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In the case of Bitcoin and other cryptocurrencies, digital coins are only created through a network of computers, which must expend inordinately large amounts of energy to confirm transactions (that is, “mining” coins); receiving coins is a reward granted to those who use their computers to do that work. A project that created coins out of thin air like Mastercoin was bound to get criticism from the Bitcoin community. Not only was ownership of Mastercoins concentrated (J.R. owned about 30 percent of the total) but the Mastercoin Foundation was a privileged party, as it was the only entity
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Smart contracts consist of code that self-executes when a set of predefined rules are met.
Nick Szabo, the cryptographer who in 1998 invented the digital currency “Bit Gold,” coined the term “smart contract” in the early 1990s. In a 1997 paper, he said smart contracts “combine protocols with user interfaces to formalize and secure relationships over computer networks.” The system eliminates the need to pay for and trust third parties like auditors, accountants, lawyers, and notary publics, as the agreements are executed through a computer program. The humble vending machine is a primitive precursor to smart contracts, Szabo wrote in the paper.
By the end of their chat Vitalik asked if there was anything he could help out with.
When he got to Israel, he asked Yoni if there was any more work he could focus on while he was there.
After briefly introducing how Bitcoin was created and its advantages over existing payment systems (irreversible transactions provide a high degree of security, lack of a centralized authority makes it invulnerable to censorship, public transactions allow for unprecedented business transparency, etc.), he asked, “Given all of these advantages, the natural question is: Is it possible to use the same functionality for other applications as well? The answer, it turns out, is yes,” he wrote. The distributed database, secured by cryptographic proof-of-work, “is good for more than just the single
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contracts for difference (a way to bet on the future price of securities).
“specify only the basic data and arithmetic building blocks and allow anyone to craft arbitrarily complex Mastercoin contracts to suit their own needs, including needs which we may not even anticipate.”
Vitalik was surprised by their comments. Why couldn’t they get that what he was saying is so much better, Vitalik thought. He considered working on a specific feature maybe for half a second but immediately discarded the idea. That approach was just wrong. The more he looked at these Bitcoin 2.0 projects, the more they felt like a Swiss Army knife. All these people spending so much time making the nail file, the corkscrew, the tiny scissors . . . but what if nobody wants to use any of those things right now, and they just want a knife, or something else entirely different? Why not build the
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Vitalik had found a welcoming group in online Bitcoin forums when it was hard for him to navigate the real world, but now he was coming up against the limits of the Bitcoin community. On one of his walks from eToro back to Tel Aviv, he became convinced he didn’t need Colored Coins, Mastercoin, or anyone else to do what he wanted. “Screw it, I’ll do it myself,” he thought.
city’s steep hills, he continued to refine the idea of a new blockchain that could become the platform enabling any decentralized, censorship-resistant application imaginable. He made his way to Ripple CTO Stefan Thomas’s studio apartment, just south of Market Street, where he would stay for two weeks, eager to get to work.
He opened his laptop and started typing, “The Ultimate Smart Contract and Decentralized Application Platform.”
He needed a name, so he went to look for science fiction terms for inspiration. He was scrolling through Wikipedia when he saw the word “ether,” which he remembered from a childhood science book. Ether is the disproved concept that there’s a very subtle material that fills space and carries light waves in the same way that physical matter carries sound waves. That’s how he thought of the word “Ethereum.” Vitalik wanted his platform to be the underlying and imperceptible medium for every application, just what medieval scientists thought ether was. Plus, it sounded nice.
For about two weeks in late November he only worked on the Ethereum white paper, sometimes from Stefan’s studio, sometimes from the Ripple office.
As he saw his thoughts materialize, it became even more apparent to him how different his platform was from what had been attempted.
Vitalik’s vision was much too big to be constrained by another chain. He was thinking about creating a base layer for everything. A computer that could simultaneously live in all the nodes of an enormous global network, which would be able to process anything you threw at it, without downtime or interference, so developers could build whatever they dreamed of, and nobody would be able to stop them or their applications. Like an infinite machine.
As he recalls it, the words of the podcast faded as he crossed the Bay Bridge, and it was just him, the stars above, and the water below. He saw the future. It wasn’t about Bitcoin. It wasn’t about money. It was bigger than that. It was about the fundamental way human society is structured. Communities had been broken, left powerless and at the mercy of an elite group. But that was about to change. Blockchain technology would give people the capacity to rebuild society so that the individual could take control of his property, his identity, his destiny. It was almost . . . biblical.
“Turing completeness” is a concept named after mathematician Alan Turing. Turing-complete machines are able to run any computer code.
“Each computational step has a cost and users pay for it in ether. Whenever you tell the network to run a piece of code, you also tell it the maximum amount of ether you’re willing to pay. The machine will stop working if it doesn’t get enough money to run the program.”
Ethereum is a proof-of-work chain, like Bitcoin, which means miners get ether as a reward for validating transactions. Miners decide if they’re willing to process the transaction for the fees offered. The reason to separate gas and ether is so that computation costs can remain stable even as the price of the cryptocurrency fluctuates with supply and demand in the market. So, for example, a transaction that costs 100 gas will always cost 100 gas, but the amount of ether the sender will have to pay the miners to process it will depend on the market price of ether.
One significant difference between Ethereum and Bitcoin is their record-keeping method. Bitcoin uses the Unspent Transaction Output model, or UTXO. The balance on each Bitcoin account is composed of unspent coins left over from other transactions. One balance usually includes many UTXOs as with a physical wallet, which might contain many denominations of bills and coins. To buy something with your bitcoin, you may have to use a combination of UTXOs, just like you would use a $10 and a $5 bill to buy something worth $12. The $3 left over from that transaction would become a new UTXO.1 Ethereum
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In Ethereum, there are two types of accounts: externally owned accounts, controlled by people’s private keys and containing no code, and contract accounts, controlled by their code.
Some of the applications that could be created on top of Ethereum, Vitalik wrote, are digital currencies, hedging contracts, a domain-name system, a reputation system, a shareholder-run corporation where decisions on where to move funds can be made by a quorum of investors, “and potentially even the groundwork for a social network.” Another example was crop insurance. “How? Simple—a contract for difference using a data feed of the weather instead of any price index,” an on-chain decentralized marketplace, and the list went on.
Vitalik wanted to create the rails under which almost any imaginable transaction could work in a peer-to-peer, unhackable, and uncensorable way. He was picturing a world computer that would take power away from bloated corporations and governments, making the world more efficient and fairer. The possibilities would be infinite.
Ethereum, on the other hand, takes features away. The protocol does not “support” multisignature transactions, multiple inputs and outputs, hash codes, lock times or many other features that even Bitcoin provides. Instead, all complexity comes from an all-powerful, Turing-complete assembly language, which can be used to build up literally any feature that is mathematically describable.
He looked at all the fields of science and saw that physicists, biologists, and chemists come up with some sort of hypothesis, they prove it, and then a hundred years later somebody comes in and creates an improved model. They pretty much forget everything that was done in the past. It becomes a footnote, and he didn’t want to be a footnote. Mathematics is the only field, he noticed, where laws are thousands of years old. He loved that proximity to immortality: once you prove something, it’s proven forever.
he decided to take a break and figure out what he really wanted to do.
the main exchange at the time was Mt. Gox, which dissolved in 2014 after losing 850,000 Bitcoins from its clients).
Unlike what he had seen during his foray into libertarian politics, cryptocurrency revolutionaries weren’t asking for permission to change the system. They were already there and anyone who wanted to could use them and ditch their bank. It was the ultimate form of protest. “Bitcoin is here to stay and there’s going to be a whole industry built around it,” he thought.
Dan and Stan presented the concept of a Distributed Autonomous Company, which also came to be known as a Decentralized Autonomous Organization, or DAO—a concept that would change Ethereum’s history a couple of years down the road.
A DAO was the groundbreaking idea of creating a computer-run organization. The business’s rules would be set in a computer program and executed with as little human involvement as possible. Because the organization would be built on top of a public blockchain like Ethereum, decision making and flow of funds would be fully transparent, uncensorable, and immutable.
But DAOs don’t have to be limited to cryptocurrencies: there can be unmanned escrow services, incorruptible arbitration services, governments that can’t ignore their constitution, crowdsourced venture capital firms,
Their grand plans required additional funding, and Dan was pushing to raise money by holding a crowdsale like Mastercoin’s, but Charles thought it was too risky. He joined the growing group of skeptics who saw these funding mechanisms as undercover securities offerings.
“To the extent that he says anything other than that he resigned for personal reasons Charles is violating the NDA or spreading lies,” Dan Larimer wrote. “Beware of this shark, he will be your friend one day and plan your destruction in secret the next.”
His favorite one was called Frontier: Elite II. It was open-ended, with no pre-scripted missions, and consisted of trading goods and people in a futuristic galaxy with the goal of amassing the most resources possible, legally or illegally.
He went back to university to do his thesis corrections and one day, chatting with his landlady about what to do next, she mentioned she was doing the Camino de Santiago, a pilgrimage crossing northern Spain. He decided that would be a good way to clear his head and went with her. She quit after the first few days, but he stayed and by the end of the trek he had managed to fall in love. He drifted for the next few years, following his new girlfriend to Italy, Norway, Canada, and back to the United Kingdom as she moved around for her research work.
Bitcoin was running on its biggest high to date, surging from around $100 at the beginning of 2013 to over $1,000 in November. It had since given up some of those gains and was back at around $600. But many of the people there had first bought Bitcoin when it traded for a few bucks and were feeling rich. Better than rich, they were feeling vindicated.
As they schemed and dreamed of greatness, they were also planting the seeds for what would become a much bigger alt-coin boom. But that would be a few years later.
As he sat alone at the table, typing away on his computer while everyone else socialized, it dawned on him that the Ethereum organization he thought was already a done deal with set roles was actually in its very early days. Everyone was still trying to figure out where they fit. As he watched Anthony, Amir, and Charles loudly talk about the benefits of blockchains and decentralization, he realized he was the most technically sophisticated person in the room, or at least the most technical person who had made any progress on the Ethereum code. To Gavin, that was worth something. As he typed
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But what got him really excited was reading Vitalik’s white paper a few months later. While Bitcoin was digital money, he understood that Ethereum could be digital anything. It was a hacker’s dream: a decentralized platform that was flexible enough to support any computer program.
his gut told him to stick to Ethereum.3
He thought about dropping everything and waiting out the financial system’s collapse in some far-flung South American village, but ended up moving to Jamaica to help his model and actress friend set up a recording studio.
While his past life at Goldman Sachs aroused some suspicion, his stint as a music producer in the Caribbean made him more likable to the anarchist-leaning hackers in the house. His experience—and bank account—also made him one of the most “adult” adults in the room.
If the test digital coin he had created actually transferred, it meant the groundwork for an actual working cryptocurrency was there. It was like wiring a whole house and then flipping the switch. If the lights turned on, it meant the wiring was done correctly. And after a few seconds of nobody saying a word, and Gavin hardly breathing, the lights turned on. The digital coin was transferred. A thrilled Gavin exchanged high-fives with Charles as Vitalik neatly clapped his hands together and said, “Yay!”
It wasn’t in his character to show it too loudly, but Vitalik was thrilled. The blockchain he had dreamed up was actually coming into being, and as he looked at everyone filling up that big house, he could hardly believe most of the people there wanted to keep building it.
his minimalistic Berlin apartment.)
“Ethereum, instead of having features, tries to be simple. We don’t have features, we have the programming language,” he said, his words picking up speed. “Out of this one single Lego brick of cryptocurrency, you can make pretty much everything.”
Back from the conference, the team stormed into the house. Cups were clashed together; shoulders were squeezed as the talk turned to the millions they’d raise to manifest their dream into reality. The idea was to sell ether in exchange for bitcoin. People from all over the world would be allowed to send funds into a digital wallet controlled by the Ethereum team.
With Vitalik’s huge success at the conference, he grew worried that they were attracting too much attention about a crowdsale that looked like an unregistered securities offering.
Joe, who had experience dealing in securities, backed Amir up and eventually everyone agreed they should regroup and think about how to do the crowdsale properly.
