Before jumping into Ethereum, let’s talk vending machines.
A vending machine is an analog contract. The user agrees to deposit cash under the implicit promise that the machine will deliver the selected good and dispense change. The vending machine is a contract with bearer — anybody with coins can participate. Vending machines are “dumb” contracts. The Ethereum blockchain is a digital protocol that executes “smart” contracts.
A smart contract is computer code comprised of rules and conditions under which a good or service should be transferred. On the Ethereum blockchain, I can use computer code to programmatically send you $5 ETH if the date is a certain day and your balance is below a threshold. The contract will only execute if the conditions are met. This completely bypasses the intermediary. Without Ethereum, we need a bank, Venmo, or PayPal — and we’re unable to program conditions for automatic execution.
Ethereum was founded in 2015 by Vitalik Buterin. He built it due to the limitations of the Bitcoin blockchain. If Bitcoin is a calculator — able to do a few simple operations — Ethereum is a computer. Users can easily build on top of it. Creativity and innovation are the only limiting factors.
Unlike Bitcoin, which has a fixed supply of 21 million, Ethereum does not have a maximum supply or a fixed monetary policy. This is a fundamental difference — and in my view, the most important one.
My hot take:
Blockchain technology has led to two separate revolutions. One is a monetary revolution — Bitcoin and the disruption of the fiat monetary system. As discussed previously, I think this revolution is likely to be winner-take-all, as the history of money is zero sum. The other is a technology revolution, which has spawned thousands of non-Bitcoin blockchains. The technology revolution has the potential to disrupt every industry that depends on trusted third-party intermediaries.
The greatest challenge in understanding the blockchain ecosystem is creating mental models that distinguish real value creation from noise. Traditional computers are ultimately controlled by people. Blockchains invert this power relationship, putting the code in charge. We have never had computers that can make commitments. That is genuinely new.