INTRODUCTION TO ETHERREUM, SMART CONTRACTS, DAapp

NAME SHUBHAM DILIP KUBERKAR

REGISTRATION NO 202103428

SYMBIOSSIS CENTRE FOR DISTANCE LEARNING

ACADEMIC YEAR 21 22 
index

introduction to Ethereum
DA app
Smarts contracts
Definition of Ethereum smart contracts and da app
History of Ethereum
Cases of da app development
CHALANGES D APP
Ethereum
conclusion
Ethereum, Smart Contracts, DApps
On February 28, 2012, an 18-year-old high school student wrote “If Bitcoin is to

achieve mainstream success, it cannot stop at the limited crowds of Internet geeks,

libertarians, and privacy advocates that it is hitting now, and it must find some way

to attract the mainstream public (Buterin 2012).” At the time, 1 Bitcoin was worth

4.87 USD or 400 JPY. The Initial Coin Offering (ICO) did not exist. Ethereum was

not yet even a proposal.

Whether you consider Bitcoin to be mainstream might depend on where you fall on

the adoption curve, but the fact that you are reading this now means Bitcoin has most

certainly reached beyond the “limited crowds of Internet geeks.” The author of that

quote was Vitalik Buterin in one of his early articles for Bitcoin Magazine. We will

look at his role and contributions shortly. First, however, we consider how we arrived
at the world of blockchain and DApps, starting with the concept of decentralization.

1 A Brief History of Decentralization

Decentralization is a fundamental part of the clever solution that gave us Bitcoin, the

first widely successful digital currency. For currencies we know well, like Japanese

Yen or US Dollars, or even other types of “currencies” such as customer loyalty

points or air miles, we rely on a single authority like a central bank, an issuing

This article has been prepared for the study group “Blockchain and Society 5.0—The Creation of

a New Marketplace based on Distributed Consensus” at the Research Institute of Economy, Trade,

and Industry (RIETI) . I would like to thank RIETI and the study group for including me in this

project as well as Makoto Yano, Chris Dai, and Jeff Wentworth for their gracious support and input

throughout the process.

company, or another trusted custodian to guarantee the value of our money. Bitcoin

does away with the need for a central authority by dividing the responsibility of

protecting the network amongst the participants. But decentralization is as old as

currency itself.

Gold used to be used as a decentralized currency because it too can be used without

referring to a central authority. Someone can trade gold for goods and services with

both parties recognizing its value. It has utility as a compact and fungible store of

that value. Because of the similarity in concept, many describe Bitcoin as “digital

gold” and Satoshi Nakamoto’s famous paper uses the metaphor of mining, just like

gold, to describe the creation of new coins (Nakamoto 2009).1

Of course, decentralization does not belong only to currencies. Modern Western

democracy, created in ancient Athens and developed through the French and American revolutions,
is practiced by the world’s most advanced economies. It is our most

familiar form of decentralization.

Computation also uses the pattern of decentralization outside of blockchain.

NASA, for example, designed its space flight computers to be redundant by allowing multiple
systems to vote on the output of a computation (National Aeronautics

and Space Administration 1971). If one makes a mistake, the other computers will

override it by majority.

It took, however, quite some time for decentralization and currency to rejoin

forces since the retirement of gold as a day-to-day medium of exchange. The Knights
Templar, a medieval Catholic military order, are often credited with inventing modern

banking (Harford 2017). Twelfth century pilgrims would deposit their valuables with

the Templars and receive a paper letter indicating the entitled value. Carrying the

promise of gold was much more efficient and secure than carrying actual gold. Those

promises are not too different from the currencies and instruments we use today.

Blockchain brings another type of efficiency to those promises by obviating the

need for the Templars (or any other third party) by purely using technology. The first

to use that technology successfully was Bitcoin. It allows a simple peer-to-peer value

exchange from one account to another.

Ethereum
Vitalik Buterin became interested in Bitcoin at the encouragement of his father. After

researching Bitcoin, he began writing articles in exchange for the cryptocurrency and

started Bitcoin Magazine with another colleague. Eventually he had the revelation

that the platform could become very powerful by being generalized beyond simple

currency exchange into something that could perform any type of processing.

5 Ethereum, Smart Contracts, DApps 79

It may be easy to think of Bitcoin as a computer network that replaces your bank.

But it is a little trickier to imagine how adding complex processing to Bitcoin could

be useful. So let us approach it from the opposite angle and imagine your bank as a

type of computer. It has three instructions: deposit money to my account, withdraw

money from my account, send money from my account to another account.

Now imagine if you could give your bank special instructions to accomplish your

savings goals: “for the next year, only allow me to withdraw up to 100 dollars per

week.” Or suppose you wanted to create a shared account for your startup business

where the CEO has full control but wants an extra level of accountability for the

other officers. “Make an account with three owners. Alice can withdraw as much as

she wants anytime but Bob and Charles can only withdraw funds if one of the others

also approves.”

You could even automate the distribution of proceeds from your business “every

time 20 dollars or more is deposited to the account, give 5 each to Alice, Bob, and

Charles, and divide the remainder evenly amongst all other accounts on a special
list.” Each of those accounts might have its own special instructions! Maybe Bob

wants all the funds to go directly to his favorite charity.

These are simple examples but something that would be really difficult to achieve

with an actual bank because of the number of humans and processes involved; they

are not equipped to provide that level of customization. It would involve power of

attorney with someone you really trust, a series of elaborate legal contracts and

independent bookkeeping, or all of the above. With a few lines of software, those

examples can be created and the pattern replicated to anyone else who wishes to

accomplish the same outcome.

It was possible that Bitcoin could evolve into this limitless computer. The developers with whom
Buterin was working, however, were not receptive to this grand idea

so he decided to embark upon the project himself. Thus, Ethereum was conceived

around 2014 and launched in 2015 to extend the concept of Bitcoin. Ethereum has

its own currency Ether (ETH) , just like Bitcoin (BTC), but the platform can run any

set of instructions, not just “send and receive Bitcoin (Hacket 2016).”

2.1 Smart Contracts

Back in 1994, Nick Szabo, a computer scientist and legal scholar, created the term

“smart contract” and defined it as: “A smart contract is a computerized transaction

protocol that executes the terms of a contract (Szabo 1994).” He envisioned a way of

bringing efficiency to written agreements in a way that enforces them automatically.

Think of a vending machine. Without a shop clerk, it enforces the contract of selling

a beverage at an advertised price to the customer who inserts a sufficient amount of

money into the machine.

The Turing-complete (Wikipedia contributors 2019) computer engine provided

by Ethereum is the first computerized transaction protocol that does many of the

things Szabo was envisioning in his earlier writings. Computer programs that are

80 W. Metcalfe

run on the Ethereum platform are called smart contracts. They can enforce certain

types of agreements between parties, just like a vending machine, but they have no

intrinsically direct relationship with legal contracts. The Ethereum smart contract

became so popular that the Ethereum version of a smart contract has eclipsed the
original use of the term and added a lot of confusion as to what blockchain can do.

Why is it a “contract”? The original idea was that it constituted some kind of

agreement between parties. Why is it “smart”? The original idea was that it could

execute itself without the need for lawyers or people to be involved. So what is a

smart contract really? Since Ethereum declared itself “a decentralized platform that

runs smart contracts,” it really just refers to a special type of software program. It

may or may not have legal implications and still needs a traditional legal framework

around it if it needs to be used as part of a legal transaction. For example, if you

write a smart contract to securitize real estate, dividing ownership of a property

up into virtual tokens, you still need traditional legal contracts (in the appropriate

jurisdictions) to tie those smart contract tokens to the actual property.

3 What Is a DApp?
What is it that emerges from the ability to manipulate numbers and data in a trustless

manner provided by smart contracts and what would we call such an application?

We can now decouple the application from an individual company or owner and

create a “decentralized application” also known by the contraction DApp. It can

be pronounced with two syllables as “dee-app” or with one syllable as “dapp.”

Capitalization is not always consistent (as in Dapp) and the D is occasionally written

with Ð (as in Ðapp), where Ð is the Norse letter eth (ETH News).

Decentralized applications are often described as trustless or peer-to-peer with

the distinguishing characteristic that there is no single server or entity controlling it

like in a client–server model. We understand the attractive properties of the smart

contract and the flexibility of the platform. But to understand what really makes a

DApp different from a centralized application, it is worthwhile considering what

goes into a contemporary centralized application.

A prototypical modern software application includes at least one user interface

(UI); this could be a mobile app downloaded from an app store, a website (accessed

from a computer or mobile device), or a desktop application installed on a computer.

It usually involves data. This data could be provided by a single group or company,

like a weather app using a national weather organization, or like in a social networking

app it could be provided by the end users themselves. Finally, it involves some sort
of manipulation of the data or computation.

A DApp uses the blockchain at the core of its data storage and processing. This is

implemented using a smart contract. Currently the UI for a DApp is usually created

using a traditional website model. So one can think of a complete DApp as a website

5 Ethereum, Smart Contracts, DApps 81

plus one or more smart contracts. A DApp has the same general properties as a traditional
application. The main difference, therefore, is that the data and computation

are provided by the blockchain.

3.1 DApp and Blockchain

The merit of using blockchains for DApps are as follows:

1. A user can see what is going to happen before executing a function or submitting

any data.

2. Once the user has performed an interaction, it cannot be withdrawn, tampered

with, or deleted.

By themselves these properties are useful. This embodies decentralization at a protocol level.
However, this facilitates another type of decentralization that is a driving

philosophical motivation behind DApps:

3. Governance can be decentralized so that the users of the application participate

directly in its management.

At this point, we consider two examples—one makes use of the first two properties, and another
that helps demonstrate the idea of governance, or structural,

decentralization.

Crypto Kitties is one of the more famous decentralized applications (Bowles 2017).
It is a game created by Axiom Zen that allows players to trade, breed, collect, and

sell virtual cats. Unique or scarce tradeable items are a well-used pattern in gaming,

both traditional and digital; however, in CryptoKitties, the virtual items are recorded

on the blockchain. In this way, the actions are transparent and guaranteed, but there

is nothing particularly decentralized about the ethos of the application.

Another example of a DApp is the DAO (decentralized autonomous organization) (Securities and
Exchange Commission 2017). The application was governed

by tradeable tokens that had voting rights. In this sense, the mechanism of the application was
guaranteed by the decentralized Ethereum layer, but the concept itself

was designed for decentralization of authority.

Coins, Tokens, and DApps
The terms “coin”, “token” , “cryptocurrency”, “virtual currency” , “digital currency”

and, more recently, “crypto asset” are now frequently used in similar or interchangeable ways. We
could continue to generate similarly exotic terminology by pairing

different “crypto” adjectives with different “coin” synonyms! It is enough to confound even the most
diligent financial linguist. Therefore, it may be quite some time

before we all agree on the correct language to use, both casually and legally. For

now, however, we take a practical approach. We can break apart the different types

of technologies and categorize them by the most accepted terms even though there

may be some overlap in real world usage.

The primary distinction we will make is between “coins” and “tokens.” We can

describe coins as a base currency. When a network, such as Bitcoin, includes the

currency as an integral part of the software, we think of that currency, in this case

Bitcoin, as a coin. As we know, Bitcoin was created for the primary purpose of storing

and exchanging funds. In Ethereum, the currency Ether is also built into the platform

and is therefore a coin. This applies to other platforms derived from Bitcoin such as

Litecoin or Monero. Coins are also used to incentivize good behavior and secure the

platform. Coins are used to pay for computation and storage resources and are given

to mining nodes as rewards for their work.

We can describe tokens as the units built on top of one of these base networks as

a secondary feature. They are a way to take advantage of a robust and established

blockchain network to create new digital assets. There is no need to convince users

to join a new network or run new software. The token runs on and is secured by an

existing network.

One of the earliest attempts to do this was with “colored coins” on Bitcoin (Bradbury 2013). Think of
it like taking a poker chip and marking it with a special red

stamp. It is still difficult to make a forgery, but now you can use it for another purpose, like a coupon
for a free bowl of ramen. Mastercoin (which became Omni) was

another attempt to extend Bitcoin by storing extra data along with the native Bitcoin

transfer transactions (Buterin 2013). These were both creative attempts to leverage

the technology but have some inherent difficulties in aligning with a platform that

has its own independent design goals. Bitcoin, for example, introduced an upgrade
to reduce the number of tiny transactions. This was done to prevent malicious degradation of the
network, however, colored coins are optimized to minimize cost by

making use of such tiny transactions.

Ethereum, having been designed from the ground up as a platform for running

arbitrary computer programs, lent itself naturally to the creation of tokens on top of

its platform. Using an Ethereum smart contract, a software developer can (comparatively) easily
create a token with any amount of supply, distribution goals, or custom

logic. The Ethereum smart contract formed the basis for most of what we call tokens

today.

Tokens, like coins, do not have any innate properties besides their bookkeeping

ability. However, they have a few basic genres under which they commonly fall.

You may have heard the terms “utility token” or “security token.” The reason this

distinction is made has to do with how the tokens are used to raise capital for a

project or business. Anyone can create tokens from nothing and sell them. The way

Ethereum raised money for its development was by selling the platform’s future

currency (Ether) for Bitcoin. The concept was that Ether could be used to pay for

the submission, storage, and execution of smart contracts and related data. It was

this “utility” that would make it valuable in the future and a worthwhile investment.

It could, of course, also be used simply as a medium of exchange like Bitcoin.

5 Ethereum, Smart Contracts, DApps 83

Inspired by the success of Ethereum, many other projects raised money by selling their own tokens.
The sale of fractional ownership in a project to the public to

raise funds, in exchange for a promise of a share of the future profits, is an economic

practice dating back hundreds of years. The potential for defrauding or disappointing

investors by lying about a project’s potential, absconding with the money, or simply

failing to execute, means we have sophisticated laws and regulations in economically advanced
societies to prevent good people from being duped into funding bad

projects.

Selling cryptocurrency-based tokens proved to be an attractive way to raise a lot

of money compared with traditional financing. ICO funding reached a peak in the

first quarter of 2018 where blockchain startups raised an astronomical $6.9 billion

through ICOs compared with $0.5 billion through equity funding (CB Insights 2019).
To avoid running afoul of existing securities laws, many projects took great pains to

indicate the tokens they were selling were utility tokens and therefore not subject to

existing regulations. There are a number of conflicting legal opinions on the subject.

Whether the regulators eventually decide there is a place for utility tokens (and what

that place is), the markets as of mid-2019 have had their fill. The span of 2017–2018

was an exceptional period and there is effectively no current interest in such projects

(Vigna 2019).

But what about security tokens? A traditional security means attaching a paper or

digital legal agreement to a physical object or to a company or project. This could

be shares in a company like Toyota or a government bond that pays interest. These

types of instruments are things that could be easily modelled or represented in the

blockchain. If we allow tokens to represent securities, we can draw on the advantages

of tokens, such as broad access to capital with low management overhead, with the

reliability and responsibility of legally regulated instruments.

3.3 The Case for DApps

There are a number of applications being pursued in the DApp space. So far, they

mostly fall under the following general areas:

• Fundraising (ICOs)

• Marketplaces including exchanges

• Identify providers—know your customer (KYC) and anti-money laundering

(AML)

• Financial services

• Securitization of assets

• Supply chain management

• Gaming.

We now examine some of these applications.

To provide financial or securities services like a bank or stock exchange in a preDApp world, the
barrier to entry is significant. The burdens of regulatory compliance,

84 W. Metcalfe

staff, infrastructure, and institutional relationships required to operate are staggering.

In the United States, the estimates to start a bank, for example, are $12 to $20 million
in capital (Harrington 2016).

Using a smart contract-based system, where the deposits are governed by publicly

visible computer code, anyone with the ability to write software can create a system

that securely handles large amounts of assets. An ambitious software developer in

2016 created a working cryptocurrency exchange called EtherDelta (Winters 2016).

The exchange smart contract held over a billion dollars of ETH and tokens at its

peak.

One of the frequently cited goals of decentralized projects is “self-ownership”

of data. After so many security breaches and revelations of large companies selling

the personal information of users, DApps provide a chance for users to have more

control over their data.

A well-designed smart contract system could allow regulators or lawmakers to

authorize or monitor certain activity on a platform. Imagine a sales program where

merchants and consumers could register in a marketplace. Each participant would

have a unique identity in the program and transactions could be posted and settled

directly through the program. Although it might sound undesirable to some less

than scrupulous audience members, every transaction could be automatically taxed

to the appropriate level by the government. When tax rates change, the government

could simply adjust the rate in the smart contract directly and there would be no

onerous actions required by merchants to implement the new rates. Moving control

to a common system instead of disparate bureaucratic entities has great potential to

align societal and commercial interests.

4 Where Is the Smart Contract?

Blockchain transactions are stored on a computer, commonly referred to as a node.

Popular blockchain platforms such as Ethereum have tens of thousands of nodes

operating at any given time. Each node stores an identical copy of all of the transaction

records. The node that validates the next batch of transactions, referred to as a block,

is called a mining node. The blocks are in turn validated by each mining node.

Every node in the Ethereum network stores a copy of all the software (smart

contracts) , data, account balances, and transaction state (Buterin 2014a). If you

think that sounds like a lot of data, it is. A copy of the production Ethereum node
at the time of writing is about 179 GB of data. A full archive of all transactions that

have occurred, including all intermediary states is 1.8 TB.2 For comparison, a typical

smartphone or laptop might have 64–512 GB of total storage.

Transactions are transmitted across the Internet between nodes in a peer-to-peer

fashion. That is, nodes have connectivity with some but not all of the nodes in the

network. It takes about 40 s for a given transaction to be seen by 95% of the nodes

2Running geth version 1.8.18-stable on Ubuntu Linux. https://geth.ethereum.org/.

5 Ethereum, Smart Contracts, DApps 85

in the comparable Bitcoin blockchain (Decker and Wattenhofer 2013). A transaction

fee is submitted alongside the transaction and the mining node receives the fees for

the transactions it groups into the block.

The mining refers to guessing the solution to a mathematical problem (unique to

the group of transactions) that cannot be calculated directly. That guessing is done

on hardware that can make millions of guesses per second. There is an expected

average number of guesses it will take to get to the solution and so the mining node

has effectively proven that it has executed a number of guesses. Hence mining is also

known as proof-of-work (PoW).

The mined block is distributed back to the network over the Internet and each

node will verify all the contained transactions before accepting it and passing it

along. Eventually all the nodes will store a copy of the system state that they all

agree upon. In this way, it is not so much a distributed computer like one would think

of in a traditional sense. It is more like one computer with many clones running in

parallel and storing the same information to make sure no one cheats. This is similar

to the redundancy of the aforementioned NASA space flight computers but on a much

larger scale.

5 DApp Development and Challenges

Ethereum has been around since 2015 and we have only seen a few years of development in the
ecosystem. Compare this with some of the early technologies of the

Internet. NCSA Mosaic, launched in 1993, was the first graphical browser to popularize the World
Wide Web. This was followed by the PHP language, MySQL database,

and Apache web server in 1995. These types of tools allowed early technology

pioneers such as Amazon and Match.com to create useful applications.

Blogging platforms Blogger, Movable Type, and Wordpress were launched in

1999, 2001, and 2003, respectively. These made it possible for more enthusiasts

to participate in the Internet. But it was not until services like Facebook became

available and popular that the Internet felt broadly participatory.

5.1 How Are DApps Made?

Many of the tools used to produce and consume DApps are still in their infancy. On

the user side of interacting with a DApp, you need a way to create and manage an

account on the network. In a traditional application, login information (email and

password) is stored on a server. In a DApp, your account is a digital blockchain key

stored on your computer’s drive or in your smart phone’s memory. There are tools

to help you manage those keys. The most popular tool to manage DApp (Ethereum)

86 W. Metcalfe

accounts and interact with DApps is MetaMask,3 an extension for the Chrome,

Firefox, and Opera web browsers.

Unlike vanilla web browsers, which automatically upgrade and are relatively

stable pieces of software, the new DApp browsers and plugins are often buggy.

Furthermore, the new interaction model with DApps including icons, jargon, and

actions are still confusing to new users.

There are also popular web-based wallets, such as MyEtherWallet,4 which allow

you to conduct transactions without installing any software. However, it is geared

primarily to exchanging Ethereum as a currency and not interacting with DApps.

Interacting with a DApp requires you to copy and paste arcane computer code into

a web form.

Hardware wallets, such as Trezor5 and Ledger,6 are a third type of wallet. They

store the encryption keys in a tamper-proof module from which the digital keys

cannot be physically removed. That way a user needs to physically connect a device

and approve an action. The challenge here is that extra work can be required to set

up, understand, and use the device. For DApp and software developers, integrating

hardware wallets requires extra development, testing, and consideration.

The aforementioned software and hardware are primarily for end users but are

used extensively by developers during the construction of a DApp. There is another

suite of tools used only by software developers, including integrated development

environments (IDEs) such as Remix, testing frameworks such as Truffle,7 and the

main programming language for Ethereum called Solidity.

Automated testing is another critical component in development. Truffle and its

complementary tools Ganache and Drizzle are the main tools used for testing. They

let you connect and deploy to a simulated Ethereum network on your own computer

to put the smart contract through its paces.

The Ethereum community maintains a series of public test networks as well. In

the final stages of development, your smart contract can be deployed to one of these

networks for a fully decentralized run-through. Truffle and its components are young

like the rest of the toolset and the execution of tests can take more time and effort to

run compared with more mature web development frameworks. However, for reasons

explained below, thorough testing is an even more critical part of the development

cycle when compared with most web applications.

In the early days of personal computers, most version upgrades took place by purchasing the latest
copy of a title and manually installing it. Today, much of the

software we use exists as an online web application and is upgraded instantly and

transparently by the owner of the website. It is a frequent pattern with contemporary

desktop and mobile phone software to enable automatic upgrades. Chrome browser,

for example, updates itself by default.

The smart contract upgrade model is unlike either of these models. Ethereum

smart contracts are, by design, immutable once deployed. This implies a number of

considerations that are very different, even contradictory, to the prevailing philosophies of web
development. Consider Facebook’s (now retired) motto “Move Fast

and Break Things.” For the world of smart contracts, one might propose the motto

“Move Carefully and Test Thoroughly so Things Never Break.”

Much of the community and audience for DApps comes from a web centric background where
certain types of rigor have lost favor and been replaced with rapid

iteration and disposability. Testing has a prominent role in smart contract development. Besides
testing, the rather academic discipline of formal verification has made

its way into the blockchain discourse. Techniques used in industrial, mass transit, aerospace, and
other fields where mistakes have huge consequences can also be

applied. But systems will still need to grow, and, despite the best intentions, mistakes
will still be made.

Given that we expect and plan for platforms to evolve, there are a few ways, at

least in Ethereum, that one can approach a path for upgrades.

1. The deployed smart contract (contract A) can be a pointer to another smart

contract (contract B) that implements the actual functionality. Somewhat like a

mail forwarding address. If the functionality needs changing, A’s reference to

contract B gets updated to point to a replacement (contract C).

2. The smart contract uses replaceable underlying libraries to implement its functionality. This is
conceptually similar to the first technique and differs mainly in

technical nuances.

Both of these methods allow for a seamless transition to the new system (provided

there are no problems or compatibility issues), but it explicitly removes one of the

properties that makes smart contracts valuable. You do not know what will happen

in the future. In a basic token implementation, will someone rewrite the underlying

smart contract so that my assets can now be garnished by a party I may not trust? If

it is immutable and non-upgradeable, you can verify with some confidence that your

tokens will be secure.

However, there is one more upgrade method that can work even if the deployed

smart contract is completely immutable and non-upgradeable.

3. You make a new smart contract and tell everyone to use it instead of the old one.

Take an example of a token backed by copper. The fictional company “Acme Copper

Coins” buys a bunch of copper and puts it in a warehouse somewhere. They create

88 W. Metcalfe

a smart contract to issue tokens against their copper supply. But perhaps they underestimated the
demand for their tokens and the smart contract was designed to only

support up to 30,000 coin buyers.

Acme could make a new smart contract that supports up to 60,000 buyers and

declare they are copying your token balances from the old smart contract to the new

smart contract. From now on they are no longer going to honor redemptions of the

old tokens. This is ostensibly OK because my new token is worth the same as my

old token. However, there is a limit to what a blockchain system can directly control.

Beyond that limit, we still rely on the instruments and conventions that exist in our
present society such as traditional contract law, public reputation, and trust. We still

have to trust Acme that they actually have copper in their warehouse and that I can

trade in my tokens with them for copper if I want to. Moreover, we might expect the

traditional justice system to intervene if they renege on that promise.

6 The Boundary Between DApps and the Real World

DApps are still a developing technology. To be put into wide use, it is necessary to

overcome various issues, including consistency with regulations, data reliability, and

the ability to respond to expanding demand (scalability) .

6.1 Consistency with Laws

Legal and regulatory frameworks are an important consideration when developing

many applications that hope to migrate to the blockchain. Take real estate tokenization

for example. If Alice sends a token to Bob that represents a share in a particular

piece of property in Tokyo, then that transaction can take place in a way that is

guaranteed and verifiable by the technology. Alice could set a price and Bob can see

that if he pays that price, the token will reach his custody. Nothing can prevent Alice

from withholding the token or Bob from withholding payment. In this example, the

blockchain replaces the escrow function of a trusted third party. It does not, however,

replace the fact that there needs to be laws that tie the share of property to that digital

token.

6.2 Reliability of Data

Getting trustable data into the blockchain is also an issue. Let us say you wanted to

create an insurance scheme that would pay out if the temperature gets too cold. Perhaps farmers
would pay into this and receive compensation if the temperature drops

5 Ethereum, Smart Contracts, DApps 89

below a specified threshold. You could create a system where anyone could participate as an
underwriter and anybody could participate as a policy holder. Effectively

parties would be taking opposite sides of a bet on the weather.

A system that feeds real-world data into the blockchain for use by smart contracts

is known as an “oracle.” By trusting a smart contract system that depends on an

oracle, you are implicitly trusting that oracle as a reliable source of data. If you

allow many oracles to provide data in a decentralized manner including incentives

for telling the truth and disincentives for cheating, then you can create a more robust
system.

Randomness is another piece of complexity in the blockchain worth mentioning.

Randomness is used in many cryptographic systems and techniques to guarantee

fairness. Because the internals of a smart contract and the participants’ attempts

to interact with it are visible to the blockchain network, a miner could gain an

advantage by knowing or altering the outcome of a transaction. For example, if a

smart contract-based lottery for highly coveted tickets to a sporting event relied on

seemingly unpredictable data such as the block creation time, the block miner could

adjust the publication time to manipulate the result.

Scalability
Like Bitcoin, Ethereum grew organically as an experiment. As more people join the

network, the demands on the technology become higher. Scalability is the potential

of the system to meet those growing demands. To frame the topics of scalability it

helps to understand the fee structure surrounding transactions and block creation.

Currently the target block creation time, a compromise between security, efficiency, and practical
network limitations, is 12 s between blocks (Buterin 2014). To

maintain this rate, the mining difficulty is automatically adjusted by the Ethereum

software as mining power is added or removed from the network.

As mentioned earlier, users of Ethereum submit a fee when submitting transactions

to the network. This fee is measured in units called gas and relates to the size and

complexity of the transaction. The miners claim a per-transaction fee as part of their

incentive to secure the integrity of the blockchain and the fee structure helps balance

the supply and demand for transaction processing.

There is a block gas limit agreed to by mining nodes, which caps the maximum

amount of fees that can be accepted into a block. This is used to manage the bandwidth, cost of
storage, and cost of computation per block. That gas limit is about

8,000,000 at the time of writing, and with an average transaction size of about 80,000

gas, about 100 transactions will fit in a block. Hence, the network can currently

process about 8 transactions per second.8

Some of the main topics in scalability are:

• Transaction throughput
8https://etherscan.io/.

90 W. Metcalfe

This is the quantity of transactions (currently 8 per second), such as sending

and receiving tokens, that the blockchain network can process per unit of time.

This number is often compared with Visa’s 24,000 transactions per second (Visa,

accessed 26 November 2019). However, we must remember that these systems

were made for different purposes and even then, an Ethereum payment transaction

is really like payment, clearing, and settlement all in one.

• Computational cost

Block validation and mining are costly in terms of computer hardware, electricity,

and ultimately fees paid by the users of the network as explained above. All the

mining nodes in the network perform all the transaction computations and this is

inefficient.

• Data storage

In Ethereum, currently all full participants keep a complete record of all blockchain

transactions. Because of the amount of accumulated data in the blockchain, it is

untenable on most consumer devices now to run a full Ethereum node.

The areas where blockchain seems slower or less efficient than its nonblockchain

counterpart technologies are caused by the trade-offs that enabled it to work in a

decentralized manner. There is, of course, active work and research being done to

improve real or perceived shortcomings and eliminate obstacles to growth.

Proof-of-stake (PoS) is an alternative to PoW mining systems that will allow

a higher transaction rate. Rather than commit computing resources to guessing a

mathematical answer to verify a block (as in mining) , users will be able to pledge

Ethereum for a period of time to gain voting rights on block confirmation and receive

a reward in exchange for helping to secure the integrity of the blockchain network.

They cannot use this pledged Ethereum and they could forfeit their stake if they

cheat.

The computation work and data storage can be split amongst different groups of

nodes. That way both computation and storage can be divided with a sufficient level

of redundancy. This technique is known as sharding.

Light nodes are another way that the network becomes more accommodating to

different players. Mobile devices, for example, lack the storage capacity to participate

in most public blockchains. A light node can contain the data required to perform

minimal validation on transactions and act as a conduit to the broader network,

relaying data both to and from the client.

6.4 The Future of DApps

We have been looking mostly at Ethereum; however, there are a number of competing technologies
being developed of which Ethereum is just one. Not all of these

technologies will proliferate. If we look at the late 1980s and early 1990s, Mintel

was a popular network in France with similar models attempted around Europe and

5 Ethereum, Smart Contracts, DApps 91

other parts of the world, while CompuServe existed in the United States. Eventually,

both of these services were fully supplanted by the Internet.

However, older technologies do not always disappear just because newer or better technologies
emerge. Legacy technologies can continue to exist alongside newer

ones. For example, even though voice and video applications such as Skype or Google

Hangouts allow you to communicate over the Internet, the enduring telephone network shows no
signs of disappearing. Not only do the networks coexist they even

seamlessly integrate. You can make a phone call from Skype or dial into a Google

Hangouts conference. Established PoW systems may continue to exist and even

interoperate with newer PoS systems.

In the coming months and years of blockchain evolution, we expect some of these

competing and overlapping systems to integrate. Polkadot,9 for example, is a platform

designed to aggregate and bridge multiple different blockchains and subnetworks.

Bitcoin and Ether might trade with each other under a system of shared security

(Parker 2019).

The UIs in contemporary DApps are still accessed in a centralized fashion. In one

way this is OK in the philosophy of decentralization. The critical parts are decentralized on the
blockchain. Ideally the whole application, including the images and

visual UI components, are decentralized as well. The blockchain can be used to help

secure and distribute those files, not just the programs and tokens. The InterPlanetary

File System (IPFS)10 is one example of a distributed data storage protocol that uses
the blockchain to do that. In the future we may see DApps become fully decentralized

by using protocols like IPFS to store and serve their files.

In the meantime, the platforms we know will continue to evolve. Proposals for

changes to Ethereum can be submitted by anyone and each new proposal is numbered based on its
order of submission. EIP-20, the 20th proposal (Vogelstellar and

Buterin 2015), became the ERC-20 standard that helped facilitate the ICO boom.

With ERC-20, token creators, token exchanges, and Ethereum wallet software could

implement a common interface and all these different parties could work together

making interoperable products. It is similar to how Sony and Philips released the

CD Audio standard so that manufacturers of CDs and CD players, along with music

producers, music stores, and consumers, could all use the same type of disc.11 As of

May 2019, the most recent proposal number for Ethereum was 2015.

Vitalik’s early article in Bitcoin Magazine was exploring “If Bitcoin is to achieve

mainstream success…”. For centuries we have used money in nearly the same way it

was invented—trading pieces of metal for goods and services. The public blockchain

is only a few years old and mainstream awareness of blockchain continues to grow.

conclusion
The purpose of ether, the cryptocurrency, is to allow for a market for computation. Such a market
provides an economic incentive for participants to verify and execute transaction requests and
provide computational resources to the network.

Thus, with smart contracts, developers can build and deploy arbitrarily complex user-facing apps and
services such as: marketplaces, financial instruments, games, etc.

A dapp has its backend code running on a decentralized peer-to-peer network. Contrast this with an
app where the backend code is running on centralized servers.