Ethereum for the Overwhelmed Layman

OPINION
Jacob Eliosoff
Jun 25, 2016 at 13:00 UTC  |  Updated  Jun 27, 2016 at 14:43 UTC

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.

help, consumer

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:

  • Fees. Airbnb charges 9-15%.
  • Handing off the key. What if you're on an airplane? What if you have two guests staying one after the other? How do you prevent guest number 1 from entering during guest number 2's stay?
  • Limited payment options. If the guest doesn't have an international credit or debit card, booking through Airbnb can be hard or even impossible. This may not seem like a big deal, but keep in mind that in many countries getting those cards is much harder.

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:

Screen Shot 2016-06-15 at 8.15.31 AM

Without Airbnb, hosts and guests still need some kind of marketplace where they can find each other. In the slock framework, this is called the Universal Sharing Network (USN). So, the guest agrees to the terms for the rental listed on the USN, sends payment to the host's slock, the slock grants door access and when the guest checks out the slock revokes his access and is ready for the next guest.

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.

Where does ethereum fit in here?

That first diagram glossed over a bunch of subtleties.

Here's a more detailed look:

Screen Shot 2016-06-15 at 8.22.30 AM

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.

Why not bitcoin?

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.

Not quite a sure thing

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.

  • Hardware. Slock.it is in the hardware game, and hardware is tough. We've seen from ASIC manufacturers how tricky this is.
  • Network effect. Even supposing good, cheap hardware, how many people are going to choose to buy and set up an unfamiliar physical device rather than join Airbnb's millions of users, just to save a few percent on the fees?
  • Overhyped automation. Slock advocates, and ethereum advocates in general, tend to gloss over all the tasks that can't be automated. When the host claims the guest broke her TV, no robot can decide whether he gets his deposit back or not. Smart contracts usually can't eliminate human involvement, only streamline it.
  • Still in beta. Ethereum is an exceptionally ambitious project, and many of its core features (proof-of-stake, sharding, etc) still aren't fully designed, nevermind implemented; that's a lot of places development could get stuck. Slocks and the USN are even more embryonic. Even assuming healthy progress, ethereum and smart contracts will always be much more complex than bitcoin, with a larger "attack surface" for hackers.
  • Shortage of use cases. Few of the many proposed ethereum use cases seem likely to win over customers anytime soon: slocks are one of the most persuasive I've seen, and they're pretty esoteric. Given that bitcoin has simple, compelling uses like remittances and online purchases, yet has still struggled with user adoption, one wonders how many people actually want to eat what the ethereum chefs are cooking.
  • The DAO is a mess. While I see ethereum as a good idea that may not pan out, and slocks as a riskier but still plausible business plan, The DAO made me shake my head even before its tragicomic undoing last weekend. Beyond the superficial bugs, it suffers from numerous incentive problems and its premise - that crowds are good at deciding how to invest capital - seems fundamentally wrong. And even if it did make good investments, calling shares "tokens" was just not going to fool the SEC.

Some predictions

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

So here are a few:

  • Unlike most cryptocoins, which will gradually fade away, at least one of bitcoin and ethereum is here to stay - though quite possibly not both. By the end of 2017, either BTC will hit $2,000 or ETH will hit $120.
  • Despite bitcoin's head-start, unless its developers start healing their divisions, ethereum's market cap will surpass it by end of 2017. Right now, ethereum looks on track to adopt proof-of-stake before bitcoin supports 10 transactions per second. That is an embarrassing reflection on their paces of development.
  • The DAO is dead: Even if it pulls through this month's crisis, further technical and regulatory minefields await. The "hard fork" plan will carry the day, returning its investors' ether (though 20+% of them won't even get around to withdrawing it), but that will be the end of it. Slock.it are a likely casualty as well, their funding model and credibility in shreds. But ethereum will lick its wounds and carry on.
  • Ethereum and bitcoin adoption will remain piecemeal. Contrary to 2013's dreams, this is a game of decades, not months. When it does come, adoption won't spread gradually but will suddenly take off in one or two centers of activity. For bitcoin some candidates are Philippine remittances, Chinese or Venezuelan capital control evaders, online poker sites or of course the next big Silk Road. For ethereum it's still early, but projects like Slock.it that "disrupt the disruptors" (Airbnb, Uber, etc) seem most straightforward.

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

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EthereumCounterpartySlock.itRootstock

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