Ethereum for the Overwhelmed Layman

Jacob Eliosoff is a computer programmer who has also worked as a Wall Street quant and as a teacher. These days he runs Calibrated Markets LLC, a cryptocurrency algorithmic trading firm.

In this opinion piece, Eliosoff takes on the difficult task of explaining next-generation blockchain platform ethereum in everyday terms, outlining its strengths and weaknesses, and how these position it within the wider framework of blockchain innovation.

There are plenty of articles about ethereum's recent DAO drama and its wild price swings, but fewer try to explain to non-geeks how ethereum’s technology could matter for everyday life – and in particular, what it offers that bitcoin doesn't.

Let's walk through a concrete example: “slocks”, the Internet-ready locks being developed by now-infamous German startup Slock.it. Suppose you want to rent out your apartment while you’re on vacation.

Airbnb works fine, but it has drawbacks, like:

One way to cut out Airbnb is to let your guest arrange the logistics – booking, payment, deposit, checking in and out – directly with the door lock itself. This requires a lock that isn’t just "smart" (electronic), but one that can handle these interactions with guests over the Internet, on terms specified by the host.

The guys at Slock.it call this a slock:

You can see Slock.it’s live demo of this at Devcon1 last November.

That’s a big-picture example of how ethereum could affect everyday life. Guests no longer need to deal directly with the host, or even with a company like Airbnb. Instead they deal with the USN (to find the room), and with the host's slock (to pay and get in). The host can enjoy her vacation, and while the USN charges a fee, it’s more like 1-2% than Airbnb’s 9-15%.

How can the USN charge so much less? Because it’s a robot. And its owner’s a robot, too.

That first diagram glossed over a bunch of subtleties.

Here’s a more detailed look:

Perhaps the most frequent confusion here is that the slock isn’t actually a single piece of hardware – nor is it what Slock.it makes or sells! The slock is what you get by combining a standard consumer smart lock, like the Danalock unit in Slock.it’s demo, with an "Ethereum Computer", a small device able to communicate both with the lock (via industry-standard protocols like Z-Wave or ZigBee) and with the USN and its listings and contracts.

It’s the latter piece, the Ethereum Computer, that constitutes Slock.it’s product. The remaining magic – and here we get to ethereum’s true role – is that the USN marketplace isn’t just a cheaper knockoff of Airbnb, but something fundamentally different.

The USN isn’t a company. It doesn’t even have staff! It’s automated, a computer program.

But it’s not even a regular computer program. Really it’s a bunch of programs – each rental listing is its own program, for instance, sending and receiving payments according to the logic programmed into it: deposit amount, checkout time and so on.

And unlike, say, Airbnb’s website, these programs don’t run on any specific server but rather on many computers, "nodes" connected to form a decentralized network (like BitTorrent). This network is ethereum, and the special, payment-slinging programs it's running are also known as smart contracts.

These smart contracts can both send and receive payments, to and from both people (guests and hosts) and each other. But they do this not via the credit card or bank networks, but via the ethereum network itself, and not in dollars or euros but in ether (ETH), ethereum’s own digital currency.

Payments between the guest, the slock and the host are in ether, though the USN may list prices in dollars and convert at purchase time using the current rate, like an FX rate. Currently 1 ETH is worth about $14, up from less than $1 in December, which explains a lot of the hype.

The final bit of alphabet soup we haven’t touched on yet is The DAO.

The DAO is a tangled tale and pretty much burnt to the ground last Friday, but for here, suffice to say that The DAO is an entity that owns the USN and pockets the 1-2% rental fees above. It, too, is neither flesh-and-blood, brick-and-mortar, nor CEO-and-lawyer, but yet another smart contract running on ethereum.

The big question you’d run into with bitcoin is – where does the Airbnb-type software run? There has to be some program receiving bookings via the USN, checking in guests, refunding deposits and so on. What hardware would it run on?

In ethereum, the answer is that this software, in the form of smart contracts, runs on the computers participating in the network. Running these contracts is what it means to run an Ethereum “node”, much like running BitTorrent means agreeing to store and distribute BitTorrent files.

So, buying one of Slock.it’s “Ethereum Computers” lets you run the Airbnb software, or any other smart contract. That same node might also run software to rent out your car, or run an online casino, or conduct an election. That’s why Slock.it call it an “Ethereum Computer” rather than just a “Slock Computer” - it’s general-purpose. Bitcoin nodes aren’t like this: they only run a specific kind of program, which pretty much just lets you send money.

So, either you'd run the "Bitbnb" software on a separate server of your own (or on a special-purpose "Bitbnb Computer"), or you’d need someone to build a layer on top of bitcoin that supports smart contracts, the way the web is a layer built on top of the Internet.

Counterparty and RootStock are two smart-contract projects building on top of bitcoin this way. But, Counterparty bundles its state (how much the guest owes you, etc) into bitcoin transactions, which weren’t designed for this purpose.

This also limits Counterparty transactions to bitcoin’s 10-minute block time, rather than ethereum’s 15-second one. Meanwhile, RootStock is far behind ethereum in development, arguably falling further behind every day, and involves some technical challenges (how to reliably transfer coins between the bitcoin blockchain and RootStock blockchain) that don’t appear to be fully worked out yet.

In both cases, you’re now dependent on two separate networks and technologies: bitcoin, and Counterparty or RootStock.

So yes, you could do it with bitcoin. But it gets clunky.

It’s a bit like saying, you can turn a wall clock into an alarm clock, by attaching a device that detects the positions of the hands and rings a bell. But why not just own a smartphone, and download an alarm app? That’s the power of a general-purpose computer.

Ethereum can do things bitcoin can’t, but there are still umpteen ways both the slock idea and ethereum itself could fail to get traction.

But, then again opining about a technology without making any concrete predictions is mighty easy.

So here are a few:

Although harder to measure than price, the most important yardstick for ethereum is user adoption.

Like bitcoin, ethereum has some paths to success that don’t rely on users: for example, sovereign wealth funds could start diversifying into cryptocurrencies. But to succeed as a technology, ethereum needs non-geeks to start using it, not because they think it’s cool but because it fulfills some practical need better than the alternatives.

The bitcoin precedent is somewhat depressing: over seven years bitcoin has won many fans – techies, libertarians, speculators, venture capitalists, vendors – but few regular users. Ethereum’s success probably depends less on transforming society in 20 years than on making someone’s life easier now.

Overwhelmed visualization via Shutterstock