{
  "path": "/posts/pay-attention-to-ethereum",
  "site": "at://did:plc:ephkzpinhaqcabtkugtbzrwu/site.standard.publication/3mdogbputbg2m",
  "tags": [
    "cryptocurrency",
    "ethereum",
    "money"
  ],
  "$type": "site.standard.document",
  "title": "Why you should pay attention to Ethereum",
  "description": "A brief explanation of cryptocurrencies and why they're useful I wrote for my non-techie friends.",
  "publishedAt": "2017-05-21T18:53:19.558Z",
  "textContent": "Cryptocurrencies are stealing the limelight in the world of finance at the moment. They definitely deserve your attention but I wanted to voice some interesting implications of their success that bear levels of consideration that only getting thoughts down in words can provide!\n\nThe first section below goes through the basic concepts of digital currencies assuming as little prior knowledge as possible, and beneath is a more editorial look at why I think the complexities of systems like this are useful and bound for success.\n\nFoundational concepts\n\nBefore I start, I should give some background for readers who are less familiar with cryptocurrencies like Bitcoin and Ether and how they work. There are a host of articles you can find on every aspect I’ll cover, so I’ll try to keep it brief and let you dig deeper as you deem necessary.\n\nThe premise\n\nCryptocurrencies are borne of the belief that some of the foundational issues that more traditional fiat currencies struggle with can be solved with the application of suitably well thought-through technological processes.\n\nThere are a couple of concepts which we’ll need a basic understanding of to grasp the potential of these new financial mechanisms, but while they’re hideously complicated in the detail, they’re not too complex at the high level.\n\nCryptography\n\nAs the name implies, cryptography is critical to cryptocurrencies’ function. Proving who you are is hard enough in physical space, let alone online and cryptography provides humanity’s best approach for this to date.\n\nIt’s a massive topic, as you might expect, but suffice to say here that, digitally, proof of identity is based on the principle that multiplying two extremely large numbers together is easy, but taking one extremely large number and finding the numbers that divide into it without a remainder is very hard (and takes a very long time, even for a computer).\n\nTo operate with cryptocurrencies, you start by generating two extremely large random (prime) numbers, or “keys”. The chances of you generating the same ones as someone else is vanishingly small as these numbers have many thousands of digits in them.\n\nYou publish one publicly, which forms your “address” (think: sort code and account number), and keep the other private as proof of ownership. For every financial action you take (e.g. “Take 5 from account X and put it in account Y”), you “sign” that instruction with your private key and append the instruction-signature pair to a shared public ledger called the _blockchain_.\n\nThe beauty of maths means that Joe Bloggs can use your public key and the attached signature to confirm that it was really you who ordered that transaction, but neither he nor anyone else without your private key can create a valid signature, and thus a valid instruction for that account’s money.\n\nDecentralisation\n\nHaving one public ledger for all these transactions seems well and good (as it prevents double spending) but if you imagine a physical book with people writing their transactions down in it, you rapidly see that there are location and locking issues: you need to be where the book is, and only one person can write in it at once.\n\nThat book is the equivalent of late 20th century banking. Then we didn’t write in the ledger, we told our bank to write in the ledger for us. Each bank had its own book, and computers to write in them, each of which was very fast. This made centralised banking manageable, but coordinating a transaction from Alex in London to Brabra in Australia still took a long time as lots of banking authorities had to agree.\n\nDecentralised banking, a core component of cryptocurrency construction, requires that _anyone_ can write in the ledger (even a thief or “bad actor”). A decentralised banking system is more like a series of noticeboards scattered around every city; when you want to make a transaction you just write it on a piece of paper and pin it up where anyone can look at it to see that it occurred. How is honesty and accuracy ensured? For that we require _the blockchain_.\n\nThe Blockchain\n\nOriginally detailed by Satoshi Nakomoto, the still pseudonymous name chosen by the group or individual that penned the whitepaper on Bitcoin, the blockchain is a way of structuring a ledger such that tampering with it or posting untruthfully is impossible by design, even when everyone has one and no-one owns a ‘master copy’.\n\nThe blockchain is an immutable list of parts of every transaction that has ever happened, organised in such a way that by reading it you can determine if the transaction you’re suspicious of is legitimate or not.\n\nTo continue the metaphor above, imagine a messenger that would regularly travel between every noticeboard, arrange all the new transactions in alphabetical order, and add the first letter of each transactional instruction to his notepad. Upon completing the last noticeboard he would add the first letter of every _notepad_ from each previous round-the-world trip he’d completed then add today’s notepad to the library and call that day’s job complete.\n\nIn this analogy the notepads are _blocks_ and the library of notepads he has created is _the blockchain_. In truth, rather than just taking the first letter of an instruction or a notepad, the blockchain uses a method called _hashing_ to turn arbitrary information into a smaller, fixed length piece of information. Hashing algorithms use every letter of an instruction as part of their calculation, so that nipping back to the noticeboard and adding an extra zero to the transfer order giving you your salary would completely change the _hash_ of your instruction, which would then differ from the messenger’s notepad, marking your forged transaction as provably incorrect.\n\nIn fact, there are many messengers performing this verification service and they corroborate their hashes against each other, to ensure consistency, before taking each notebook and adding it to the library that is the immutable ledger: the truth of the currency’s use.\n\nOn top of this, because the third notepad contains information from the second, and the second from the first, every subsequent round the messengers do further confirms and adds proof to all the transactions which came before. A concerned individual can wait for many rounds of proof before they agree that a transaction is truly verified and, of course, rather than happening once a day, these checks can occur in seconds.\n\nThis corroboration is the infrastructure that makes cryptocurrencies work and work requires incentive to be completed, so who does it and why do they bother?\n\nMining\n\nWhen people talk of “mining Bitcoin” or “mining Ether” what they mean is being the messenger of the analogy above. By inspecting transactions from around the world, hashing and arranging them in a specific way (such that completing that task is very hard, but proving that it has been completed is really easy), any individual can perform this task, and by performing it enough times a miner is rewarded with a currency coin. In fact, this is the _only_ way that new coins are introduced into circulation.\n\nTo control the rate of inflation some arbitrary complexity rules are imposed into the currency’s definition, for example: a miner might be required to order all the transactions in a block such that the last digits of the hash are 3832. This means that the miner must try millions of combinations of all of the transactions to find the order that produces a hash with the right four last digits (which takes time), but anyone can look at the result and know that the work was done at a glance. It is restrictions like these, combined with Moore’s Law and some fancy maths, which ensure that the inflation of cryptocurrencies like Bitcoin and Ether are predictable, regular and limited.\n\n---\n\nThere’s much more that could be covered in this background, but let’s get straight to the point.\n\nWhy is all this complexity useful?\n\nAs I see it there are two foundational and relevant changes to the global post-millenium economy:\n\n- Technology has progressed to the point where there are things consumers are willing to pay for that are just ones and zeroes\n- The internet makes information transfer to any human effectively free\n\nYou may see where I’m going with this: trade is no longer bound by geography. When I use the internet to buy a Chinese-made light bulb, it still has to be shipped to me; if I want to buy a computer game on a physical disc, there needs to be a store for me to walk into; but if an engineer sells her software through the internet she could be on the moon and the only difference to her being in the next door room would be the 1.3 second delay in delivery time imposed by the speed of light. Clearly if you don’t need to rely on a physical store or distribution network your business is simpler and cheaper to run, I believe the same is true for non-physical currencies.\n\nSo what currency does our hypothetical lunar coder—let’s call her Ada—charge her customers in? She weighs up the benefits each currency provides in terms of spending power (money is useless to her unless she can spend it), stability (so that a week’s work isn’t worth only a loaf of bread by Saturday), and the features that currency offers (like fungibility, being backed by gold or being accepted in more countries than any other).\n\nSo, if we assume cryptocurrencies have enough features that they gain popularity, and thus the _potential_ for spending power and stability, what features do they have that would make them a good choice for pure-digital traders?\n\nCost\n\nThough it’s not always visible to consumers, all financial transactions cost money to process. To pay for your beer with a bank note, there must be the infrastructure that prints those notes, that ensures forgeries are difficult and quickly identified and there must be staff that operate that infrastructure and _physically move the notes around_. If you think your bank is pushing contactless payment upon you, you’",
  "canonicalUrl": "https://www.byjp.me/posts/pay-attention-to-ethereum"
}