Cryptocurrency All-in-One For Dummies - Peter Kent

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to the Ethereum blockchain and has the added benefits and security that come with that. If you can imagine a software project, it can be built on Ethereum.

      The Turing-complete programming languages are the main feature that makes the Ethereum blockchain vastly more potent than the Bitcoin blockchain for building new programs. Ethereum’s scripting language makes programs like Twitter applications possible in a few lines of code, as well as extremely secure.

      Smart contracts, like the one you create in Chapter 3 of this minibook, can also be built on Ethereum. (You can find out even more about smart contracts in Book 4, Chapters 7 and 8.) The Ethereum protocol has opened up a whole new genre of applications. You can take just about any business, government, or organization’s processes and build a digital representation of it inside of Ethereum. Currently, Ethereum’s platform is being used to manage digital assets (a new class of asset that lives online and may represent a whole digital asset such as a Bitcoin token or a digital representation of a real-world asset such as corn commodities), financial instruments (like mortgage-backed securities), records of ownership of assets such as land, and decentralized autonomous organizations (DAOs).

      Ethereum has also sparked a major global fundraising effort by start-ups that used the ERC token standard to raise capital to build their innovations. Ethereum has opened a new way of organizing business, nonprofit, and government. It has made it possible to hold, share, and trade value without ever meeting the other party or using a third party to facilitate. The code does the work.

      Decentralized applications: Welcome to the future

      The most revolutionary and controversial manifestation of Ethereum is the self-governing and decentralized application (dApp). dApps can manage things like digital assets and DAOs.

      dApps were created to replace centralized management of assets and organizations. This structure has a lot of appeal because many people believe that absolute power corrupts absolutely. For those who are fearful of losing control, this type of structure has massive implications.

Snapshot of the world’s first immortal digital game, Etheria.

      The power of decentralized autonomous organizations

      DAOs are a type of Ethereum application that represents a virtual entity within Ethereum. When you create a DAO, you can invite others to participate in the governance of the organization. The participants can remain anonymous and never meet, which could trigger Know Your Customer (KYC) rules (the process a business must go through to verify the identity of its clients) and anti-money-laundering (AML; the laws and regulations designed to stop the practice of generating income through illegal means) compliance issues.

      DAOs have been created for raising funds for investing, but they could also be designed for civic or nonprofit purposes. Ethereum gives you a basic framework for governance. It’s up to the organizers to determine what’s being governed. Ethereum has created templates for you to help in the creation of DAOs.

      Here’s how DAOs basically work:

      1 A group of people write a smart contract to govern the organization.

      2 People add funds to the DAO and are given tokens that represent ownership.This structure works kind of like stock in a company, but the members have control of the funds from day one.

      3 When the funds have been raised, the DAO begins to operate by having members propose how to spend the money. Voting may be affected by how much Ether the member risks or stakes in the DAO.

      4 The members vote on these proposals.

      5 When the predetermined time has passed and the predetermined number of votes has accrued, the proposal passes or fails.

      6 Individuals act as contractors to service the DAO.

 Snapshot of Ethereum.org blockchain application depiction.

      FIGURE 5-2: Ethereum.org blockchain application depiction.

      Unlike most traditional investment vehicles, where a central party makes decisions about investments, the members of a DAO control 100 percent of the assets. They vote on new investments and other decisions. This type of structure threatens to displace traditional financial managers.

      DAOs are built with code that can’t be changed on the fly. The appeal of this is that malicious hackers can’t monkey with the funds in a traditional sense. However, hackers can still find ways to execute the code in unexpected ways and withdraw funds. Also, the immutable nature of a DAO’s code makes it nearly impossible to fix any bugs once the DAO is live in Ethereum.

      WITH GREAT POWER COMES … GREAT POWER

      The first Ethereum DAO ever built is called, confusingly enough, “The DAO.” It’s an example of some of the dangers that come with decentralized and autonomous entities. It is the largest crowdfunded project in the world — its founders raised approximately $162 million in 26 days with more than 11,000 members. What people had thought was the greatest strength of The DAO became its greatest weakness. The immutable code within The DAO locked into place how the organization would be governed and how funds would be distributed. This allowed the members to feel secure in their investment. Although the code was well reviewed, not all the bugs had been worked out.

      The first significant threat to Ethereum came from the hack of The DAO. An unexpected code path in The DAO’s contract allowed any sophisticated user to withdraw funds. An unknown user managed to remove about $50 million before he could be stopped.

      The Ethereum community debated bitterly about whether it could or should reclaim the Ether. The DAO hacker had not technically done anything wrong or even hacked the system. Fundamentalists within the Ethereum community felt that code was law and, therefore, nothing should be done to recover the funds.

      The very thing that made Ethereum strong was also its greatest weakness. Decentralization, immutability, and autonomy meant no central authority could quickly decide what to do. There was also no one to punish for the misuse of the system. It really did not have any consumer protection measures. It was a new frontier, like the software name suggested.

      After spending several weeks discussing the problem, the Ethereum community decided to shut down The DAO and create a new Ethereum. This process is called hard forking. When the Ethereum community hard-forked the network, it reversed the transaction the hacker had committed. It also created two Ethereums: Ethereum and Ethereum Classic.

      Not everyone was in agreement with this decision. The community continues to use Ethereum Classic. The tokens for Ethereum Classic are still traded but have lost significant

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