What is Ethereum

Ethereum is one of if not the most impressive invention of the last decade. There have been many advances in that time but few were as revolutionary as Ethereum. Most people who have heard of Ethereum will have heard of it in comparison or alongside Bitcoin. It is the second most widely used cryptocurrency. If it’s only second though why haven’t I picked Bitcoin as my most impressive invention? I certainly think Bitcoin is impressive but while it and Ethereum are similar there are some features of Ethereum that make it stand out.

For those who aren’t really sure why these things might have any value or use at all hopefully the below will give some idea as to the power of these inventions. One note is that while I’ve chosen Ethereum as the focus of this piece, many/most cryptocurrencies can do a number of the things below, I’ve focused on Ethereum because it is the only one that has all of these features built into it, so hopefully these analogies can either give you a better understanding of why it is so powerful or give you a different view point on just how powerful it is.

We’ll start off with the one most people will have come across. Ethereum is like Money. In principle you can trade ethereum for goods and services. I say in principle because as most people are aware the price of Ethereum is somewhat volatile making its actual use as money somewhat less stable than something like the pound. Typically a currency (or at least a useful one) has to be a unit of account, a medium of exchange and a store of value. While Ethereum has a bit too much volatility for widespread adoption for most of these uses at the moment even if it doesn’t become something that fulfils these ideals it is directly enabling the creation of things that are. This is probably the least interesting analogy of the bunch.

Ethereum is like a web browser[1]. The web browser acts as an intermediary technology allowing you to interact with useful things that you can’t access any other way. Similarly Ethereum can/will act as this intermediary allowing you to interface with a number of interesting/useful applications and protocols. As the analogy goes the web browser largely started with message boards and media but then branched out into basically everything you can do today. Ethereum started largely as a currency alternative but in the future it will be the gateway to a huge number of uses that you require it to use.

If you’re not sure about what these things you might want to interface with are consider numaire. This is a token built on top of the Ethereum protocol by the hedge fund Numerai allowing you to stake money on sets of predictions you send them in response to their datasets. This allows them to act like a distributed hedge fund taking advantage of machine learning talent all over the world without ever having to learn whose model belongs to who and with anyone getting equal opportunity to take part.

Moving on we could also say that Ethereum is like a computer[2]. One of the main motivating reasons behind the creation of ethereum was that bitcoin didn’t have a scripting language. You could use it but not programatically. Hence ethereum was born largely to solve this problem and is therefore “Turing complete”. This simply means that any problem you could solve on any other Turing complete system (i.e most computers) you could solve on Ethereum. Why does this matter? well it means that you can implement basically arbitrarily sophisticated logic into how your programs work. This allows things like smart contracts[3] to be able to execute based on almost any logical protocol you can imagine, the possibilities are in some ways literally endless.

Ethereum is like double entry book keeping. This one might be the strangest at first sight but my reasoning here is that double entry bookkeeping was a way of increasing the accuracy and reliability of units of accounts. Ethereum, given that it fundamentally uses a distributed ledge technology, is arguably an example of the next level of development in this area. The ability to keep track of a global set of accounts without the need for any trust in the other parties is a really impressive thing to have accomplished. Going back to the double entry book keeping analogy, one parallel I want to draw on is that this innovation was a social technology and like most other social technologies was largely a public good. Once double entry bookkeeping was known about it could be used by anyone (non rival) and you couldn’t stop anyone from using it (non excludable). This meant that while it was massively value creating it inherently could not be value capturing. Ethereum is like if you could own a slice of all of the value created by double entry bookkeeping.

This analogy also gets to another part of Ethereum, the “what can it do for me” question. Double entry book keeping couldn’t “do” anything for a consumer, nothing instantly became possible at its invention. Instead it was what it enabled, it enabled higher degrees of trust, it enabled higher degrees of certainty and the ability to handle complex systems of payments more reliably. This enabled a scaling up of previous institutions that, while maybe possible before the invention, would have had much much higher levels of operational friction involved. While I do think Ethereum will have/has had direct consequences I think this idea of it as an enabling device is a useful one if you aren’t convinced by any of the current offerings on the protocol.

I was initially inspired to write this when I read Fred Wilsons post[1] and thought his reframing of crypto wallets as web browsers was such a powerful metaphor to make and put them in such a new light that I wanted to carry it on and see what other framings I thought could be helpful. Hopefully I (somewhat) managed it.

[1] I’m taking this example directly from Fred Wilson of USV although to be fair to him, he actually mentions how a crypto wallet is more like a web browser but I’ve singled in on Ethereum. One because that’s the topic of this post and the analogy still stands when we only look at it and two the diversity of things built on top of Ethereum make it much more like a web browser than any other protocol out there.

[2] This may be somewhat underselling it, Ethereum isn’t actually like a computer it literally is a distributed computer, but hey it’s still not like the computers most people think of so I’m leaving it as an analogy.

[3] Smart contracts are ways to implement a system of rules programatically and without needing to trust any third parties i.e a lawyer. Very cool would recommend having more of a look into them.

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