Introduction to Cardano (ADA) Part 4

Three generations of cryptocurrencies. Introduction to Cardano ADA. Part 4. Introduction to second generation cryptocurrencies.


Ethereum is an example of a second-generation cryptocurrency. Ethereum took Bitcoin’s innovations several steps further and introduced ways to use blockchain that fix many of the problematic issues with the Internet.


Decentralized applications on the Ethereum network

The Ethereum network is similar to a decentralized app hosting platform and marketplace, on which anyone could create, publish and sell their own decentralized applications (or dapps). There is no strict definition of the term “decentralized application.” A dapp is an application that doesn’t depend on a central authority, connects users and creators and of app directly, and in some way uses blockchain principles and technology. For example, a distributed version of Twitter could be saving all the public tweets on its own public blockchain and thus solve the issue of censorship once and for all.

In the whitepaper for the Ethereum network, its founders described three types of decentralized applications. The first type is the dapps that manage money, possibly under certain conditions. An example of such a dapp in action would be user A agreeing to send user B a certain amount of money if the weather on a certain date in Miami is colder than 60 degrees Fahrenheit.

The implementation of such apps is possible on the Ethereum network because the developers of the network equipped it with smart contract functionality.


Smart contracts on the Ethereum network

A smart contract is a virtual agreement between parties that involves some kind of transaction or exchange. The main benefit of smart contracts on the Ethereum network is that once a contract becomes active, it becomes decentralized. The network enforces and executes the contract serving as an independent enforcing party, without the parties in the contract having to find and pay a middleman. Smart contracts make it possible to transfer power from the people and organizations who currently manage contracts to the networks.

This doesn’t mean that removing attorneys from the process of contract creation and execution is a good idea. While it is true that the Ethereum network will enforce and execute a contract, it will do so “as is.” If there are discrepancies or issues with conditions of the contract, the network will still execute the contract. In technology, this is also known as “garbage in, garbage out.” The network will not convert a poorly constructed contract into a well-constructed one. It will also not notify the parties about potential issues that the contract may be coming with. If you plan to run smart contracts on the Ethereum network (or any other network), you best bet is still to hire an experienced attorney who will go over the potential issues with you. The network will simply execute what the parties agree to, without going into the details of the agreement.

However, even with these limitations, the potential of smart contracts is tremendous. Most contracts in existence today rely on a third-party for reviews, authentication, monitoring, execution, and enforcement. Typically, such a third-party is someone from the legal profession, for example, an attorney, a court or a judge. Legal professionals in most jurisdictions need to get education and obtain government certifications before they can practice law, which is why the costs of dealing with a third-party currently are often huge. Because most of the work is done by humans and not machines, there are high risks of loss, theft and destruction. Smart contract can eliminate all of these risks altogether. When a smart contract network utilizes blockchain technology, a decentralized blockchain can store several copies of the contracts on various machines. If someone tries to change the conditions of a contract, the blockchain would simply reject the changes. Trying to destroy a contract would also be not possible if the network has multiple nodes on it (a node on a blockchain network is a computer with a full copy of the network’s blockchain).


Decentralized applications managing external sources, governments and voting

The second type of decentralized apps on the Ethereum network is the dapps that manage money and need another piece. For example, an app may be paying money to hardware owners for using their computers to perform some computations. The third type is the dapps that do not deal with money and deal with governance and voting instead, essentially making it possible for people to create organizations that are state-free, tamper-proof, fully transparent and democratic. Such an organization would have a computer run it instead of humans. The participants could create a smart contract with rules and vote on the rules that they agree on. The term for such an organization is DAO, which is short for decentralized autonomous organization (not to be confused with “The DAO,” which was a project on the Ethereum network).