I recently launched a new site called Decentral Station: a curated list of links with an introductory essay. This is a short version of the essay.
In 2009, I wrote a book called Pull, on how things would be different once everything is online and interconnected. That vision is finally coming to life. This short essay is my attempt to describe the fast-moving world of decentralization: blockchains, cryptocurrency, triple ledgers, distributed apps, and more. I’m going to start using eBay as an example.
Today, eBay is a public company with 165 million active users, 35,000 employees, $18 billion in revenues and net income of $530 million. Around the world, eBay owns and operates huge buildings full of servers — to make sure all the information is backed up and available. If any one data center is attacked or destroyed, the other locations will take the load.
eBay is a centralized system with its own infrastructure, controlled by its executives. It’s expensive and profitable: by the time you get paid, you’ll lose about 10% of the price to the various intermediaries in the eBay ecosystem. It’s also vulnerable: it can be hacked, not least by its own employees, and credit card numbers and account information can be stolen.
There’s another way to build that system now. In a decentralized system, we could design an application similar to eBay that doesn’t use central servers and control. We could store data on anyone’s computer who wants to store it. These aren’t volunteers — we pay them a few cents for their computing power. At the scale of eBay, there would be tens of thousands of such computers, and all of them store a full copy of the system, creating massive redundancy. Since thousands of computers have a copy, no “bad actors” can disrupt it. You could build a scalable system simply by writing a set of rules and building a database to manage all the listings and transactions.
This is what the blockchain allows. A blockchain records an encrypted, permanent record of every transaction; hardware+software nodes on the network called “miners” verify and store that information for a small price. This creates a distributed system that expands as necessary and can’t be hacked.
Ethereum, which was first described in a white paper in 2013, is the operating system that adds programming to blockchains, effectively turning the network of “miners” into the world’s largest computer. Ethereum can be programmed just like any general-purpose computer, and apps built on Ethereum can grow to any size, are incredibly secure, preserve anonymity, are auditable, and provide the same service at the same scale for less than 1% of the centralized price. We can now do everything eBay does with a fraction of the people, no hardware, secure payments, and at least 90 percent cheaper. Decentralized marketplacesare already fully functional and growing fast.
While blockchains manage transactions (think of blockchains as ledgers), we’ll use a similar scheme to store our content (web sites, images, videos, etc.) and pay for computing power from tens of thousands of people who offer these services. Some of them will be in huge data centers, others will be in people’s basements — it won’t matter. Systems will expand and contract easily, and payments may be made in microseconds, seconds, or minutes — depending on the system. Your encrypted data will go onto thousands of verified servers, so it can’t be destroyed.
eBay on Ethereum
If you forget marketing and customer service, a system that scales securely to the size of eBay could be created in a few months by a small team and left online as open-source software with no extra charges at all. It wouldn’t have to be a company or have any employees. It would cost just a few pennies to list anything, from a matchbook to a car. It could rely on community-based methods of policing, reputation, arbitration, and resolving problems.
Think about that. If this kind of service took off, something on the order of $200 billion in annual recurring revenues from eBay, Craigslist, job boards, and other classified systems would be reduced to … almost zero. The only real cost would be for the “miners” who provide storage and processing power for pennies.
Is that really possible, you ask? It’s already been built.
Because Ethereum has its own currency, it lets us write smart contracts. You program business logic into a smart contract and let it execute automatically. Now the system will make sure that only allowed actions can take place, whether it’s escrow, payment for services, scheduling an appointment, heating a building, landing an airplane, checking out at the grocery store, harvesting potatoes, etc. Renting or using a shared car in the future will involve no human contact. No need to check in at the hotel — just go straight to your room. Software makes most of the decisions using sensors and event-driven data feeds as input.
Definition of smart contract for business people:
A smart contract is software that, once initiated, can effect transactions and agreements in a way that is unambiguous and must be verified and recorded by all nodes of the Ethereum network. It may be made up of subcontracts and have unknown dependencies. It cannot be revoked except under predetermined conditions.
The software will execute as written regardless of any legal frameworks.
Groups are working on creating libraries of code/contract modules that will form an active “smart” infrastructure that eventually will tie into smart legislation and existing legal frameworks worldwide.
Let’s say you want to deposit some money and have it earn interest. You would use a smart contract to specify exactly what you want, and enter it into a peer-to-peer lending ecosystem. If someone is willing to give you the terms you are looking for, they would accept your offer and begin a smart contract. Or, you could look at the offers and accept one. The person on the other side could be one, or even several people, or an institution, but there’s no “bank” in the middle, no escrow service, no set-up fees, and no recurring fees.
Imagine setting up a decentralized poker game. You would program it in some language that executes on the Ethereum virtual machine (in other words — use any of a number of popular programming languages) to manage tables, deal cards, etc. And you could use smart contracts to handle the money, so that as soon as everything is known, the money transfers automatically from person to person — not to the house and then back out.
Think of it as programmable money — we couldn’t have smart contracts before, because there was no automated way to settle. Permanent, reliable, fast, automatic settlement will be a game changer, not just for how we use money but for how we use people.
The Decentralized Stack
Ethereum is the new operating system of the Internet. Here are the parts so far:
- Bitcoin: A cryptocurrency whose central mechanism, the blockchain, is being used for other purposes.
- Blockchain: A permanent, time-stamped record of encrypted transactions & data.
- Ethereum: An open-source virtual machine that allows programmers to build dapps using blockchain. Includes ETH, its own native currency.
- Smart contracts: Business logic encoded to run on Ethereum dapps, using new contract-building languages.
- Dapps: Distributed apps — applications that use blockchain storage and computing power through Ethereum. Generally, dapps look and feel like existing apps you know and use every day.
- Ether (ETH): The Ethereum currency — can be used as a token of value; also has real market value as a currency and will replace Bitcoin in many cases.
- Miners: People who own machines that store blocks and provide computing power.
- Gas: A token used to pay miners a small amount of Ether for each transaction.
- Decentralized storage: Lets us store as much content as we like on computers around the world and pay a small fraction of what we would pay Dropbox or Amazon.
- Decentralized processing: Similar to “Folding at Home” and other large-scale processing projects, we will use thousands of small computers to do supercomputing and pay each one a bit of gas for the service.
- Extras: There will be plenty of APIs, gateways, exchanges, security, authentication, and other services to facilitate communication between ecosystems, especially for highly regulated industries and products.
- Web 3.0 browsers: New browsers are being built that help you manage your cryptocurrency, keys, passwords, blockchain, identity, permissions, etc.
Pros and cons of this new stack:
- Robust: Ethereum runs redundantly on thousands of machines with no off-switch, no central control, and no chance to destroy the network. Unlike other networks and systems, the Ethereum network can’t go “down” any more than the Internet can.
- Trustless: There is no third party in the middle to manage the transaction, and you don’t have to trust the miners who do this work for you — you pay a bit of gas for each transaction and every miner gets a copy of your record in the blockchain. High redundancy and confirmations ensure that bad actors can’t steal your money.
- Latency: It can take up to ten minutes to confirm a transaction and have it replicated on thousands of computers managing the blockchain. This is a feature. It’s meant to ensure that the cryptography can’t be hacked by super-fast machines. Many companies are working to add “sidechains,” tokens, and other software to reduce confirmation time, which is essential for certain markets.
- Scalability: The system scales out efficiently, since millions of people paying a bit of gas is a strong incentive for thousands of miners to provide services. The more transactions, the larger and more efficient this market gets.
- Throughput: The goal is to upgrade this trustless system to process tens or even hundreds of thousands of transactions per second, at the level of today’s large-scale proprietary systems, like Visa and SWIFT. We are not there yet. Even though security is built into the system at the lowest level, time scalability will be a challenge as more people want to use dapps. Other systems provide the speed, but not the trustless security. Many people are currently working on this problem, with different types of solutions in different industries.
For More Information
That’s just a very brief introduction. It continues on my site, with more use cases and issues. At the moment, only a handful of people are able to bridge the gap between the technology and the business threats and opportunities. This year, we expect around $20 billion to go into blockchain-based projects. If you want to learn about this fast-moving world, your best starting place is DecentralStation.com. If you would like me to come give a talk to your group, board, executives, or planners, please see my talk description.