Satoshi Nakamoto's development of Bitcoin in 2009 has often been hailed as a radical development in money and currency, being the first example of a digital asset which simultaneously has no backing or \'intrinsic value(opens in a new tab)\' and no centralized issuer or controller. However, another, arguably more important, part of the Bitcoin experiment is the underlying blockchain technology as a tool of distributed consensus, and attention is rapidly starting to shift to this other aspect of Bitcoin. Commonly cited alternative applications of blockchain technology include using on-blockchain digital assets to represent custom currencies and financial instruments (\'colored coins(opens in a new tab)\'), the ownership of an underlying physical device (\'smart property(opens in a new tab)\'), non-fungible assets such as domain names (\'Namecoin(opens in a new tab)\'), as well as more complex applications involving having digital assets being directly controlled by a piece of code implementing arbitrary rules (\'smart contracts(opens in a new tab)\') or even blockchain-based \'decentralized autonomous organizations(opens in a new tab)\' (DAOs). 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 any of the systems described above, as well as many others that we have not yet imagined, simply by writing up the logic in a few lines of code.
Financial derivatives and Stable-Value Currencies Financial derivatives are the most common application of a "smart contract", and one of the simplest to implement in code. The main challenge in implementing financial contracts is that the majority of them require reference to an external price ticker; for example, a very desirable application is a smart contract that hedges against the volatility of ether (or another cryptocurrency) with respect to the US dollar, but doing this requires the contract to know what the value of ETH/USD is. The simplest way to do this is through a "data feed" contract maintained by a specific party (eg. NASDAQ) designed so that that party has the ability to update the contract as needed, and providing an interface that allows other contracts to send a message to that contract and get back a response that provides the price. Given that critical ingredient, the hedging contract would look as follows: 1. Wait for party A to input 1000 ether.
id: d602a4f13595a41d6cc06393b7ebc037 - page: 22
2. Wait for party B to input 1000 ether. 3. Record the USD value of 1000 ether, calculated by querying the data feed contract, in storage, say this is $x. 4. After 30 days, allow A or B to "reactivate" the contract in order to send $x worth of ether (calculated by querying the data feed contract again to get the new price) to A and the rest to B.
id: e62930963ecae5e56558ccb8b4479f24 - page: 22
Such a contract would have significant potential in cryptocommerce. One of the main problems cited about cryptocurrency is the fact that it's volatile; although many users and merchants may want the security and convenience of dealing with cryptographic assets, they many not wish to face that prospect of losing 23% of the value of their funds in a single day. Up until now, the most commonly proposed solution has been issuer-backed assets; the idea is that an issuer creates a sub-currency in which they have the right to issue and revoke units, and provide one unit of the currency to anyone who provides them (offline) with one unit of a specified underlying asset (eg. gold, USD). The issuer then promises to provide one unit of the underlying asset to anyone who sends back one unit of the crypto-asset. This mechanism allows any noncryptographic asset to be "uplifted" into a cryptographic asset, provided that the issuer can be trusted. In practice, however, issuers are not always trust
id: 0bd4d9b995e63c017da5781da4c05237 - page: 23
Financial derivatives provide an alternative. Here, instead of a single issuer providing the funds to back up an asset, a decentralized market of speculators, betting that the price of a cryptographic reference asset (eg. ETH) will go up, plays that role. Unlike issuers, speculators have no option to default on their side of the bargain because the hedging contract holds their funds in escrow. Note that this approach is not fully decentralized, because a trusted source is still needed to provide the price ticker, although arguably even still this is a massive improvement in terms of reducing infrastructure requirements (unlike being an issuer, issuing a price feed requires no licenses and can likely be categorized as free speech) and reducing the potential for fraud.
id: 51a683cc04cab16cfa5077f85c254d8e - page: 23