*https://vas3k.com/blog/ethereum/*
vas3k, November 2017
This is the continuation of Blockchain Inside Out: How Bitcoin Works where basic ideas of blockchain technology – transaction pool, block chains, and mining, were explained. I’d recommend everyone not familiar with these terms read that post first. The following article is more complicated, with programming terminology and links to the first article.
Ethereum is the second most popular blockchain project in the world and looks like the most interesting from technical point of view.
Bitcoin, the starting point, was not just a system of financial transactions, but a display of the new way of network organization, where security is guaranteed not by “middlemen” and “customer agreement” but pure mathematics. That’s how the world found about blockchain – the constant data list guaranteed from any external data modifications by mathematics.
Ethereum used blockchain idea as the starting point and used it for a wider class of implementations. It became possible to guarantee not only the validity of financial transactions but literally any conditions and agreements. It also made possible automation of creation of such conditions.
In everyday life, we always make agreements based on “if… then” principle, regarding everything, not only finance. “If I help you to write an article then you let me play your Play Station”, “If I get fit by the summer then I get myself a holiday in Hawaii” etc.
The main problems about agreements are that nobody can really guarantee the fulfillment – help friend with the article, but he refused to share his PlayStation, spent time by playing PlayStation instead of going to the gym. But got a flight to Hawaii anyway – to break the agreement with yourself is pure pleasure.
To avoid these problems business uses contracts: trained people fill the papers with special words, cover them with stamps and signatures so that there is something to bring to the court, where agents on salary punish the violator using another special paper. At the end of the performance, everybody gets together and walks laughing all the way to the tax office.
It looks like a ridiculous game where I must trust someone only because he seems to be honest. All the same – agents, fees, arguments, and promises which looks just like the problem solved by blockchain technology.
That’s what authors of Ethereum were thinking of, and so appeared smart contracts.
Let’s start with the very common situation: our old friend Alex is going to visit another city and rent an apartment there. Some web browsing and he finds the following ad – girl named Kate offers an apartment in the very center for $300. Kate and Alex ain’t familiar so couldn’t trust each other. Kate is afraid that Alex could change his mind at the very last moment. Alex knows very well about the situation when nickname Kate is used by a swindler who has no apartment at all but is good in getting away with other people’s money.