Per definitionem, smart contracts are:
Computer protocols that facilitate, verify, or enforce the negotiation or performance of a contract or that make a contractual clause unnecessary.
In other words they automate processes, for example the trading of Ether, in an absolute safe and secure way – secured by nodes. Nodes are nothing else than peers in the network that verify transactions and contracts for maximum security and transparency. Please refer to my prior blog posts to read more about that.
So, the upsides of smart contracts are minimized counterparty risk, reduced settlement times, and increased transparency. In 2015 UBS experimented with this blockchain enabled technology eventually defining a hypothetical system in which payment streams could be fully automated – self paying financial instruments. Wonderful, right?
Are there downsides? Plenty!
Let’s take a look on what happened in June 2016. The DAO (DAO generally stands for: “decentralized autonomous organization” – I will write an own article about those) is, basically spoken, a highly decentralized and automated investment firm responsible for Ether transactions. An unknown attacker used a security hole in the smart contract to breach in and destroy Ether worth of 65 million dollar at the time. That unleashed a heavy debate about the sense and security of smart contracts and subsequently triggered a so called “hard fork”. This hard fork resulted in a splitting of the Ethereum blockchain that reverted the attack. I do not understand either how that should work from a technological point of view.
One can read a lot more about that if one does a little internet research – here i just want to give you a glimpse of what can happen if we rely on technology too much, especially when it’s so new and barely understood.
So yeah, Ethereum absolutely is an high impact phenomenon and is, in the short term, only inferior to bitcoin in terms of market capitalization. The magnitude Ethereum is creating will soon be on the level of bitcoin, I am quite sure about that. But of course there are a lot of things to be dealt with before smart contracts can reach the level of a technical standard sometime. A lot.
CC’s and blockchain technology are two of the most interesting topics at the moment for me and I will share much more thoughts on them with you in the upcoming weeks and months.
Kind regards – Luca out.