Authored by Tyler Keenan via B2C – Content Remix by Karl Montevirgen of Halifax America
If you’ve heard about Ethereum, you probably know it as another decidedly volatile digital currency, a la Bitcoin. But if that’s all you know about it, you could be overlooking one of the most significant developments in digital infrastructure in decades.
Even though it’s only been around since July 2015, it’s already attracted serious interest from JPMorgan Chase, BP, Microsoft, and others. So what is Ethereum and why are some of the biggest companies in the world interested in it?
A Hypothetical Example
Before we get into how Ethereum works, it might be helpful to explain how it could be used in the future.
Take, for example, a hypothetical supply chain for a modern airplane manufacturer. It could include hundreds, if not thousands of parts from suppliers spread all around the globe: you might have engines manufactured in the US, avionics from Europe, and the fuselage from Asia.
If there’s a defect with the plane (or, god forbid, an accident), it can be enormously costly and time consuming for the company and investigators not just to fix the problem but even identify where in the manufacturing process it occurred.
A major part of this complexity lies with the sheer number of different records, many of which may be incomplete or inaccurate, and all of which will need to be reconciled across the various manufacturers, subcontractors, suppliers, shippers, etc.
Imagine, though, if these records all existed on a single ledger distributed across all the relevant parties. This ledger would act as an authoritative record that all parties could access and agree on, with complete provenance information so that defective parts or inefficiencies can be precisely identified and corrected. Someone conducting an audit need only pull up a single record for each part to see everything they need to know about it.
Not only would such a system save money and time in the manufacturing process, it could also make it easier and faster to conduct safety investigations.
What we’ve described is just one hypothetical application of blockchain technology…which could be implemented via a platform like Ethereum.
Other examples range from B2B applications like self-executing contracts to developing a decentralized and secure voting system that could change the way elections work in the future.
Ethereum and Bitcoin
Now that we’ve looked at how Ethereum might be used, let’s take a look under the hood. Like Bitcoin, Ethereum is built on top of blockchain infrastructure. Bitcoin may be the first and most high-profile application of the more general blockchain infrastructure, but it’s not the only potential application.
While often compared to Bitcoin, Ethereum has much higher and broader goals than simply becoming another cryptocurrency. It does have its own digital currency, Ether, which can be traded for dollars on any number of exchanges, but these tokens are more than just a stand-in for other types of currency–they’re essential to the functioning of the network itself.
Mining the Ether
The key to separating Ethereum from Bitcoin and other blockchain applications is the very clever role that ether mining plays in the platform.
In general, mining is how decentralized currencies get around the need for a central bank to issue more money. Miners use computers with powerful GPUs to solve complex puzzles, and whoever solves the puzzle first is rewarded with a token, whether that’s ether or bitcoin or dogecoin. The more processing power you contribute, the more likely you are to solve the puzzle and get the tokens. There are a number of major mining operations, but in many cases groups of individuals pool their computing power and then divide the ether amongst themselves.
The difference with Ether is that miners aren’t just guessing random numbers for its own sake, they’re validating the next block in the blockchain.
As we explained in our blockchain explainer, validating one block in a blockchain also validates every prior transaction. Thus, the longer the chain gets, the more secure it is.
In essence, miners act as accountants for the entire blockchain network, keeping track of the state of every smart contract as well as the amount of ether held by every party.
Ethereum, Blockchain, and Smart Contracts
So now that we have a secure, auditable, decentralized ledger, what can we do with it? We’ve written before about smart contracts, but it’s worth revisiting now that we’ve looked at the infrastructure that supports them.
As we’ve said before, smart contracts are a way for parties to set up a self-executing agreement on a shared network, in this case a blockchain running on Ethereum.
- Smart contracts don’t simply record the terms of the deal, as with a paper contract…
- …they also automatically verify when the terms of the deal have been satisfied and facilitate the transfer of any goods, content, or money associated with it.
Among the advantages to smart contracts are their speed and security. Because smart contracts self-execute the moment the terms of an agreement are met, there’s no time lost waiting for both parties to verify that the terms of the deal have been satisfied and then send and receive goods and payment.
Furthermore, because an Ethereum blockchain is supported by thousands of independent miners who are constantly verifying the state of the ledger, a smart contract is virtually tamper-proof, making it an exceptionally secure place to transact business.
Lastly, the blockchain itself can also holds assets, whether that’s digital currency or some other digital good (like the title to a car, for instance, or an .mp3 file) so there’s no need to put funds or goods in escrow accounts.
But the potential for smart contracts is way bigger than just speeding up payouts. The concept of a self-executing agreement stored on a publicly distributed system can be applied to many scenarios.
- We’ve already looked at how smart contracts could revolutionize supply chains.
- Another moonshot application is to use smart contracts to create a smart power grid that optimally allocates power among homes, businesses, and powerplants.
- Yet another might be a way to distribute and trade company shares that also facilitates the automatic payment of dividends
How Is the Enterprise Supporting Ethereum?
As we’ve seen, the range of potential applications for blockchains is a big reason corporations from a variety of industries are deeply invested in Ethereum and blockchain more generally. JPMorgan Chase, BP, Microsoft, Merck, Toyota, and Samsung have all joined the Enterprise Ethereum Alliance, which despite it’s superhero-sounding name is actually a non-profit aimed at promoting Ethereum as an enterprise-grade blockchain. In more concrete terms, that means they’re supporting the development of features that meet the regulatory and governance needs of large corporations.
For instance, any financial or healthcare institution would need to be able to demonstrate that their blockchain can securely store sensitive data, whether that’s credit card numbers or patient records. The idea is that these developments will both spur the adoption of blockchain technology by other enterprises while also standardizing how it’s implemented. Lastly, those developments will “trickle down” to the public, allowing smaller companies and individuals to take advantage of them.
It’s also worth noting that the EEA isn’t the only consortium interested in blockchain’s potential business applications. There’s also a competing consortium called Hyperledger, led by IBM, that’s similarly focused on developing an enterprise-focused blockchain. These groups aren’t promoting competing technologies so much as trying to define the de facto standards that blockchain developers will use going forward, similar to how the W3C defines the standards and best practices for web development.
What Does This Mean for Smaller Companies?
At the moment, probably not much. Unless you’re a cryptocurrency speculator or developing a distributed application, you probably don’t have a pressing business need to start mining ether or get on a blockchain. We’re in the Wild West days of blockchain technology, where all kinds of individuals and organizations are still trying to figure out what they can do with the tech. It may be exciting, but more as a signal for where the future is headed in 5-10 years rather than the next couple quarters.
Another challenge faced by blockchain advocates is that it can be difficult to explain how exactly the thing works. Educating potential enterprise users about blockchain is one of the main functions of the EEA, but they’re not the only ones trying to raise awareness. One group of Canadian programmers has developed a game involving, what else, digital cats to introduce laymen to the basics of Ethereum and smart contracts.
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