If you are an active follower of the blockchain space it’s hard to have missed the news that Counterparty announced they recreated Ethereum’s smart contract platform on Bitcoin.
This is a big thing, and I like it. I will tell you why after I explain what’s going on. Here’s a simple summary. Not eli5, but possibly eli15.
What’s this all about?
Bitcoin is the largest and most secure decentralized cryptographic ledger in existence. Its ledger is considered unbreakable, yet requires no central party to govern it. It’s an amazing technical achievement. And it has a track record of over five years. But it’s pretty dumb: it can only record transactions of money, in one currency: bitcoin.
Counterparty is an initiative built on top of Bitcoin hence ofwhich offers many more advanced financial instruments. For example, Bob could issue a new token called “Shares of BobCo Inc.” on Counterparty, Alice could buy some of these tokens and thus have a share in BobCo without requiring any third party. Counterparty can be used in production right now.
Ethereum is an initiative to build an even more advanced platform, using the same blockchain principle as its fundament, but technically independent from Bitcoin. The Ethereum project is ongoing and planned to go in production early 2015. As Bitcoin is a ledger for money, Counterparty is a ledger for complex financial instruments, Ethereum is a ledger for anything you can imagine. It contains, among other components, a virtual machine on block chain which runs smart contracts. It allows running computer code in an incorruptible, indisputible way, without any central governing party.
For example, Bob could write a small computer program that says “If I haven’t sent a transaction to this contract within a period of one year, send all of my belongings to Carol”. Carol is Bobs daughter, and this simple program is Bobs testament that will be executed without needing a notary or any discussions with nasty family members.
One common bond that the Bitcoin, Counterparty and Ethereum software have is that they are all open source software. Within certain boundaries, anyone can take the source code and build something else based on it.
Now what’s this news that Counterparty supports Ethereum smart contracts? The Counterparty team has taken part of the open source Ethereum code and adapted it so that Ethereum contracts can be run on Counterparty. That means Bob can create his testament and sleep with the comfort that it is secured by the most secure blockchain in existence: Bitcoin.
As Jeff Garzik notes this is quite a coup:
What a coup! @CounterpartyXCP, * Grabs the good stuff – Ethereum tech * Ditches the bad stuff – Wonky economics, new chain
— Jeff Garzik (@jgarzik) November 12, 2014
About the bad stuff, the “new chain”: one of the biggest points of criticism and skepticism that Ethereum has received are that they create their own blockchain. As practically all “altcoins” (clones of Bitcoin) have shown, creating a new blockchain is trivial but securing it is hard. Blockchains are secured by miners that solve computational puzzles. If miners move their resources away from a coin, the coin becomes more vulnerable to what’s known as a 51% attack.
Simply said, if not many computers chew on the cryptographic puzzles for the SomeAltCoin blockchain, an attacker can direct a large amount of computation power of his own toward SomeAltCoin mining and wreak mayhem in ways like spending his SomeAltCoin twice or undo transactions, compromising the worlds trust in it. This has been successfully done with many altcoins. With Bitcoin it’s much harder, because Bitcoin mining has reached the level where it’s infeasible to do economically unless you set up a huge server farm.
As Ethereum is an entirely new blockchain, principally it will be just as vulnerable as any other altcoin. Now that we can run our Ethereum contracts on Counterparty, this problem is solved. All hail Counterparty, goodbye Ethereum? I don’t think so.
Why is this great news?
For many reasons I think this is good for Counterparty, good for Ethereum and good for the blockchain space as a whole. I’ll explain why.
Ethereum contracts become more useful
Before today’s news, Ethereum contracts could be run on the Ethereum blockchain, when it is ready in early 2015. After this news, we can run them today, secured by the Bitcoin blockchain. Developers of Ethereum contracts now have an additional way to use these contracts. That’s a plus.
Furthermore, Ethereum contracts on Counterparty can securely execute transactions in Counterparty tokens and bitcoin. In the above example of Bob’s testament, an unsolved problem was how the transaction of Bob’s assets to his daughter Carol would be completed in a secure way. With Ethereum contracts on the Counterparty network on the Bitcoin blockchain, there’s a whole range of options to do that securely.
“Ethereum” is more than smart contracts
Reading all this could make you think that Ethereum has no future. But Ethereum has other things to offer. It’s a platform for distributed applications (DApps), in which smart contracts play an important role. These applications are built with common web technologies as I recently talked about. They interact with the contracts, and could for example allow for Bob to create his testament in a user-friendly manner. The distribution of the apps (think appstore) is itself supported by Ethereum in a decentralized way.
On the Bitcoin network, the confirmation time for a block with transactions is 10 minutes. On the Ethereum block chain, transactions with a contract are confirmed after 10 seconds. For many purposes, including the testament example, 10 minutes is more than fast enough. But there’s a whole range of more real-time applications that require faster transaction times to function in a useful way. Ethereum and Counterparty can coexist, just like IBMs Ethereum fork and Ethereum can coexist.
Bitcoin is not perfect
There, I said it. Yes, Bitcoin is an amazing innovation that offers, and inspires, many possibilities that were unheard of before. Yes, Bitcoin is the largest, longest running, most secure blockchain. Yes, Bitcoin has a first mover advantage. Yes, there are huge problems with altcoins. But no, Bitcoin is not free of important, fundamental problems. One of the best resources to learn about them is Tim Swansons book The Anatomy of a Money-like Informational Commodity.
One very argument important argument is this: Bitcoins mining economics are broken. They don’t scale and are a resource waste disaster. Because of the way the proof-of-work algorithm works, miners are incentivized to spend up to the value of their mined bitcoin value on electricity and short-lived hardware. That means that at a price of $400 per bitcoin, for every bitcoin mined up to $400 worth of electricity will be wasted. If Bitcoin is to be a significant global store of value, its price will rise, and with that the amount of scarce resources wasted.
The fact that many altcoins have failed and Bitcoin has not, doesn’t mean that it’s impossible to create a successful new cryptoledger. And attempting to do so in a well-funded, well-set-up organization with a lot of very bright minds is a far more promising way than “just launching another altcoin”. Ethereum has yet to decide on a final mining algorithm, and has a chance to offer something significantly better than Bitcoin’s proof-of-work. I look forward to seeing what it is.
Mind you, Bitcoin is a wonderful technology that I’m extremely excited about. But I’m more excited about the phenomenon of decentralized cryptographic ledgers in general than the specific instance that Bitcoin is. And I applaud any serious effort toward building a better one.
Counterparty supporting Ethereum contracts is a great step forward. Meanwhile, the Ripple guys are doing promising stuff with Codius, realizing smart contracts from an entirely different angle. New building blocks for decentralized systems are becoming available every day. Let’s build awesome things with them!
Disclaimer: the author is not involved in or invested in the Ethereum project, nor in Counterparty. He does own some bitcoin.