Ethereum: a computer in the sky
So far in the programme we've talked a lot about bitcoin, but nowadays there’s a whole world of thousands of other cryptocurrencies out there. One of which Eva Higginbotham has bought, as she tells Phil Sansom - and which Eth2's Justin Drake explains...
Eva - I own £10 worth of Ethereum. My friend bought some Bitcoin and bought some Ethereum using this app, and I just got jealous of them talking about the highs and lows of watching it go up and down. I was like, "well, I'll put in £10". As we know from earlier on in this show, I don't really understand how it works; it was just kind of enjoyable to watch. So I can show you, I started with £10. I now have £14.22. And that is over quite... it's been a little while, I don't remember exactly when I got it, but at least a few months ago. And you can see it on a graph.
Phil - Oh yeah. There's a big climb.
Eva - It's gone way up. And I bought it at that point - see there, halfway up the big climb! So I should have bought it down here.
Phil - You probably made overall a good choice. Most cryptocurrencies are really small, don't last very long; you can think of them like penny stocks. Bitcoin is by far the biggest, it's got like two thirds of the market; but this one Ethereum, is definitely the second. And it's very different. I thought we probably wanted to explain it, and so here to answer some of your questions that you might have is Justin Drake. He's a researcher from Eth2, he works on this stuff.
Justin - Hi there. Thanks for having me.
Phil - Justin, I'm sure Eva has some questions. Eva, why don't you take it away?
Eva - To start with, what actually is Ethereum?
Justin - There's the network - and it's this computer which runs in the cloud, it's kind of a virtual computer - and then there's a second aspect to this computer, which is the financial aspect, and there's a token which is native to the blockchain called Ether. And this is what you own in your wallet.
Eva - So I have Ether. I don't have Ethereum.
Justin - That's exactly right. You own Ether.
Eva - And how is it different from Bitcoin then?
Justin - One of the key differentiators has been that Ethereum is programmable. You can also think of Bitcoin as a computer, but it's a very simple computer. You can almost think of it as like a calculator. It can do one thing and one thing very well, and that one thing is the transfer of funds from one place to another. On Ethereum, you can actually write very complex programs to create new and interesting financial schemes. So one very simple example is the idea of an exchange on the Ethereum blockchainl; there's an app called Uniswap which will swap one asset for another purely with code. And in that sense, there's this saying which is that 'code is law'. There's no concept of legal contract that comes into play. There's no concept of humans. It's purely automated with just machines.
Phil - Crucially Justin it's basically like the Bitcoin blockchain, and it uses the same proof of work, where everyone's spending all this power and computing power to create the next link in the chain.
Justin - Yes. So Ethereum today is using proof of work. The future version of Ethereum, which is going to use proof of stake, is meant to be purely digital, where the voting power is proportional to how many Ether do you own as opposed to how much electricity you're expending. This is better for the environment, but it's also better for the holders of the token, because we don't need to print as many Ether in order to reward the validators. There's been almost close to a decade of R&D to get to this point, and it has been a very difficult problem to tackle. The good news is that today, the proof of stake is live; and at some point in the future, in roughly 12 months, we hope to remove the proof of work component and replace it solely by proof of stake.
Eva - Isn't that risky in its own way though? Because couldn't I just buy all the Ether and then I just say, "well, and the next transaction was me getting even more Ether from everybody else"?
Justin - Yeah, that is a great question. It turns out that today, right now, there's about $6 billion of Ether at stake. So if you want to overwhelm the system, you need to match the $6 billion with another $6 billion.
Eva - Might be a little bit out of my league for right now!
Justin - But we have another cool, really cool, defense mechanism, which Bitcoin doesn't have, is that if for some reason you do perform this attack - and maybe you're a nation state, like the US government or China - well, it turns out that we can identify the attacker, penalise, and remove them from the system.
Phil - Just finally, Justin - what I know is cool about Ethereum is that you've got this Ether, but you've got this other layer, upon which there's this whole ecosystem of strange stuff like financial instruments, and weird things people are trading, that - am I right - is absolutely huge?
Justin - Right. We have basically a new internet of finance. Ethereum, when it came out, started with just Ether the asset. But because you have this programming layer, it turns out we have a lot of experimentation. And what we call this financial layer is DeFi, decentralised finance. And right now there's about $40 billion locked and participating in the DeFi ecosystem. And this is growing extremely fast.