The Ethereum blockchain, smart contracts and token

If you have followed my blog for some time, you might know that it started with a few posts on the bitcoin blockchain – about its foundations in elliptic curve cryptography, blocks, mining and transactions. The bitcoin blockchain has been established in 2009, and since then, a lot has happened in the blockchain world.

Maybe the most exciting new development are token – tradable coins that actually live on top of an existing blockchain. In particular non-fungible token are all the rage these days, and allow you to document ownership in a particular, uniquely identifiable asset like a piece of classical or digital art in the blockchain. Everybody who has access to a blockchain can create a token, and, according to Investopedia, more than 200.000 of these token did already exist by the end of 2019.

Technically, a token is nothing else but an application that uses persistent storage to store the information who owns which token respectively how many token. The point of a token is that this is not simply an ordinary application running in some data center, which might raise the usual concerns about whether you can trust the programmer and the operator, but is a so-called smart contract – an application whose code is stored in the blockchain and which is in a certain sense running on top of the blockchain and uses the blockchain as storage.

Thus, token ownership is stored in the blockchain, and as such, is subject to the usual guarantees in terms of integrity and durability that a blockchain has to offer. As the program code itself is also stored in the blockchain, you can also trust that it is not manipulated after initial deployment, and, as every node can run the code independently, the consensus mechanism of the blockchain also makes a manipulation during program execution at least extremely difficult.

Token are an important, but by far not the only application of smart contracts. You could, for instance, implement a smart contract that allows you to cast votes based on blockchain technology – the technology will make sure that every participant can only vote once, that votes are correctly accounted for and cannot be manipulated, and that the entire voting process is documented transparently in the blockchain. Or you can build a smart contract that acts as a deposit for collateral, where the logic implemented in the contract makes sure that the collateral is only released if a certain condition is met. There are broker applications that allow you to trade digital currency without the need for a trusted third party, fully decentralized organisations (DAO), whose members would, for instance, jointly invest into startups and vote transparently on the usage of funds, and many more applications of smart contracts. There are even games – check out Crypto Kitties, one of the first NFTs that was implemented.

Not every blockchain supports smart contracts. The bitcoin blockchain, for instance, does not (even though there is some scripting built into the validation process). The most popular (and, to my understanding, the first) blockchain that introduced smart contracts is the Ethereum blockchain, which was initially designed in 2013 and launched as a project in 2015. The Hyperledger Fabric blockchain has a similar concept (although smart contracts are technically quite different from what Ethereum does), and the same is true for Corda or EOS.

A couple of weeks back I became curious and wanted to understand how exactly a token works. I started to dive a bit into the Ethereum blockchain, smart contracts, token standards, dApps and Solidity, and, as always, decided to document my findings in a short series on this blog. If you follow along, here is what you will learn.

At the end, we will put everything together, mint our own NFT and build a frontend that will act as a wallet, allow you to list the token that you and others own and to trade token. As always, I will make the corresponding code available in my GitHub account so that you can get your hands dirty and directly jump into coding.

So let us get started and dive into the Ethereum blockchain – what it is, why it is different from the bitcoin blockchain and how it serves as basis for smart contracts and token. Watch out for my next post to appear which will talk about this.

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