-- Demystifying the mysterious but ubiquitous Ethereum Virtual Machine --

An introduction to smart contracts and the ERC-20 standard.

The invention of Bitcoin was a revolution. While by far not the most functional or efficient blockchain, it cannot be criticized due to it’s groundbreaking position. The inventor Satoshi Nakamoto opened  the minds of a select few discerning people to a whole new possibility of currency based on distributed ledger, meaning no central controlling authority that  would keep track of balances and transactions (and could then interfere with them)  that anyone can participate in easily in an open source way. Now as the rest of the world begins to understand and accept the possibilities, we’ve still only seen the tip of the iceberg in terms of blockchain’s potential.

Bitcoin however, is simple in terms of utility. It’s designed as a store of economic value and a transactional network only. As a predominantly capitalist global society this is a fundamental beginning. This idea of a decentralized network however has vast potential beyond just economics.  It took the team behind Ethereum to take the next important step in blockchain’s evolution, the emergence of the smart contract. Inspired by BitTorrent, a peer-to-peer file sharing network, Ethereum pioneers saw the possibility that the financial ledger of Bitcoin could be used to store and process any data including operable code, and so the idea of the smart contract was born.

Smart contract’s use this idea of a distributed ledger, a network of voluntary participants, to host and manage digital agreements governed by encrypted code. Once created the terms of contract  are stored on blockchain and cannot be amended or altered by either party and it is impossible to default. Whatever conditions were  outlined get executed on the blockchain completely and without delay, and without any single managing authority or middleman.

Nevertheless,  we only need to take a look at the proliferation of crypto scams, rugpulls etc that happen in the sector, to realize it’s clear that the crypto world is far from safe and secure. It is fundamental to note however, that so called ‘cryptocurrency hacks’ actually occur on related protocols and 3rd party platforms (exchanges etc),and arise out of secondary factors such as failures in the code of the contract, not the integrity of the actual blockchain. Some chains are vulnerable to brute force attacks or overwhelming market related pressure, but again, these are secondary factors, not related to the encryption that is fundamental to blockchain network functioning.

 The major tangible advantage Ethereum acquires from it’s dominant position is it’s security against such attacks. A blockchain network’s security against such overwhelming pressure rests largely on it’s usage. The larger the investment in it and variety of participants the less vulnerable it will be. Ethereum as the innovator and market leader is far more robust than smaller newer chains.

For new projects starting looking for practical ways to develop a project without making it vulnerable, the logical choice was to create a token hosted by the Ethereum blockchain. Prior to the 2017 Bitcoin price surge, not only blockchain projects but real world establishments too, were looking to take advantage of the booming crypto market and tokenize some aspect of their business, such as loyalty rewards, membership discounts or activity participation. The vast majority of these tokens and coins in development were created on the Ethereum blockchain. Thus, a need for a standard of set of requirements for Ethereum tokens arose and  the ERC-20 standard was established. The standard outlines 6 mandatory and 3 optional functions that define an ERC-20 token and allows developers to leverage the utility of the Ethereum blockchain in a permissionless way.

Although Ethereum had little competition in the early days the situation can be compared to Nikola Tesla succeeding against Thomas Edison in the standardization of electricity into alternating not direct current. While there are practical benefits and drawbacks to each, only AC has established itself and will probably forever shape the way we work with electricity going forward.

In the case of Ethereum, the competition came later on. When the leading crypto exchange, Binance, sought to establish it’s own decentralized exchange (DEX) built on a proprietary layer-1 network, it did so from a fork of Ethereum. Being completely interoperable with Ethereum at the beginning and still sharing identical address formats, Binance Smart Chain is much faster and cheaper to transact on. Although upgraded to have a unique proof-of-authority (POA) consensus mechanism BSC does not offer an alternative blockchain operating environment such as other competing layer-1s might do. Incidentally, the convenience offered by transacting on BSC, fueled by the sheer popularity of the Binance exchange and token has  only reinforced the Ethereum network standards as the working environment that all other projects must accommodate for.

Next up; from BSC into the explosion of web3, NFTs, IoT, the metaverse hype….and finally, the emergence of the ubiquitous but mysterious; Ethereum Virtual Machine.

(Posts are opinion and not endorsements. Views are in no way to be interpreted as investment advice)

Thumbnail created from photos by Miguel Á. Padriñán and Jonathan Borba.