Ethereum, the programmable blockchain
  • Micha
  • 28. September 2017
  • 8 min read
Ethereum blockchain
This part of our article series deals with Ethereum. The Ethereum blockchain is capable of processing more than just transactions. It can run applications called smart contracts. A programmable blockchain. Ethereum is the latest craze in the crypto biz and its associated currency – the Ether – has been every investor’s dream this year (despite a huge slump in June from which it has now mostly recovered). Learn what Ethereum is capable of.

The first two parts of this series were mostly about the well-known Bitcoin Blockchain as most people had at least heard of Bitcoin and it having something to do with money in the broadest sense. But this blockchain is just one of many…

Let's talk Ethereum! Ethereum, like the Bitcoin network, is a blockchain (want to really understand how a blockchain works? Try part 1 and part 2 of this series) but as opposed to its older relative it can do quite a bit more than ‘just’ be home to a cryptocurrency. I don’t want to go into too much detail concerning the technical differences from the Bitcoin blockchain but dive more into the possibilities of building processes and business cases in a way that they can be segregated from economic, political or private interest groups – which makes Ethereum pretty cool.

In short, Ethereum offers not only a way to log transaction protocols but it can actually run programmes and apps. While this sounds nice, it is actually well beyond nice, it might be revolutionary. These programmes, called smart contracts can be implemented into the blockchain network and may be called by any user in the network while being forever immutable and fully transparent – as with every transaction in a blockchain. No one can ever delete these programmes, which also called decentralized apps (dapps), and no one can change their internal logic once it is there. People and organizations can handle multiple use cases using Ethereum without the need to trust any third party or even trust each other as long as they are sure about how the smart contract works. The terms and outcomes of a smart contract are fully transparent to anyone, so it’s a fair game and if you are being screwed over, it will most likely be your fault for not being informed about the contract allowing for this to happen. As the contract is just a piece of software, you'd better make sure to know Solidity. This is the programming language used for Ethereum smart contracts.

A decentralized computer

Ethereum is not a database, it is a computer. But, boy, it’s slow! Then again, it is certainly not about computing power and speed, as it is not there to handle complex computing operations. But for the first time there is the option to secure and handle dynamic and complex information and relationships in a peer-to-peer network. Paired with its transparency and immutability there are a whole lot of innovative ideas to be realized here.

To participate in the Ethereum world, the users need a wallet. With this they can send and receive Ether (ETH, the BTC equivalent of Ethereum), broadcast smart contracts they have written to the network or interact with smart contracts. To call a smart contract, which means to interact with it and have it run its function(s), users need to make a transaction to the contract, which, like any user in the Ethereum network, has its own address. Perceive a smart contract like a user with a wallet, receiving and sending transactions based on what its inherent rules dictate. As opposed to another user, the smart contract can only do what is was programmed to do, which everyone is able to see.

As an example, imagine a very simple smart contract for donating money for good causes. Any user can send ETH to the smart contract which saves the sent amount. It is programmed so that upon passing a threshold amount, all ETH are sent to an Ethereum address of, let’s say, the Red Cross. When users call this smart contract (using a transaction which has the smart contract’s address as the recipient) they need to send some extra ETH to compensate for ‘gas’ with it. This is the fee that is needed to cover - the broadcasting of their own transaction to the network and have it mined as part of a block - the transaction which is made once the threshold has been passed. The smart contract needs to store some extra ETH in order to be able to make transactions So in order to have 1 ETH reach its intended goal, the donor needs to spend e.g. 1,00002 ETH including gas, which actually is just another term for a fee in ETH. If the user would have sent only 1 ETH when the minimum required donation is 1 ETH, he would have received his money back, minus the gas price he still had to pay for running the transaction.

So many possibilities

But let’s get to something more interesting. Ethereum reveals that not only currencies are a use case for blockchains. Through smart contracts, two people as well as huge groups of people can administer funds, documents, memberships or track ownership. They can agree on actions and rules that entail certain consequences which happen automatically without the need to trust anyone (but the smart contract which you can examine thoroughly). I’ll depict this in the examples below. Among these there are also some more simple ones which could be realized with the Bitcoin blockchain or similar ones. The possibilities the various existing blockchains offer are huge and will probably shake a number of industries in the future. But keep in mind that much of what is about to be shown may still not be realistic due to missing links with existing systems or legal and regulatory restrictions the mentioned industries underlie that forbid the use of emerging and experimental technologies. But let’s be creative…

Financial Services

This industry holds great potential for disruption through blockchain technology. Especially the clearing process taking place when money is moved between two banks could be dramatically simplified and sped up. A bank transfer needs some time to be processed, no matter if it’s domestic or foreign, and reach its recipient. Typically Bank A collects all requested transfers to a specific destination (Bank B, Bank C, Bank D, ...) and then sends the bundled amount to each of the recipients a couple of times per day. In between they undergo a clearing process, conducted by a central institution: a clearing house. A foreign currency transfer can take up to several days with this process. A blockchain could dramatically accelerate the process. Depending on the used blockchain (and its block time) a transfer could be settled within seconds to minutes, but never days. Moreover there would be no need for a clearing house, reducing cost for transfers. Ripple is a blockchain that is already in use for this very purpose, but not too many banks are part of the network unfortunately. Fidor bank in Germany is one example and they have been using and offering it to their customers since 2014.

Another use case for the financial services industry are mortgages which can be handled with smart contracts, automatically registering incoming installments and once the mortgage is paid off, delete the mortgage from the (digital) land register. If installments fail to be paid over a certain period of time, the smart contract could also prompt actions like a forced sale. Nobody would need to even take another look at the mortgage as it completely manages itself. Can you see the potential to save tremendous amounts of money from extensive administrative processes?

Insurance

An example: Etherisc have designed a flight insurance as a showcase in the course of an Ethereum conference. Attendants were reimbursed if their flight was canceled or delayed. Every user paid a certain amount of ETH to Etherisk and stated their flight details. The contract was automatically notified (by external flight data planted into Ethereum by a so-called oracle) if one of the flights was late or cancelled, releasing a transaction to the according user instantly in this case. This way, even small amounts can be insured which is not common as the administration cost would far outweigh the potential earning for the insurer. With the clerk being a programme in the blockchain, the costs are extremely low, allowing even smallest amounts to be insured.

Internet of Things (IOT)

As indicated, addresses/users in a blockchain don’t need to be people. They can be machines, too. All devices connected to the internet could potentially prompt actions from smart contracts. Imagine your electric car, which is connected to the internet, being charged by a solar panel on top of someone’s house which you just casually parked in front of. Both objects can have their own wallet and the solar panel receives some ETH from the car’s wallet after it has been charged through a charging station provided by the house owner. The respective owners won’t need to take any action. Now imagine a decentralized power infrastructure built around this idea with excess energy from solar panels being provided to charge the growing amount of electric cars. This would take load off power grids as well as increase convenience for consumers.

You are observing the emergence of a fascinating technology of such a great potential and importance that is is often compared to the rise of the internet in the 90s. It will take quite some time, still, until the most functional and promising use cases can be realized. We will arguably experience many ups and downs in the course of Ethereum’s and other blockchains’ evolution. Banks, insurers, tech corporates, governments and SMEs – many parties are experimenting with the technology, invest in it and apply first business cases based on it. It remains to be seen who will win or lose in this race. But I guarantee that we will see some major change and exciting new solutions to existing problems and things we didn’t even think about.

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A post by Micha
Rasender Reporter und King of Content