Ethereum is a new cryptocurrency project started by Vitalik Buterin and Charles Hoskinson and others. Part of that project is a new currency, called “ether”, but this is NOT another alt-coin. In my opinion, it’s the most interesting project in the crypto space since the introduction of Bitcoin itself. Assuming that it works, that is. The testnet was just released.

So what is Ethereum? In some respects, its design is similar to Bitcoin. Miners hash blocks of transactions and are rewarded in newly-created ether coins. It uses a new proof-of-work hashing algorithm called “Dagger”, which is, like Scrypt (the hashing algo used by Litecoin and most alt-coins), designed to be Memory-Hard. The developers are also experimenting with a new proof-of-stake mechanism called “slasher”, but the intention seems to be to promote a research effort to create a Memory-Hard algorithm that will be resistant to dedicated hardware like ASIC’s. The blockchain protocol is also different; Ethereum will use a variant of the new GHOST protocol, which should allow for a much shorter time interval between blocks.

So far, that just sounds like a state-of-the-art alt-coin. The real innovation is Ethereum’s Turing-complete scripting language. This is very cool, as it implements a new entity on the network, a programmable contract. From their whitepaper:

A contract is essentially an automated agent that lives on the Ethereum network, has an Ethereum address and balance, and can send and receive transactions. A contract is “activated” every time someone sends a transaction to it, at which point it runs its code, perhaps modifying its internal state or even sending some transactions, and then shuts down.

In Bitcoin (and the alt-coins), tx are generated and received by addresses. In Ethereum, contracts too can generate and receive tx. This creates endless possibilities. For example, in Ethereum, one could create a CFD. From an article by Buterin:

Each Ethereum contract has its own internal scripting code, and the scripting code is activated every time a transaction is sent to it. The scripting language has access to the transaction’s value, sender and optional data fields, as well some block data and its own internal memory, as inputs, and can send transactions. To make a CFD, Alice would create a contract and seed it with $1000 worth of cryptocurrency, and then wait for Bob to accept the contract by sending a transction containing $1000 as well. The contract would then be programmed to start a timer, and after 30 days Alice or Bob would be able to send a small transaction to the contract to activate it again and release the funds.

In the CFD example, I think the idea is something like this. Alice wants to bet on the change in next quarter’s US GDP. She creates a contract that includes a formula like PAYOUT = (ALICE_PREDICTION - GDP1Q2014 / GDP4Q2013 - 1) * GEARING and funds it with 10,000 ether. This is like a limit order. The script in the contract specifies that anyone who sends 10,000 ether to this contract will take the other side of this trade. The script also contains the public key of an “oracle”, eg a trusted website that publishes economic stats for the purpose of authoritatively fixing the settlement value of CFD’s. After X days the script consults the oracle, pays it a small fee, and gets signed value for GDP1Q2014 , which script checks against the oracle’s public key. Script then computes the formula and sends Alice max(10000 + PAYOUT,0) ether and Bob max(10000 - PAYOUT,0) ether.

Some other contract types that have been suggested:

Multisignature escrows

Savings accounts

Peer-to-peer gambling

New currencies within Ethereum

As Buterin says:

This is the advantage of Ethereum code: because the scripting language is designed to have no restrictions except for a fee system, essentially any kind of rules can be encoded inside of it. One can even have an entire company manage its savings on the blockchain, with a contract saying that, for example, 60% of the current shareholders of a company are needed to agree to move any funds (and perhapps 30% can move a maximum of 1% per day). Other, less traditionally capitalistic, structures are also possible; one idea is for a

democratic organisation with the only rule being that two thirds of the existing members of a group must agree to invite another member.

Interesting stuff. Bitcoin’s advocates have always emphasised that Bitcoin is a decentralised payments system as well as a currency, and have gone to great lengths to build on top of it a richer set of financial exchange so that assets other than bitcoin can be traded on the blockchain. coloured coins, and protocols like Mastercoin are the best examples of these efforts.

The Ethereum guys share the same goals of these projects, but have a very different view about what the underlying technology needs to be to make them happen.

..as far as being an effective low-level protocol is concerned, Bitcoin is less effective; rather than being like a TCP on top of which one can build HTTP, Bitcoin is like SMTP: a protocol that is good at its intended task (in SMTP’s case email, in Bitcoin’s case money), but not particularly good as a foundation for anything else.

What makes Ethereum more like TCP and Bitcoin more like SMTP is that the former contains a Turing-complete scrip system whilst the latter does not. Bitcoin’s scripting system was deliberately made to be not Turing-complete to protect the network’s peers from malicious and buggy code. Instead of restricting the scripting language to deal with this problem, Ethereum uses an economic solution: tx and contract fees.

Ethereum will be like a giant distributed computer that automates all sorts of useful financial processes, as well as hashing tx blocks to define distributed ledger, like Bitcoin’s network does. But on Ethereum, contracts will have to pay fees to have their computations done, to compensate peers for resources consumed to run the contracts, and to make error and malice costly. My guess is that much rides on how effective this solution turns out to be. Bitcoin is very robust. It is also much less complex by not having Turing-complete scripting.

I will blog more on Ethereum as I learn more about it. I wish this project much success. The concept is brilliant if it actually works.