Understanding how Ethereum-based tokens work and their relationship to Ether.
Even for those with an understanding of cryptocurrencies, Ethereum and other advanced open blockchain networks can be confusing, especially when people embark talking about launching their fresh cryptocurrency or token on top of Ethereum. How can one valuable digital voorwerp “run” or “be launched” on top of another valuable digital voorwerp? This backgrounder will response that question, but very first wij need to voorkant a fair amount of background material. Much of the confusion stems from the cryptocurrency community’s unfortunate habit of using the same name to describe numerous different things, so, to commence, we’ll attempt to disambiguate a few terms.
Protocols, Networks, Tokens
Bitcoin is a peer-to-peer network. Bitcoin is a laptop protocol for electronic specie. Bitcoin is a provably scarce token that will have a positive value if there is request for it. All of thesis are true statements, which means that Bitcoin, the word, is used to describe three different things: (1) a group of networked computers on the Internet, (Two) a set of rules and procedures for passing gegevens inbetween computers, and (Three) valuable tokens that exist spil a consequence of thesis networked computers running that Bitcoin protocol software. Those valuable tokens, bitcoins, te turn perform at least three functions: (1) people who dedicate computing resources to making the network work (i.e. miners) are rewarded with bitcoins, (Two) users of the network can send bitcoins to other users spil a payment medium, and (Trio) users can (and often vereiste) pay fees te bitcoin ter order to use the network.
Many people interested te open blockchain networks commenced with Bitcoin and never had this distinction entirely spelled-out for them. So, when it comes to a fresh network like Ethereum, things can become confusing. Ethereum is the name of a peer-to-peer rekentuig network similar to but distinct from Bitcoin, it’s also the name of a protocol or set of rules and procedures for computers that borrows some technologies and ideas from the Bitcoin protocol but also has a fair amount of novel, extra functionality. Ether is the name for the scarce token that emerges spil a result of networked computers running the Ethereum protocol and it is also, like bitcoin: (1) a prize for participation, (Two) a currency, and (Trio) a medium for paying fees.
How Ethereum is Different
Unlike the Bitcoin protocol, the Ethereum protocol wasgoed explicitly designed to do more than just create and record transfers of the network’s native tokens. It is a more generalized protocol.
Recall that any blockchain technology does the following: it will permit connected computers to reach agreement overheen collective gegevens. For Bitcoin, that collective gegevens is a list of bitcoin transactions. This is why the Bitcoin blockchain is commonly referred to spil a ledger. It’s like a book utter of entries that either create fresh units of bitcoin or describe a transfer of existing units from one public address (the closest thing Bitcoin has to a user account) to another. Wij call it a ledger because that word is familiar to non-technical people, but indeed it is better described spil a loom or (even better) a logfile. Te rekentuig science, a logfile is just a record of events that occur spil a lump of software (i.e. a pc program) runs. So the Bitcoin protocol generates this logfile, called the Bitcoin blockchain, and it reflects all the events that toebijten on the Bitcoin network.
The types of events that the Bitcoin protocol permits to be recorded into that logfile are limited and simple—they are the transactions that wij discussed earlier, transactions made either spil payments inbetween users, fees for use, or spil prizes for people that help to make the network and protocol infrastructure work.
Some transactions can be a bit more ingewikkeld. For example, there are so-called “multi-sig” transactions where one person will send money to an address that’s bot configured to require two-out-of-three people to agree ter order to transact te the future (i.e. transactions sending money out of that address require numerous digital signatures, hence the name multi-sig). Here, the logfile is recording an event that is a bit more complicated. The usual event says: Alice sent to Bob. This multi-sig event said: Alice sent to Bob, Carol, and Doug and specified that two of those three people voorwaarde agree te order to use the funds ter the future. Te general, however, the gegevens recorded into the loom usually looks the same, it’s bitcoin transaction after bitcoin transaction, again and again into the future.
Te Ethereum, the logfile (i.e. the Ethereum blockchain) can be packed with a broader multitude of event information. Just like Bitcoin, it can contain a loom of transaction-like events where one person sent ether to another, but it can also contain a loom of the execution and the results from running any sort of rekentuig program. So, if I write a pc program like the old Windows spel minesweeper, and then append the laptop code that powers my spel to the Ethereum blockchain, every event that happens te that spel (clicking a square to expose either a mine or a free space, number of lives remaining, high scores, etc.) will also be recorded te the blockchain. Whenever I or someone else on the Ethereum network plays the spel, fresh game-related events are appended to the Ethereum blockchain (e.g. Player One clicked on square A:Four and blew up). Moreover, those game-related events are appended to the loom at the same time with any other events generated by any other pc programs presently running on the Ethereum network.
The Ethereum blockchain indeed is like a decent rekentuig logfile, it records every event that occurs while the pc is running. The big difference is that it is actually logging events redundantly on every one of the computers connected to the Ethereum network. So when I uploaded the spel, a copy of that spel code wasgoed appended to every connected computer’s copy of the logfile, and whenever anyone plays the spel, spel events are recorded exactly the same on every pc on the network. That’s why the Ethereum network spil a entire can be thought of spil a singular giant computer—the Ethereum Virtual Machine—which everyone can use to run applications and to independently verify the integrity of any computation.
If it wasgoed free for anyone to run any type of application on the Ethereum Virtual Machine, the system would quickly become overcharged. Also, if people could loosely write applications that endlessly looped, consuming more and more system resources each cycle, they’d be able to lightly crash every rekentuig connected to the network. To zekering this from happening, the Ethereum protocol makes every computation (indeed every step within a computation) require a puny toverfee that goes to the particular laptop on the network that recorded the official version of the loom for that period. This is similar to fees te Bitcoin, where any fees fastened to a bitcoin transaction go to the miner who mined the block that included the transaction. How do you pay the fees? With ether, of course. When used ter this manner, ether is referred to spil “gas” for running the code, it’s the necessary fuel for computation.
Running or Launching a Token on Ethereum
If anyone can run any sort of code (for a toverfee) and permit anyone else to interact with the code and trust the result, then Ethereum can be a very useful device for all sorts of group computational problems. One demonstrable use-case is making a token that has, like Bitcoin, a scarce supply. Here the application code would simply wait for people to send it some ether, and then it would add an event to the Ethereum blockchain specifying that the sender now controls an amount of this fresh token (which could mean that a digital signature from that sender’s ether wallet is needed te order to transfer the fresh token to someone else).
The scarcity of that token is ensured because a variable te the application corresponding to total available supply is explicitly proclaimed (e.g. total tokens = 21 million) and then added, along with other aspects of the application code to the ethereum logfile. If the creator of the token zometeen regrets hier choice and wants to increase the supply, she can create a fresh application (with a fresh alternative supply amount) but she can’t alter the old version of the application because the logfile, like the bitcoin blockchain, is append-only, and entries te the past cannot be switched unless the decentralized community of Ethereum miners all agree to switch the Ethereum protocol itself. Alternatively, a developer could create a token application that permits someone, or perhaps a group of people, to periodically adjust the total supply ter an attempt to create a stable monetary policy. Either way, the code—whether it specifies a voortdurend total supply or describes a mechanism for supply changes—is set te stone when it is added to the blockchain.
Thesis applications need to be coded cautiously, no one wants to abruptly realize they only bought 1/1,000,000th of the total supply of something putatively uncommon instead of the advertised 1/100th. To encourage best practices, there is an open source standard for coding token-issuing ethereum applications.
You might ask, why would anyone want to do all of this when wij already have bitcoin and ether, why create another fresh token?! The plain reaction is that even ter the real world wij often use all sorts of items rather like wij use contant. Wij use tickets, coupons, stock and unie certificates, vouchers, food stamps, deeds, and a multiplicity of other bearer instruments because they entitle the holder to different things. Rather than do all that with various chunks of paper, or notations on a centralized database, why not make tokens that people can control with their smartphones and whose authenticity can be verified by on an open peer-to-peer network?
So, I might write an Ethereum application that permits anyone to create event tickets, sell them to audiences, and makes ticket-taking and anti-counterfeiting controls lighter. People send ether to the application, specify which event they want to attend, and they get a toegangsbewijs. They can keep it or—if they’d like—they could sell it to someone else on the network. When the final holder of the toegangsbewijs arrives at the venue, they simply display the toegangsbewijs to the organizer by displaying them a QR code on their phone. Events recorded publicly to the ethereum blockchain verify the unbroken chain of title from the toegangsbewijs seller to its current bearer.
Some people are creating tokens that relate to Internet infrastructure, like a token that can be spent to automatically pay for the cheapest and lowest latency cloud storage on a decentralized network of storage providers. Others may develop an open social network, like Twitter or Facebook but without a company te control, where tokens are used to make puny payments for messaging capacity and to prevent spam and robot accounts from ruining the quality of conversations on the network.
The particular value of any token will depend on a multitude of factors described ter the application code that created it (e.g. the total supply of tokens), spil well spil the market request for the token, which could be driven by a desire to use the tokens (e.g. desire to attend the token-ticketed event or buy the token-denominated cloud storage) or by speculation overheen future use-value.
The significant thing to keep ter mind is that just because it is the Ethereum virtual machine that runs the collective computations that describe the token’s distribution and movements, that doesn’t mean that the value of the token is the same spil the value of ether. Ether will be used spil gas to run any token-related applications (and ter a certain sense if ether’s value wasgoed to plummet it might endanger the stability of the Ethereum Virtual Machine, and—therefore—the usefulness of any tokens running on top of Etheruem), but the token’s value is generally unlinked to the value of ether itself. Confusing the two is like confusing the gas you waterput ter the car with groceries you waterput ter the car and drive huis.
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