Ethereum and smart contracts

Ethereum and smart contracts

26. maj 2020Læsetid: 3 minutter

Ethereum's potential is not only about how the price of Ether will rise or not in the future, but also about the value of the platform that Ethereum actually is, and not least will become, and how it can be the platform we use in the future to build new applications.

We can take it from the beginning. Ethereum is a platform, a future decentralized internet. An internet where the users own their own data. This means that applications and companies cannot steal data and use it. It is also an internet where everyone has access to the same financial applications and services. Of course, this will lead to that the future of the Internet Ethereum may not be as intuitive as the Internet we use today, but on the other hand, more and more understand the risks of not owning and having the right to their own data.

Ethereum is thus the block chain itself, the platform, and Ether (ETH) its cryptocurrency - its fuel. Just as Bitcoin, Ether is fully digital. It can be sent to anyone in the world, at any time. In addition, it is not a central entity, such as a central bank, a whole country or even a company, that controls the availability of Ether. But while ETH and BTC have some overall similarities, they also differ significantly in several ways.

Bitcoin started as a reaction to the fiat monetary system. As a way to give everyone an alternative to unbanked currencies that are eventually inflated by so-called "monetary stimulus". Historically, all fiat currencies have met the same fate, central banks have printed so much money that the value per unit becomes non-existent and confidence in the centralized currency disappears. This is true not only in modern times, but also during the Roman Empire, silver coins were mixed up until 5 percent of the population sat at 90 percent of the wealth, and others starved to death. In Argentina during the crisis in the early 2000s, some parts were returned to barter systems. Where people met on so-called "treques" to exchange services and goods with each other.

Ether has occasionally been criticized by Bitcoin maximists for not being a sufficiently scarce currency to function as a store of value in the future. Unlike Bitcoin, whose maximum number will eventually be 21 million Bitcoin, Ethereum has not previously had reason to slow down the rate of inflation for Ether. The purpose of Ether can be described rather as fuel in an engine (which we describe in more detail below), where the engine refers to Ethereum as a platform, rather than as cryptocurrency whose only task is to function as "money" in the future.

Smart contracts and Ethereum Gas

To understand the role ETH has for Ethereum, we first need to understand smart contracts and the fee structure to execute these. Smart contracts are not new to Ether or Bitcoin. It was not until the early 1990s that Nick Szabo likened a vending machine to explaining the concept of smart contracts for the first time. Szabo then argued that the transaction could not be carried out properly unless several criteria were met - which is what a smart contract means.

It is with smart contracts that we can implement different things in Ethereum's ecosystem. This is useful if, for example, you want to be able to condition a transaction, so that the recipient does not receive the payment until the conditions are met with the payer. When miners carry out transactions, they charge a fee, a so-called gas fee. Gas is thus the fuel on which Ethereum's platform runs. Although today there is no maximum limit on how many Ether can be mined, there is a proposal for a so-called EIP (Ethereum Improvement Protocol) whose purpose is to streamline the fee structure. How this EIP (1559) could in theory also make ETH more scarce, we will go through in the next article.

Legal notice

This information is in the sole responsibility of the guest author and does not necessarily represent the opinion of Bank Vontobel Europe AG or any other company of the Vontobel Group. The further development of the index or a company as well as its share price depends on a large number of company-, group- and sector-specific as well as economic factors. When forming his investment decision, each investor must take into account the risk of price losses. Please note that investing in these products will not generate ongoing income.

The products are not capital protected, in the worst case a total loss of the invested capital is possible. In the event of insolvency of the issuer and the guarantor, the investor bears the risk of a total loss of his investment. In any case, investors should note that past performance and / or analysts' opinions are no adequate indicator of future performance. The performance of the underlyings depends on a variety of economic, entrepreneurial and political factors that should be taken into account in the formation of a market expectation.


31-10-2020 15:03:02

 

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