Ethereum- A summary

Part 3

In this third and final post on the topic of Ethereum, Dr. Neeraj Oak sums up his thoughts on this potentially ground-breaking decentralised contracting system and considers the issues and benefits he thinks should be highlighted before Ethereum is launched.


To summarize my view in the previous two posts, Ethereum is a good idea but one that is far more complicated than even Bitcoin was at its inception. This is an admirable thing, but it is important to provide credible solutions to the rather fundamental legal and technical issues that Ethereum faces before it is officially launched. Without these, Ethereum seems a risky proposition for any investor.


One vital part of creating a sound market proposition for Ethereum is in crafting a cohesive argument for why their service is better than a centralised, non-pseudonymous alternative. If the argument centres on the idea of a safe means of transferring data or value, then eliminating pseudonimity is a good way of achieving this. On the other hand, if the goal is to eliminate the need to trust a single central authority then this could be achieved in easier ways. For instance, making several independent organisations responsible for maintaining copies of the ledger would preserve a part of the checks-and-balances of full decentralisation without exposing ordinary users to the hassle and potential threats that could come from holding a copy of the ledger themselves. Without explicit reasons for including the design features of pseudonimity and decentralisation, Ethereum risks looking like a purely ideologically motivated experiment rather than a practical alternative for mainstream users.


It is also worth considering the merits and drawbacks of making the Ethereum project fully open source during development. While this certainly increases the confidence and engagement of the cryptocurrency community, it also makes it hard to keep competitors and clone services out of the market. Ethereum will live or die by its ability to get third party developers to utilise its smart contracts and scripting language. If Ethereum’s code can be easily reproduced, then it faces a real risk of being outcompeted by a cloned or forked service with a better marketing department. In response to this issue, supporters of Ethereum have made the argument in the past that the best guarantee of a quality service is the participation of its creators. I’m afraid I don’t subscribe to that view; the very fact that Ethereum is being developed a mere 6 years after the launch of Bitcoin suggests that open source projects are very susceptible to competition from new innovators from outside the immediate circle of their creators. More to the point, the effort of fighting off forks and clones will be a distraction to the Ethereum team, win or lose.


I’ll finish with this thought: the reasons why Bitcoin is the dominant cryptocurrency today is not only that it was first. It is also because it launched at a time when hardly anyone had heard of the concepts it espoused, and fewer still believed in them. Through its early years, it was obscure and barely capitalised. I believe that it was this period of insignificance that gave the Bitcoin community the time to find answers to its early critics in a relatively technical, low-stakes environment. In contrast, Ethereum will be launched with its coffers filled and in the full glare of the media spotlight. Its creators should prepare for a rocky few months after its launch.

Neeraj Oak

Chief Analyst, Digital Money


Author of Virtual Currencies – From Secrecy  to Safety, co-author The Digital Money Game

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Ethereum- Opportunities and challenges

Part 2

In the second post on the topic of Ethereum, Dr. Neeraj Oak examines some of the outstanding technical and legal challenges that Ethereum faces.

In this post I’m going to give a brief outline of the kinds of challenges and obstacles that Ethereum will have to overcome before it launches. But before I do that, I want to consider some of the advantages that Ethereum could bring to the virtual currency community.

Bitcoin was designed to be a value transfer mechanism, but in its original form it only supports the transfer of one commodity: Bitcoins. In recent years, the idea that other commodities could be traded on the Bitcoin blockchain has grown in popularity. So-called coloured coins have been proposed that can be used to represent other items on the blockchain, using the benefits of decentralisation to record ownership without the need for a trusted third-party registry.

If Ethereum achieves what it has set out to do, it would represent a far more flexible implementation of the coloured coin concept, not only allowing other commodities to be traded but also enabling the creation of complex trading instruments like derivatives and options. It would also open up the possibility of decentralised versions of existing services such as Dropbox.

If it succeeds, Ethereum holds a great deal of promise in terms of the opportunities it would open up for entrepreneurs in the blockchain technology space. But for this to happen, Ethereum must tackle a few serious concerns about its technical operation and the legal ramifications users may face by using Ethereum contracts.

Technical issues


Bitcoin’s creators are believed to have purposely left Turing-completeness out of their service because of the unnecessary hassles it creates. For instance, when code is executed in a pseudonymous decentralised system, the processor of that code is unaware of its origin. This is dangerous, since the code could be malicious, both in its operation on the funds it is given and its interaction with the computer on which it is being processed.

As an example, imagine an Ethereum user who decided to upload a virus to the blockchain. This virus would be contained within a smart contract and would eventually reach a processor for execution. If the processor attempts to execute the code without any safeguards, they could risk infecting their own computer. However, if they were to somehow screen the code before processing, they may have to perform considerably more computations (in verifying the code is secure) than they are being paid for. Further, even the most sophisticated screening process cannot guarantee that any piece of code is safe to execute, so processors would still run a risk of infection even after they take due precautions.

Ethereum partially addresses this problem by forcing a finite execution time on all contracts by charging the contract ether for the computational time it takes up. This makes infinite loops impossible, because they would require infinite money to perform. Unfortunately, this does not tackle the security challenge of finitely long malicious code.

Legal issues


An immediate problem with the idea of smart contracts is that in practice it is hard to hold anybody to account for their actions. Because the contracts execute autonomously from their creators once deployed, their activities are hard to stop should they become destructive or malicious. Moreover, one cannot track down the creators of the code easily because Ethereum upholds the principle of pseudonimity, the representation of users with account numbers or public keys. Even if the creator of a piece of malicious code were located, it would be difficult to punish him/ her for the potentially unintended or unforeseen actions of their autonomous code.

It may also be the case that a smart contract created between two people was the result of deception or coercion. Ordinarily, a physical contract drawn up by two parties is witnessed by independent signatories to minimize the risk of coercion. However, in the digital world there is no way of knowing if one of the parties signing the contract is doing so against their wishes. Moreover, neither party has any recourse to a court of law should the contract have been misrepresented, since it is unclear which nation’s jurisdiction applies. After all, the contract signatories may be in different countries, as may be the processor who executed the contract code. As a further complication, the execution of the contract cannot be stopped once it has been deployed, so in practice the only law that counts in the world of Ethereum is the computer code that resides within each contract. This leaves users of such contracts dangerously exposed, something that they should be made aware of before they put their digital signatures to any smart contract.

Ethereum is an innovative idea, but one of the problems with innovations is that they stretch the institutions that already exist in our societies. This would not be a problem if the idea was to remain experimental, but as things stand at least $15 million worth of investment has been put into Ethereum and several million more may follow once the service is brought to market. If credible solutions to the legal issues that Ethereum could face were not made public by then, the creators of Ethereum should probably prepare to face some stern criticism.

Join me for my next post, in which I sum my views on Ethereum and the possible risks and rewards it offers to investors.

Neeraj Oak

Chief Analyst, Digital Money


Author of Virtual Currencies – From Secrecy  to Safety, co-author The Digital Money Game

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Ethereum- Bitcoin 2.0?

A great deal of publicity has surrounded the development of Ethereum, the decentralised contracting platform. Over the next few posts, Dr. Neeraj Oak considers what Ethereum offers, and the benefits and obstacles it might face as it is brought to market.


I’ve had a lot of people asking me about Ethereum lately. It has been a hot topic among virtual currency enthusiasts, partly due to Ethereum already claiming to have raised around $15 million worth of Bitcoins from its initial sale of Ether, the value unit of the Ethereum system.

In this post, I’d like to cover the basics of what Ethereum claims to be and what differentiates it from existing virtual currencies such as Bitcoin. But before I begin, it’s worth stressing that Ethereum has not yet launched so we can’t know for sure if its final feature set will live up to the ambitions of its developers. Consequently, we can only base our knowledge of its features on the project yellowpaper and public code.

What is Ethereum?

Bitcoin, the first and largest of the cryptocurrencies, works on the principle of a decentralised blockchain in which transactions are registered. When a user requests a transaction, the system bundles it up with a set of other transactions into a mathematical puzzle called a block. This block is solved by transaction processors (or miners) who expend computational effort on the problem in return for a monetary reward. This system makes the history of Bitcoin transactions tamper-resistant, an important feature when dealing with people’s money.

Ethereum will also be a decentralised exchange system, but with one big distinction. While Bitcoin allows transactions, Ethereum aims to offer a system by which arbitrary messages can be passed to the blockchain. More to the point, these messages can contain code, written in a Turing-complete scripting language native to Ethereum. In simple terms, Ethereum claims to allow users to write entire programs and have the blockchain execute them on the creator’s behalf. Crucially, Turing-completeness means that in theory any program that could be made to run on a computer should run in Ethereum.


As a more concrete use-case, Ethereum could be utilised to create smart contracts, pieces of code that once deployed become autonomous agents in their own right, executing pre-programmed instructions. An example could be escrow services, which automatically release funds to a seller once a buyer verifies that they have received the agreed products.

Because the execution of code costs time and computational capacity, the people who process Ethereum contracts (analogous to Bitcoin’s miners) must be compensated. As such, Ethereum contracts are issued along with a finite amount of ether, the value token of Ethereum. When the code is processed, the processor receives a predefined amount of ether from the contract for the work they put in. By making code costly, the designers of Ethereum also hope to limit the size of their blockchain, since it could quickly balloon to a size that dwarfs Bitcoin’s if safeguards were not put in place. In the short term, it also creates an income for the creators of Ethereum: the money they have raised so far has come from the pre-sale of ether.

Ethereum contracts are designed to be ‘fuelled’ by ether, so the designers of the system have chosen to inject 18 million ether units into circulation through mining each year in perpetuity. This is unlike the Bitcoin model of mining, which has diminishing returns that result in a long term limit in the quantity of value tokens in circulation.

Join me for my next post, in which I look at some of the outstanding technical and legal challenges that Ethereum must overcome before it reaches the market.

Neeraj Oak

Chief Analyst, Digital Money


Author of Virtual Currencies – From Secrecy  to Safety, co-author The Digital Money Game

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Join us to explore ideas at The Digital Money Group on LinkedIn