Rabbit Hole #7: The Ethereum White Paper
Rabbit Hole #7: The Ethereum White Paper
Come read (and get crypto-pilled) with me! 💎
Last week, I read the Bitcoin white paper
to understand blockchains. It was a good read, actually. Not the worst kind of technical literature.Ethereum can be seen as a successor to Bitcoin. It builds on the same idea — the blockchain — but it allows much more than transactions of digital currency. As a result, many crypto people, when you ask them for an introduction to their world, suggest reading the Ethereum white paper by Ethereum founder Vitalik Buterin.
That’s a bad idea. White papers aren’t a good intro for most people, since they’re technical and fairly boring. Plus, many things have changed since the white paper was published in 2015. A better approach would be reading the Ethereum website, which has clear, clean, and nicely illustrated explanations.
Or better yet: you can tag along as I read the white paper right now.
The title of the paper is A Next-Generation Smart Contract and Decentralized Application Platform. Already, in the introduction, we get main idea: Bitcoin was great as a new experiment in money, but the underlying blockchain technology can be used for so much more. What would that be?
What Ethereum intends to provide is a blockchain with a built-in fully fledged Turing-complete programming language that can be used to create "contracts" that can be used to encode arbitrary state transition functions, allowing users to create [all sorts of systems, like DAOs], simply by writing up the logic in a few lines of code.
Bitcoin was money and little else. Ethereum is Turing-complete, which means computationally universal: it can (in theory) compute anything that another computer can. This opens a whole world of possibilities.
Introduction to Bitcoin and Existing Concepts
In this first section we get a bit of history about Bitcoin. Did you know the first experiments in decentralized digital money go back to the 1980s? But none of them could work without a way to create a consensus on what the correct transactions are that would not rely on authority. The “proof of work” algorithm was the big breakthrough for Bitcoin.
The paper then explains that the blockchain functions as a state transition system. Succinctly put, the blockchain exists in a state, then a transaction
occurs, which makes the blockchain transition into a different state. The state consists of saying who owns every single bitcoin in existence.Traditionally, state transition systems are easy to build: you just need some centralized service to keep track of the state. Ah, but we don’t want that! This is where the blockchain idea comes in. The paper proceeds to explain how that works, including pretty clear detail on the mining process, but we all saw that last week so let’s not linger.
What other applications have made use of the Bitcoin innovations? The paper mentions a few — Namecoin, Colored coins, Metacoins — to make the larger point that blockchain technologies must either:
build a new, independent blockchain, or
build protocols on top of Bitcoin.
The first is a lot of work to implement. The second has limitations that in many cases requires a trusted centralized server which, in the words of Buterin, is “arguably a highly suboptimal result” since you might as well not use cryptocurrencies then.
Good thing there’s a third approach:
using scripts (code) on top of Bitcoin.
You can have some program (called a smart contract) e.g. own bitcoin and then perform some computations to check if a condition is met before making a transaction. But this is limited for many reasons, such as lack of Turing-completeness. You can’t compute everything with Bitcoin scripts — notably, you can’t write loops! Loops allow you to repeat some piece of code as many times as needed. Programming without them is really limiting.
Ethereum
Ethereum is a new protocol. It’s a blockchain with a built-in Turing-complete programming language. It allows anyone to write smart contracts and program “decentralized apps.”
The philosophy of the project is summarized in five principles:
Simplicity: the entirety of Ethereum should be relatively easy to understand
Universality: Ethereum allows anything to be done, if you can code it
Modularity: the various parts of Ethereum are separate
Agility: Ethereum can adapt to new advances
Non-discrimination and non-censorship: nothing is forbidden
(Aside: I really like when people make it clear what their guiding principles are. Maybe science papers should have similar lists of “main points” or something.)
The state of the Bitcoin blockchain is simply who owns every bitcoin or fraction of bitcoin. In Ethereum, the state is instead made up of accounts. Accounts come in two flavors: external accounts (controlled by, say, a person) and contract accounts (controlled by code).
Accounts have a bunch of properties. They maybe have some code. They may have some data in memory. And they may have some ether — the currency of the Ethereum network. Ether (ETH) is to Ethereum what bitcoin (BTC) is to Bitcoin (capitalized).
Here we get an important piece of clarification that I wish I had understood sooner: smart contracts aren’t contracts in the sense of needing to be fulfilled or complied with — they’re more like robots living in the Ethereum network, ready to execute some code whenever they receive certain inputs (transactions), and able to hold ETH.
Transactions are more complex than in Bitcoin. They’re messages that communicate the recipient, the sender, and the amount of ether to be transferred, but they can also include some data, and they also, importantly, specify two things about gas.
What is gas? It’s a state of matter together with solid, liquid, and plasma, but, in the context of Ethereum, it refers to some abstract “fuel” that is needed to perform stuff. Anyone who does anything in Ethereum needs to pay for gas! This includes computations (so loops can be very costly), storage, and data transfer. This is useful because it prevents people from just hogging all the resources for a buggy infinite loop. On the other hand, it does mean that you have to pay a fee to process any transaction.
The white paper then shows an example of a transaction, and the effect it has on the state of the network. We’ll skip this, but it’s well-illustrated, if you want to get a deeper understanding. There are also some details on how Ethereum is actually implemented in code, as well as on how the blockchain differs from the Bitcoin blockchain.
Applications
The third section of the paper describes some of the applications that can be built with Ethereum. There are three types:
financial (involving money)
semi-financial (involving money and other things)
non-financial (no money involved)
The first example application is token systems. A token is a thing that represents something you can own: dollars, company stock, gold, real estate, art, etc. For example, I own 1 token of CabinDAO, which is analogous to holding one share of a company’s stock. Another application of this, which you may well have heard about, is non-fungible tokens, or NFTs — tokens that represent unique assets such as works of art.
Then there’s some discussion of financial derivatives, identity and reputation systems, decentralized storage (think Dropbox but on the blockchain), DAOs (see my post from two weeks ago), and several others.
Miscellanea and Concerns
This section goes in more depth on various topics, including fees, scalability, and Turing-completeness. The most interesting part is about the currency and its subunits. The main one is ether (ETH), which as of typing this is 3,592.66 United States dollars. But there are subdivisions:
one thousandth of an ETH is called a finney (so $3.59)
one millionth is called a szabo ($0.00359)
one quintillionth (1 / 10^18) is called a wei ($0.00000000000000359)
The wei is the smallest unit — typically applications will never need to subdivide this much.
The paper concludes:
The concept of an arbitrary state transition function as implemented by the Ethereum protocol provides for a platform with unique potential; rather than being a closed-ended, single-purpose protocol intended for a specific array of applications in data storage, gambling or finance, Ethereum is open-ended by design, and we believe that it is extremely well-suited to serving as a foundational layer for a very large number of both financial and non-financial protocols in the years to come.
So that’s it. That was the Ethereum white paper. Some parts are pretty dense, but the budding science readability expert that I am rates it as pretty readable!
By now Ethereum has grown into something pretty big. There are other competing networks — such as Solana — but Ethereum was the first, and still the biggest. NFTs, most of which are traded in the Ethereum system, have reached billions of dollars in sales. Several DAOs have sprung into existence, leading (among other things) to me sitting here by a creek in rural Texas finishing up this post.
To Étienne two or three weeks ago, Ethereum was just another of them cryptocurrencies. It simply was the second most popular one for whatever reason. I had no idea what the difference with Bitcoin was (nor did I really understand Bitcoin in the first place).
Now I do, and… I get why it’s exciting? There are so many problems with the web right now — domination by a few megacorporations, censorship, social media driving everyone crazy — and it’s good to have at least one promising avenue of progress that may be able to deal with them. Not to mention the other dysfunctional parts of society (*cough* academic science *cough*) for which crypto might be able to help.
I suppose that’s what it means to be crypto-pilled.
As a friend put it: crypto and web3 are not as momentous in history as the invention of the internet was, but they probably are the most momentous thing to happen since the internet was invented. I’m not sure I’m ready to make the same claim, but I sure am much closer to thinking that compared to a month ago.
A white paper is a document that introduces and explains a product or idea. It is a kind of gray literature. The palest shade of gray, I guess.
Transactions are abbreviated as “TX” which I am absolutely unable to read as something else than “Texas.”