What lawyers need to know about Ethereum

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Ethereum is the second largest cryptocurrency by market cap rate, and as such, this is often the second search for blockchain-based project lawyers after Bitcoin.

The Ethereum project is often an exciting revelation of the applications of blockchain technology, especially after learning the basics of what Bitcoin has to offer.

To summarize, Bitcoin was created as a decentralized peer-to-peer cryptocurrency. It uses a distributed global ledger called a blockchain to ensure transactions are verified accurately and the network is maintained.

Now Ethereum is similar in that it uses the blockchain, but it differs in that it does so much more than just being a way to send money to someone. Of course, you can send someone the Ether Equivalent (ETH) of $ 1,000 (around 0.35 ETH at the time of writing) the same way you can send someone for $ 1,000. of BTC, but you’d be glossing over Ethereum’s biggest feature.

Think of Ethereum as a smartphone with an app store, on which any developer can launch an app, as long as it meets the standards set by the Ethereum community.

Ethereum has basically created a blockchain that anyone can rely on; rather than building their own blockchain, independent developers can simply rely on the Ethereum network. This platform, called Ethereum Virtual Machine (EVM), has been used to launch more than 10,000 decentralized applications (dApps).

To give you a better idea of ​​what Ethereum is Actually used for:

The NFT OpenSea marketplace, a startup recently valued at $ 1.5 billion, is largely built on Ethereum (although it does support other chains, but we’ll get to that later.)

Attach, a stable currency pegged at $ 1, is built on Ethereum; it is the largest of its kind, with a market capitalization (USDT) of nearly $ 70 billion.

Uniswap, a protocol designed for decentralized peer-to-peer token exchange and a key facet of the decentralized finance (DeFi) universe, is built on Ethereum.

Axie Infinity, a blockchain-based game in which ferocious little cartoon creatures compete against each other, is built on Ethereum. Its token, AXS, has a market cap of over $ 4.3 billion.

So outside of development, financial, and consumer applications, Ethereum has one feature that deserves any attorney’s attention: smart contracts.

Ethereum: Quick Facts

The Ethereum blockchain is an unlicensed public blockchain with many of the same technological components as Bitcoin: 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 highest market cap and is one of the fastest growing digital assets to date. Projects that launch on Ethereum use their own native token (to be distinguished from the term “coin” because coins have their own blockchain.)

Ethereum allows users to specify the amount of computing power to spend on a transaction – a measure of processing power called “Gas.” If a transaction can be completed within a specified limit, it will be executed – otherwise, the changes are rolled back. Simple payments are a fairly low calculation process and require less gas, while more complicated operations like minting an NT (or deploying a smart contract) require more gas.

Gas charges have been a fairly controversial topic in the cryptocurrency community. Since thousands of decentralized applications use Ethereum’s blockchain, the network can become congested at times of high activity and gas costs can increase astronomically.

For example, on a calm day in 2021, gasoline charges could cost around $ 5 to send someone ether or around $ 40 to buy an NFT on OpenSea. However, in busy times it is normal to see a gas charge of $ 80- $ 200 to send a payment, or even thousands to buy an NFT!

Ethereum has several network upgrades in motion that emphasize the scalability of the project. However, this did not stop competing networks like Binance smart chain to simply copy the idea of ​​Ethereum and make adjustments to prioritize cheaper transactions.

Enter the smart contract

Smart contracts are pre-programmed contracts that allow the performance of specific legal functions once certain criteria are met. For example, a smart contract could specify that a defined amount of cryptocurrency tokens will automatically be transferred or sold if a requirement is met.

Smart contracts on Ethereum use Ethereum’s proprietary language called Solidity. The Ethereum Developer’s Manual defines smart contracts as “a type of Ethereum Account. This means that they have a balance and can send transactions over the network. However, they are not controlled by a user; they are deployed over the network and executed as scheduled. Smart contracts can set rules, like a regular contract, and apply automatically them via code. Smart contracts cannot be deleted by default, and interactions with them are irreversible.

(Starting the blockchain OpenLaw focuses on simplifying smart contracts for a mainstream audience)

In practice, the decentralized lending industry uses smart contracts to guarantee and issue loans in a transparent manner. Platforms like BlockFi and Celsius lend cryptocurrency to people who request it and have collateral for them – one can get a loan of $ 100,000 at 1% interest rate by placing around 9.6 BTC as collateral (around 400 $ 000). cryptocurrency interest accounts also pay users for holding their cryptocurrency on the platform. Businesses make money on the difference between borrowing and lending rates, like a traditional bank.

However, many of these loans are based on smart contracts. Does the person have the guarantee? If so, issue the loan. Does the person pay their interest? Has the person repaid their principal and paid their interest? Any questions that would otherwise need a human or multiple humans for approval can be handled by the smart contract, which runs automatically.

Ethereum even allows the complete removal of the centralized entity (BlockFi or Celsius, in this case). DeFi ecosystems like SushiSwap allow users to lend and borrow from each other without ever knowing who the other party is – without any human being involved in the transaction.

Another great example of smart contracts is the mechanism behind prediction markets.

Ethereum-based prediction market platforms allow people to create personalized smart contracts based on the potential future outcome of an event. For example, we could create a smart contract to allow people to bet on the winner of the 2029 NBA Finals.

People would send Ether (or that prediction market’s token) to a wallet described in the contract. Once the 2029 final is over and the winner is named (likely confirmed by a specific oracle in the contract), the winning parties would receive their tokens and winnings in the wallet address they specified when they entered into the contract.

How to build an Ethereum dApp?

Decentralized applications built on Ethereum must meet the token standard they aim to qualify for.

For example, most of the tokens on Ethereum are ERC-20, a standard for fungible tokens (each token is exactly the same as the others). 1 Basic Attention Token (BAT) will always equal 1 BAT.

Ethereum also specifies the ERC-721 tokens, which are Non-fungible tokens (the NFTs you’ve probably heard so much about). DFTs are unique items that are unlike any other, such as a song, picture, or act for a house.

Typically, dApps must meet the following criteria:

  • The code must be completely open-source;
  • The token and the project must work independently;
  • The app must use a cryptocurrency token;
  • No one entity can control the majority of cryptocurrency tokens (it cannot be a centralized project);
  • Future changes to the application should be determined by user consensus;
  • The data stored by the project must be stored in a decentralized blockchain, and not in a central database, and it must meet 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 to lawyers

Blockchain, especially in the form that Ethereum-focused developers are applying it to, is expected to revolutionize a wide variety of industries, and the law is at the forefront.

Legal departments like Rocket Lawyer and Legal Zoom are already experimenting with blockchain smart contracts. Rocket lawyer Rocket wallet The product, for example, bills itself as a “legal execution and payment of contract on the Ethereum blockchain” and has partnerships with ConsenSys (a Brooklyn-based Ethereum investment company and project incubator) and OpenLaw (a startup working on smart contracts for the general public.)

However, Ethereum is not the end of everything for blockchain and law. Several Ethereum competitors are behind the scenes, each trying to deliver a unique value proposition to inspire innovators and developers to leverage their platforms. In addition to Ethereum, projects like Cardano, Peas, and Solano are all projects with substantial implications for the legal sector.

If you want to know more about the Ethereum project, we strongly recommend that you read the Documentation for Ethereum developers and immerse yourself in the ecosystem – even just developing a minute’s literacy on the subject will likely help you serve yourself for years to come.

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