In the beginning the Prophet Satoshi brought us Bitcoin. And the cryptogeeks and libertarians looked upon it, and said lo, we smile upon this, for it is good, and decentralized, and solves the Byzantine Generals Problem. For a time all was well. But then came wailing and gnashing of teeth and wearing of sackcloth. And then came the Prophet Vitalik, bearing Ethereum; and lo, it was even better.

Maybe.

There appears to be a severe outbreak of Ethereum Fever south of Market. — parker (@pt) May 20, 2016

What is Ethereum? It’s a combination of a cryptocurrency, like Bitcoin, and a vast decentralized computer. Let me explain. As an above-average TechCrunch reader, you already know Bitcoin is a currency whose transactions are secured by the immense computing power of its distributed network of “miners,” rather than any central entity. But you may not appreciate that every Bitcoin transaction is actually a program written in the Bitcoin scripting language — aka a “smart contract.”

Bitcoin’s contractual language is quite limited, by design. But it allows for transactions that can be delayed until a particular time; or transactions that occur only if, say, 3 of 5 signatories agree to them; or crowdfunding campaigns that only transfer money if a particular total is attained; and many other possibilities. Importantly, once incorporated into the Bitcoin blockchain, these contracts require no trust and no human intervention. Bitcoin is programmable money … with a highly restrictive programming language.

Ethereum removes those restrictions entirely. The Ethereum scripting language is Turing-complete, meaning it can replicate any program written in any traditional programming language. However, to prevent ill-behaved contracts with infinite loops from running forever, every Ethereum transaction computation must be paid for. Just as Bitcoin miners collect small amounts of bitcoin, known as “fees,” in exchange for mining transactions onto the Bitcoin blockchain, Ethereum miners collect “ether,” the Ethereum currency, for running Ethereum contracts.

You may well be thinking: “Oh come on. Bitcoin was more than abstruse and geeky enough. Now this new made-up-magical-money thing is even more complicated? Why should I care?”

You should care because decentralized cryptocurrencies like Bitcoin and Ethereum are–or at least could be–essentially an Internet for money, securities, and other contractual transactions. Like the Internet, they are permissionless networks that anyone can join and use. Ethereum optimists might analogize Bitcoin as the FTP of this transactional Internet, with Ethereum as its World Wide Web.

I’ve waxed about why I think Bitcoin matters. I’m a little less enthusiastic about Ethereum … so far. To be clear: as I’ve written before, Ethereum is really cool, truly innovative, and potentially revolutionary. However, it is now–probably–at the peak of its initial hype cycle.

Consider: heavily funded Bitcoin startup Coinbase will soon support Ethereum trading on its rebranded cryptocurrency exchange. Microsoft offers “Ethereum Blockchain As A Service” on Azure. Ether has risen in value more than tenfold over the last year, to a market cap which now exceeds $1 billion. And while Bitcoin’s hashrate, a measure of the computing power devoted to mining, still vastly exceeds Ethereum’s, look at the hockey-stick nature of that latter chart.

Most of all, though, consider the DAO, and the $163 million — $163 million! — it has raised. Sorry: I mean “raised.”

What is the DAO? It stands for “Decentralized Autonomous Organization.” Ethereum offers a tutorial explaining how to create your own. The DAO, however, as Seth Bannon explained on TC recently, is a particular DAO which:

as of the time of writing, controls more than $100 million in assets, and yet it exists entirely on the Ethereum blockchain. In exchange for supporting The DAO financially (in the form of Ether), backers get DAO tokens, which they can then use to vote on the direction of the organization. They can use their tokens to vote on big governance issues (akin to traditional shareholders) but also on minute details of how The DAO spends its resources. In this way, token holders have total control over The DAO’s assets and its actions. People with projects they’d like to build for The DAO can submit ideas in the form of a proposal written in plain English accompanied by smart contract code. The code automatically executes payments so long as certain agreed-upon conditions are met. Because this is all built on top of Ethereum, which allows for robust smart contracts, this can all be done autonomously.

Or as Peter Vessenes put it:

It’s a cross between a crowdfunding site and a venture capital / private equity partnership. It’s controlled by a set of voting rules encapsulated and enforced on the Ethereum blockchain as a smart contract. People that trust the code, rules and plan are sending ether directly to fund the contract. […] If a certain percentage decide to fund a proposal, then it’s funded.

Think of it as a kind of corporation incorporated only on the Ethereum blockchain, whose laws consist entirely of those defined by its contract code. A corporation that appears to be a means of investing in the future … without having any concrete idea exactly what that future is yet. For many people, that kind of investment is a holy grail.

But if this sounds to you like a poor fit with existing legal and regulatory structures, and/or a disaster waiting to happen, well, you’re certainly not alone:

What's the future of the DAO? Regulators nuking it, of course. https://t.co/C0I1cmDCQF — 📎Josh Myer (@xek) May 17, 2016

To quote Eris COO (and attorney) Preston Byrne:

the plain-English covenants made on funding proposals, the absence of legal certainty as to what THEDAO actually is and the nebulous and ever-shifting nature of THEDAO’s “membership,” will make it very difficult to properly assign ownership in these projects’ work product. #THEDAO might look and feel like a company, but on cursory examination, too many gaps, too few formalities, not enough structure and legally incorrect methods reveal themselves as fatal to the exercise. […] I sympathise with THEDAO’s intentions, in that I believe that the financial markets are currently rigged against the “little guy” and that there is no reason why the kinds of investment opportunities (and returns) available to the super-wealthy should not be available to small investors whose traditional means of accumulating wealth (savings) are all but useless given current, zero interest-rate monetary policy. I also believe that blockchain tech will one day play a role in facilitating more democratic access to the capital markets. However, the current body of laws governing this sphere of conduct exists to ensure that people to whom investments are marketed can be absolutely certain about what they’re getting in exchange for their money. In this respect THEDAO clearly falls very short of the mark.

Yes. ALSO possible to imagine a (not legally suspect) DAO that isn't a crapcoin disaster. Sad if this sets us back https://t.co/whBz5sEMKX — Michael Casey (@mikejcasey) May 18, 2016

Its worth noting that the money the DAO has “raised” is essentially refundable. As Bitshares founder and DAO skeptic Dan Larimer puts it:

The DAO has tentatively raised $100 million dollars worth of ETH, but so far the investors have taken no real risk. Every single person who has purchased DAO tokens has the ability to reclaim their ETH so long as they never vote. The end result is a massive marketing campaign that totally misrepresents what has been invested and what hasn’t. Considering there is no real risk being taken beyond the risk of holding ETH and that there is the potential for a large gain it is no wonder so many people have participated.

So let’s all try to damp down the hype just a bit. Right now all we have are headlines, promises, and a lot of “raised” money which has not actually been committed. Let’s wait for the results, if any — legal and otherwise — to roll in before declaring the DAO revolution underway. Because, I mean, I like hype too, but this is getting more than a little ridiculous.

https://twitter.com/prestonjbyrne/status/733791922129620992

That said, the DAO does serve to illustrate that these are fecund, exciting times for Ethereum. I’m not worried about the hype; that gets in everywhere. What most concerns me about the Ethereum project is security.

Ethereum is planning a transition from proof-of-work security (mining) to proof-of-stake security. There are very good reasons to do this, but proof-of-work, for all its flaws and excesses, is simple and thoroughly tested. Ethereum’s “Casper” proof-of-stake mechanism is fascinating; but if it has a serious undiscovered flaw, the entire network is at risk.

Similarly, one reason Bitcoin’s scripting language is limited is to help prevent hacking and denial-of-service attacks on the Bitcoin network and its miners. There’s no denying that Ethereum offers a vastly larger attack surface than Bitcoin does.

Worse yet, this applies not just to the network itself, but to individual Ethereum contracts. As Vessenes puts it: “Ethereum Contracts Are Going To Be Candy For Hackers.” To quote the ensuing, and surprisingly good, Hacker News discussion: “Running a machine on a blockchain (Ethereum) is much more complex and error prone then recording transactions on a blockchain (bitcoin.)”

I hope this doesn’t sound too pessimistic. I am genuinely excited about Ethereum in the medium to long term, and you should be too. But I also think we’re now at the peak of its first hype cycle, and important lessons need to be learned, hopefully the easy way, before it begins to achieve its revolutionary potential. There is a reason that “may you live in interesting times” is deemed a curse.