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19 July 2017

What you need to know about Bitcoin, Ethereum, and smart contracts

Money is pretty simple nowadays: A piece of paper or a digital asset that you can exchange for goods and services. Someone else takes care of all the fine print. Some kind of central authority issues the money, calculates its value, and makes sure that that wire transaction you’ve sent goes to the right recipient. 

But money is changing. First there was Bitcoin, a digital currency that takes care of the issuance and payments parts all by itself — by means of technology instead of authority. And then there was Ethereum, which adds another layer over Bitcoin’s underlying technology, the blockchain, by letting anyone run complex commands from within the digital coins themselves. 

If the concept makes you dizzy, you’re not alone. Even figuring out how to correctly operate a Bitcoin wallet can be daunting, and this smart contract stuff sounds either like hardcore sci-fi or incomprehensible babble, depending on how technical you are.  

And yet, I strongly suggest you invest some time into learning how smart contracts work. If you don’t, in the future you might be too ignorant to understand what’s happening with the money you own. 

Here’s a non-definition that I like: Ethereum makes your money alive. 

You can do a lot of very advanced stuff with regular money. Invest it into the stock market and place an order that sells if the price goes below a certain point. Have it transferred to another person in case you die. Place it in an escrow account and have it transferred to some entity if certain conditions are met.

Ethereum makes your money alive.

But to do every one of those things, you need a different authority, with which you have to confirm your identity and possibly pay often an insignificant sum of money.  

With Ethereum, all of that stuff is baked right into the money itself. You can literally purchase some ether (Ethereum’s currency) right now, and create a smart contract that does any of those things, and it will stay valid as long as Ethereum exists. 

But someone will figure out a way to simplify this, right?

This may sound like that time in the ’90s when everyone warned you’ll need to learn how to code if you want to be a human in the future. That never happened, except, in a way, it did. You don’t have to know how to code to function in the modern life, but life is easier if you can — if only by the simple virtue of never being out of a job.

You don’t really have to know how to code to be an adult these days, but it sure as hell doesn’t hurt. 

Learning how smart contracts work is by no means necessary right now, and if the concept lives up to its promise, in the future there will be people who will handle the fine print instead of you… for a fee. But you will once again be putting trust into someone else’s authority, which undermines the very concept of Bitcoin and Ethereum. It’s better if you can do it yourself. 

Here’s something that might hit closer to home. In the past couple of months, a lot of people who knew what smart contracts are and how they work earned money — and you probably didn’t. They did it by investing in ICOs, for example, or by building cool new things on the Ethereum platform themselves. There are no guarantees, of course, but those who recognized the potential of this technology early on had a much better chance at succeeding. 

And if you tried to invest without the necessary knowledge, you could’ve easily lost money. A smart contract that might look promising at first could be flawed in many ways, and one that seems boring could be revolutionary. For an example of how tough it can be to determine which Ethereum-based project is promising and which one is flawed, read this elaborate critique of the recent Bancor ICO (here’s the response from Bancor). 

I’m not saying everyone should drop what they’re doing right now and start learning about Byzantine-fault-tolerant multiparty consensus systems (an actual term from the Ethereum white paper), or take courses in Solidity (the programming language of the Ethereum platform). But familiarizing yourself with the basic concepts and learning enough to be able to read an upcoming ICO’s white paper might pay dividends in the future. 

Where do I start?

I can tell you where I started. I read what I could find online. I follow the key people on Twitter and the community of investors and traders that gather around influential blogs and on Reddit. I’ve bought some ether, and I (unsuccessfully) tried to participate in an ICO or two. I’ve read the Ethereum white paper, several times. I’m learning the basics of Solidity and dabbling with my own smart contracts.

But you don’t have to do all of those things.

Here are some basic concepts you need to know. An Ethereum smart contract is a piece of code that runs on Ethereum’s blockchain, and as such is by definition decentralized. It is impersonal, transparent, unyielding. It does not care about who wronged whom, or what your name is. It does what’s written in the code. Once it’s live on Ethereum’s blockchain, no one can alter it. This is precisely what makes it great. 

You also need to know that, despite these facts, it’s possible that a contract is bad for you. Maybe one of its functions calls parameters from the outside that can be changed at a later time. Maybe some stuff in there is defined in such a way that the digital assets you think you own can be erased or devalued. It’s very tough to figure out these things on your own (if you’re not an expert), but now you at least know some questions you can ask. 

Finally, know that Ethereum may just be the beginning. Other platforms that are in some ways even more advanced, like Tezos and EOS, are cropping up. And Ethereum itself is under very active development; what’s true today may not be true in a year or two. So you need to know that you can’t just learn a thing or two and forget it; you have to keep up with the times. 

A future ruled by knowledge and technology instead of authority

The possibilities of this new technology is vast. It’s not unimaginable that a decade from now, a platform such as Ethereum will handle stuff like trust funds and wills. It might become an important part of your life. Who do you want to be: The person who doesn’t have a clue and has to fully trust an expert, or someone who can tell when they’re being swindled?

I still don’t know everything there is to know about Ethereum — in fact, I’ve barely scratched the surface. But I do know, roughly, how a smart contract works, and I’ve built a foundation that’ll make it easier to learn more in the future. I strongly suggest you do the same. 

Disclosure: The author of this text owns, or has recently owned, a number of cryptocurrencies, including BTC and ETH. 

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