Is Ethereum Blockchain App Platform decentralized enough?

The blockchain is a great new invention. It's an open, distributed ledger that allows for the tracking of bitcoin transactions. It's designed to solve some of the most complex problems in computer science and finance, such as computations that require a high level of anonymity and trust between participants.

A huge part of what makes blockchain so great is its decentralized nature — it doesn't rely on anyone central entity or authority to maintain its records, like a bank or some other regulatory body might do. That's part of why it has been able to gain such large support over the last few years -- because people trust technology more than governments and banks ever could.

While blockchain is great, something has always bothered me about it.

Blockchain is an open, decentralized ledger that doesn't rely on anyone's central entity or authority to maintain its records.

When I was a kid, I remember what they used to call "the Internet." That's just a convenient way of saying that you had lots of computers linked together and they were all sharing information quickly, easily, and in real-time.

This was the kind of world that I dreamed about as a kid. You could look at the Internet, grab some information and move on. No one would ever say, "It's just too damn inconvenient for me to read the information right now." For them it was a no-brainer — the Internet meant that they could get the information whenever they wanted without having to go through any complex procedures.

Blockchain is almost exactly like that. It's a shared database where all of its records are constantly updated in real-time. But instead of just being able to look at it if you want, you can also change any existing record in real-time.

Think of blockchain as the Internet. It's a shared database where all of its records are constantly updated in real-time. (Source: Shutterstock)

In other words, it's a whole lot like the Internet, but then you can also change anything on it when you want.

This is great because you don't have to trust anyone in central authority to keep things up to date. Everyone has their own "copy" of the database that they can use as they see fit, whenever they need to check something out or change something.

You can reach out to any other user, even someone you've never met before. You can reach out to anyone on the Internet and they'll be able to see what you're doing within their copy of the blockchain. For example, if I want to read someone else's record of how much money they have in their bank account, I can do that right now.

And because a blockchain-based database is run by many different users all over the world instead of a central authority, one entity or other authority can't deny any action that takes place in the database for any reason.

It's open and decentralized — just like the Internet was.

But that's where blockchain's Internet analogy falls apart a bit.

I was reminded of this fact recently when I started looking into a new blockchain startup called Ethereum. While Ethereum is great, it's more centralized than the Internet is — and therefore it may not be distributed enough to solve some of the biggest problems in software today.

We'll dive into what makes Ethereum different from other decentralization solutions in just a moment, but first, let's talk about how people are already using the technology behind Ethereum. This will help put everything else into context as we move forward.

Ethereum: A Blockchain App Platform

Ethereum is an open-source, blockchain-based platform that allows developers to build and deploy decentralized applications (Dapps) based on the Ethereum network. It can be used to create all sorts of products, such as social networks, crowdfunding platforms, and even entire governments (should you desire…).

The idea behind Ethereum is to help developers quickly and easily create custom-made blockchains for their applications. Since this would require a lot of effort if done in conventional ways, it takes away a lot of time/effort for developers and also makes things more efficient for end-users.

When you create a Dapp on Ethereum, you're creating a blockchain that interacts with the rest of the Ethereum network. This is done by using something called "smart contracts." A smart contract is simply a computerized agreement designed to facilitate and record exchanges of value or property between two or more parties.

The applications that can be built on top of Ethereum are called decentralized applications (Dapps), which are built on top of its peer-to-peer network. Dapps can be used to control virtually any type of digital assets, such as cryptocurrencies, stocks, real estate, and even other assets like domain names.

For investors, Dapps are a way to invest in new companies and projects without having to worry about the dangers of single points of failure. For example, if you were an early investor in Facebook (FB), it was probably pretty stressful wondering whether the company's servers would crash or whether someone would find a way to hack into its system. With a decentralized application like Ethereum, you don't have to worry about things like that happening — because there is no single database that can be hacked or shut down or controlled by any other entity except for the network itself.

The best way to think of Ethereum is as a "distributed cloud platform." It works exactly like some other distributed platforms we use today, such as Dropbox and Box.

If you're not familiar with these applications, they store information on multiple servers around the world — instead of on just one computer. That way, if anyone server in their system goes down for any reason, you don't have to worry about losing access to your data.

Ethereum is a distributed cloud platform that facilitates the process of coordinating different people and processes to work together efficiently — kind of like how a central bank coordinates economic activity within an economy.

Because anyone can see what's happening with the Ethereum blockchain at all times, you can even look up a record from years ago and verify that it's there. It's essentially an immutable, time-stamped record of all transactions.

So if you have a computer that's running Bitcoin and the Ethereum blockchain, you can easily see that the system has been working without a single failure. That means you could trust it enough to move your cryptocurrency holdings into it — something you probably wouldn't be able to do with a traditional bank account.

Currently, Ethereum is more centralized than the Internet because of how applications are built on top of its network. To run an application on Ethereum, developers don't just register their Dapp with the system and then wait for someone in another country to run a copy of it for them somewhere else (as happened with the Internet).

Instead, developers have to manually deploy the application on the network. This means they have to create so-called "full nodes" of their own — and then run that node on an Internet-connected server. While this doesn't necessarily introduce centralization into Ethereum, it does give more power to the developers themselves — rather than distributing it among many different users.

This is why some people, such as Ethereum's creator (and fellow TechCrunch writer) Vitalik Buterin, think Ethereum isn't decentralized enough for its good.

"Centralization is not the answer. Centralization is cancer." Vitalik Buterin, Ethereum creator

As far as I'm concerned, this isn't a negative for most Ethereum users. It's more of a warning to developers that they should be careful about how they design their applications and make sure that everyone has access to it — even if they're using different computers around the world.

How Does Blockchain Technology Work?

If you remember back to our discussion about blockchain's Internet analogy, you'll see that this problem isn't unique to Ethereum. We've seen other decentralized applications (such as Bitcoin) have similar issues in the past.

Many people believe that the Internet has become too centralized, thanks to some of the largest companies in the world — such as Google and Facebook. So in many ways, blockchain technology could solve the problems that currently plague modern computing and communications.

This is why a lot of people are optimistic about Ethereum (and similar platforms) — because they think decentralized applications could revolutionize how we do business online.

To give you a better idea of how Ethereum works, let's take a look at how some cryptocurrency exchanges operate on top of their blockchain. Since these decentralized applications work similarly to traditional marketplaces (such as eBay or Amazon), I thought it would be a nice way to follow along with this discussion.

As you probably know, when you want to buy something on the Internet, you typically go to a popular website like eBay or Amazon and search for it. When someone tries to sell something, they usually post it up on one of these sites — so you can always find them if you want a product.

Usually, sellers just list their product without offering much detail about how it works — since most people are just looking for whatever's available for sale. But if a buyer is searching for a specific item that's not available on the site in their area, eBay (or Amazon) will connect them with the seller who has what they're looking for.

Now, unlike eBay and Amazon, every currency exchange works a little bit differently. This means you should do some research and see how each one works before you decide to use it for your personal needs. There are plenty of horror stories about people who used these exchanges in the past — only to end up losing their money.

But for an example of how this could work, let's take a look at LocalEthereum — which is a marketplace that allows people to buy and sell Ethereum (ETH) using local currencies from their country.

Let's say I'm looking to buy ETH from someone else on the site. I'd search for the currency I wanted, filter through the listings to find one that had the currency I needed, and then click "I agree to terms" on that particular listing.

Then, I'd go to my local bank account and designate a certain amount of money for buying ETH — which is referred to as an "account." LocalEthereum works a lot like a traditional bank — except that it uses Ethereum software instead of the normal database system.

When I'm ready to make my purchase, I simply transfer some money from my bank account into my ETH account on LocalEthereum — then wait for my order to be fulfilled with the currency I wanted. Because I was able to securely transfer currency from my bank account to my ETH account, the seller knew that I meant business.

A few days later, the seller would send me my ETH — which I could then use to pay for other goods and services on the blockchain. They might even send me some money in return (depending on how much they're charging for it).

Now, this might seem a little bit complicated right now, but it's pretty simple if you look at it that way. It works just like any other marketplace online — except that you're dealing with cryptocurrency instead of international shipping or something else like that.

Because the buyer and seller only have access to their funds, they can't spend more money than they own. And because every Ethereum transaction can be easily traced back to a particular user, there's no way for someone to cheat the system with fake transactions.

There are other decentralized exchanges — such as EtherDelta — that let users buy and sell cryptocurrency without having to use their local bank accounts at all. And there are even more decentralized exchanges that use different Ethereum-based operating systems rather than a traditional database system like MySQL.

For example, the dEX is a new P2P exchange that's still in development — but it promises to let users trade cryptocurrencies directly from their wallets (meaning no fees). In theory, it could be a highly useful new way of buying and selling cryptocurrency.

Even though such platforms are still quite new, there are hundreds — if not thousands — of people using them. And since Ethereum has a global reputation for being secure and reliable, these platforms will likely continue to improve over time.

How Can Ethereum Help with Online Payments?

Because of the decentralized networks that have used the Ethereum blockchain up to this point, we know that it can process a lot more than just currency transfers. Because each transaction on the blockchain is cryptographically verified, it makes sense for developers to use this blockchain to create whatever they want.

The fact that your personal information is never transmitted and stored on the blockchain (while still being validated by it) makes it particularly good for creating secure digital identities. This means businesses can finally create more secure ways of doing business online — without having to worry about them being hacked or compromised.

There are a few companies that are already using Ethereum's software to provide decentralized identity services — such as uPort and Civic. uPort helps people share a single digital identity with trusted organizations, while Civic lets people store their identity documents on the blockchain. And now they're working on integrating their software with mobile phone apps.

Since these online identity services are so secure, you can also expect to see more companies working on blockchain applications for businesses. Amazon recently announced that it's working with IBM to use the Ethereum blockchain to allow businesses to create their own custom identities.

Meanwhile, Mastercard has been working on its decentralized identity mechanism called the xCurrent — which is based on the Ethereum blockchain. Like Civic and uPort, it lets users create a decentralized digital identity to share sensitive information with trusted organizations.

So even though Bitcoin has been getting most of the attention for online payments, it's just one of many digital currencies that require a lot less computing power and energy than what's needed by existing payment networks.

And as Ethereum continues to grow, we'll likely see more applications for it that don't rely on the blockchain. Just recently, a company called Slock.it created a new platform called Bridge that makes it easier for companies to manage their digital assets without having to use a blockchain at all. This is just one example of how Ethereum could be used in the future — but it's certainly not the only way developers are using the software today.

The Future of Ethereum Cryptocurrency

In the short term, we can expect to see Ethereum continue to grow via:

Merchant adoption of Long-term commercial blockchain applications (such as online identity services).

The future of Ethereum is still up in the air. But we can expect to see Bitcoin's dominance start to weaken over the next few years. And if Ethereum continues to grow in popularity and usefulness, we could see it becoming the dominant cryptocurrency for payment transactions.

And if that does happen, it would be a big win for decentralization — which has been a growing topic of discussion for decades now. It wouldn't just mean that online payments would be run on the blockchain rather than by banks — but that all other kinds of financial transactions would be run by this revolutionary new technology as well.

But until Ethereum does start to dominate digital currency trading, it won't necessarily be a bad thing for Bitcoin. After all, Bitcoin is still the most popular cryptocurrency and it's the first one to use a blockchain.

From a long-term perspective, Bitcoin is probably going to benefit at least in some ways from Ethereum's growth. So if you're interested in maximizing your returns from cryptocurrencies, you might want to consider diversifying your cryptocurrency portfolio now — and perhaps investing some of that money in Ethereum later on.