Ethereum is the second largest Cryptocurrency by market cap rate, and as such, it’s often the second blockchain-based project lawyers are investigating after Bitcoin.
The Ethereum Project is often an exciting reveal of the uses of blockchain technology, especially after learning the basics of what Bitcoin has to offer.
To sum things up Bitcoin was created as a decentralized peer-to-peer cryptocurrency. It uses a distributed global ledger called blockchain to ensure transactions are scrutinized and the network is maintained.
Ethereum is similar in that it uses blockchain, but differs in that it does so much more than just being a means of sending someone money. Sure, you can send someone the Ether Equivalent (ETH) of $ 1,000 (about 0.35 ETH at the time of writing), just as you can send someone $ 1,000 worth of BTC, but you would be the greatest To gloss over the functionality of Ethereum.
Think of Ethereum as a smartphone with an app store that any developer can launch an application on, provided that they meet the standards set by the Ethereum community.
Ethereum essentially developed a blockchain that anyone can build on. Instead of building their own blockchain, independent developers can simply build on top of the Ethereum network. This platform, known as the Ethereum Virtual Machine (EVM), has been used to power over 10,000. to bring to market decentralized applications (dApps).
To give you a better idea of what Ethereum is Strictly speaking used for:
The NFT marketplace OpenSea, a Startup last worth $ 1.5 billion, is largely based on Ethereum (although it supports other chains, but we’ll come back to that later.)
Tether, a Stablecoin pegged to $ 1, based on Ethereum; it is the largest of its kind with a market capitalization (USDT) of nearly $ 70 billion.
Uniswap, a protocol that was developed for decentralized peer-to-peer token swapping and represents an important facet of the decentralized financial universe (DeFi), is based on Ethereum.
Axie Infinity, a blockchain-based game in which wild little cartoon creatures compete against each other, is based on Ethereum. Its token, AXS, has a market capitalization of over $ 4.3 billion.
So outside of developer, financial, and consumer applications, Ethereum has a feature that deserves the attention of any lawyer – smart contracts.
Ethereum: Brief Facts
The Ethereum blockchain is a public, permissionless blockchain with many of the same technological components as Bitcoins: cryptographic hash function, decentralized P2P network, private and public key encryption and a proof-of-work consensus algorithm.
Ethereum’s native coin, Ether, has the second largest market capitalization and is one of the fastest growing digital assets. Projects that start on Ethereum use their own native token (to be distinguished from the term “coin”, since coins have their own blockchains).
Ethereum allows users to specify how much computing power to devote to a transaction – a measure of computing power known as “gas”. If a transaction can be carried out within a set limit, it will be executed – otherwise the changes will be rolled back. Simple payments are relatively low-computation processes and require less gas, while more complicated operations such as minting an NT (or deploying a smart contract) require more gas.
Gas fees are a pretty controversial topic in the cryptocurrency community. With thousands of decentralized applications using Ethereum’s blockchain, during moments of high activity the network can become overloaded and gas charges can skyrocket.
For example, on a quiet day in 2021, gas fees could be around $ 5 to send someone some ether, or around $ 40 to buy an NFT on OpenSea. However, in busier times, it’s normal to incur gas fees of $ 80 to $ 200 for sending a payment, or even in the thousands for buying an NFT!
Ethereum has several network upgrades in motion that focus on project scalability. However, this has competing networks like Binance Smart Chain from simply copying the Ethereum idea and making adjustments to prioritize cheaper transactions.
Enter the smart contract
Smart contracts are preprogrammed contracts which enable the exercise of certain legal functions as soon as certain criteria are met. For example, a smart contract could stipulate that a certain amount of cryptocurrency tokens would be automatically transferred or sold when a required condition is met.
Smart contracts on Ethereum use Ethereum’s proprietary language called Solidity. The Ethereum Developer’s Guide defines smart contracts as “a type of” Ethereum account. That means they have credit and can send transactions over the network. However, they are not controlled by a user; They are deployed on the network and run as programmed. Smart contracts can define rules, like a regular contract, and force automatically them about the code. By default, smart contracts cannot be deleted, and Interactions with them are irreversible. “
(Blockchain startup OpenLaw focuses on making smart contracts easier for a mainstream audience)
In practice, the decentralized lending industry uses smart contracts to seamlessly secure and grant loans. Platforms like BlockFi and Celsius Lend cryptocurrencies to people who apply and have collateral for them – one can get a $ 100,000 loan at 1% interest by placing about 9.6 BTC as collateral (about $ 400,000) Interest accounts in cryptocurrency Also, pay users to keep their cryptocurrency on the platform. The companies earn from the difference between the loan and lending rates, similar to a traditional bank.
However, many of these loans are based on smart contracts. Does the person have the securities? In that case, issue the loan. Is the person paying their interest payments? Has the person repaid their principal and paid their interest? Any questions that would otherwise have to be approved by one or more people can be handled by the smart contract, which is carried out automatically.
Ethereum even allows for the complete removal of the centralized unit (in this case BlockFi or Celsius). DeFi ecosystems like SushiSwap allow users to borrow and borrow from each other without ever knowing who the other party is – with no human involved in the transaction.
Another great example of smart contracts is the mechanism that underlies the prediction markets.
Ethereum-based forecasting market platforms allow people to create custom smart contracts based on the potential future outcome of an event. For example, we could create a smart contract so people can bet on who will win the 2029 NBA final.
People would send Ether (or the token of this prediction market) to a wallet described in the contract. Once the 2029 final is over and the winner is determined (likely to be confirmed by an oracle specific to the contract), the winning parties would transfer their tokens and winnings to the Wallet address you specified when concluding the contract.
How do you build an Ethereum dApp?
Decentralized applications based on Ethereum must meet the token standard for which they want to qualify.
For example, most of the tokens are on Ethereum ERC-20, a standard for fungible tokens (each token is exactly the same as the others). 1 basic attention marker (BAT) always corresponds to 1 BAT.
Ethereum also specifies ERC-721 tokens that Non-fungible tokens (the NFTs you’ve probably heard so much about). NFTs are unique items that are different from others, like a song, picture, or deed for a house.
In general, dApps must meet the following criteria:
- The code must be completely open source;
- Token and project have to work autonomously;
- The application must use a cryptocurrency token.
- No single entity can control the majority of cryptocurrency tokens (it cannot be a centralized project);
- The future changes to the app must be determined by the consensus of the users;
- The data that the project stores must be stored on a decentralized blockchain, not a central database, and it must conform to cryptographic standards;
- The token must use a standard cryptographic algorithm such as Proof-of-Work (POW) to generate new cryptocurrency tokens.
Final thoughts: why Ethereum is important for lawyers
Blockchain, especially the form in which Ethereum-focused developers adopt it, is set to revolutionize a wide variety of industries, and the law is at the forefront.
Legal service providers like Rocket Lawyer and Legal Zoom are already experimenting with blockchain smart contracts. Missile attorney Rocket wallet Product, for example, describes itself as “legal contract execution and payment on the Ethereum blockchain” and has partnerships with ConsenSys (a Brooklyn-based Ethereum project investment firm and incubator) and OpenLaw (a startup working on smart contracts for mainstream audiences.)
However, Ethereum isn’t the end of all things for Blockchain and Law. Several Ethereum competitors are in the starting blocks, each trying to offer a unique value proposition to encourage innovators and developers to build on their platforms. In addition to Ethereum, there are projects like Cardano, Speckle, and Solano are all projects with a significant legal impact.
If you want to learn more about the Ethereum Project, we highly recommend that you check out the Documentation for Ethereum developers and immersion in the ecosystem – even developing a tiny bit of literacy on the subject will likely help you for years to come.