The Ethereum Ecosystem includes smart contracts, decentralized applications (DAPS), decentralized finance (DeFi), tokens, and Decentralized Autonomous Organizations (DAOs).
We discuss the relationship between Ethereum and tokens built on its platform, highlighting their dependence on Ethereum and the potential for interoperability through cross-chain solutions.
We also examine the role of token supply and market value, explaining how upgradable smart contracts and proxy contracts can affect a token’s supply.
We’ll address the growing threat of Central Bank Digital Currencies (CBDCs) and the preference of central banks for permissioned blockchains, contrasting these approaches with Ethereum’s decentralized and permissionless nature.
Furthermore, we explore Ethereum’s governance and control mechanisms, emphasizing the platform’s increasing decentralization and the use of upgradable smart contracts and proxy contracts.
A Bright Future For The Ethereum ecosystem
The Ethereum ecosystem continues to evolve and expand, shaping the future of decentralized technologies and challenging traditional financial systems.
As Ethereum’s influence grows, the Ethereum Ecosystem promises to remain a vital force in the world of blockchain and digital currencies.
What is the Ethereum Ecosystem?
The Ethereum ecosystem refers to the interconnected network of projects, services, and individuals built around the Ethereum blockchain.
It includes various components such as decentralized applications (dApps), smart contracts, protocols, development platforms, wallets, and the community of developers, users, and investors.
The ecosystem thrives on innovation and collaboration, fostering the growth of new ideas and solutions to improve the functionality, security, and scalability of decentralized systems on the Ethereum platform.
Q: As far as tokens are concerned, does this mean tokens built on the Ethereum blockchain?
Yes, when discussing tokens in the context of the Ethereum ecosystem, it generally refers to tokens built on the Ethereum blockchain.
These tokens are created using Ethereum’s smart contracts and follow standard protocols, such as the ERC-20 for fungible tokens or the ERC-721 for non-fungible tokens (NFTs).
These tokens can represent various digital assets, including cryptocurrencies, utility tokens, governance tokens, or digital collectibles, and can be utilized within decentralized applications (dApps) or traded on decentralized exchanges.
Q: Are all of these tokens tied to Ethereum? So when something happens to Ethereum it will affect them? Is their success dependent on the success of Ethereum? So if Ethereum were to fail or lose importance, the tokens would fail with it?
Yes, tokens built on the Ethereum blockchain are inherently tied to Ethereum. They rely on the Ethereum network for transactions, security, and smart contract functionality. tokens built on the Ethereum blockchain are inherently tied to Ethereum.
As a result, these tokens can be affected by events that impact Ethereum, such as network congestion, changes in gas fees, or potential security vulnerabilities.
While it’s true that the success of Ethereum-based tokens is somewhat dependent on the success of the Ethereum platform, it’s important to note that many projects are working on interoperability and cross-chain solutions.
These innovations aim to allow assets and data to move seamlessly between different blockchains, reducing dependency on a single platform.
However, if Ethereum were to face significant challenges or lose its importance in the blockchain ecosystem, tokens built on the platform could be negatively impacted.
Tokens built on the Ethereum blockchain are inherently tied to Ethereum.
Projects might migrate to alternative platforms or fail altogether, depending on the severity of the situation and the adaptability of the projects.
Nonetheless, the Ethereum community is continually working on improvements and upgrades to maintain its position as a leading smart contract platform.
Q: So it is possible for these tokens to build a work-around or use interoperability and cross-chain solutions for their functionality, but what about the long-term effects if Ethereum were to fail?
Q: Most of these coins have a maximum total supply. What does this mean? Presumably it means no new coins can be created after the supply is reached, but how do they insure this?
Q: If they can make changes to the code, why wouldn’t they be able to make changes to the code that limits the total quantity of tokens that can be issued?
Maximum Total Supply On The Ethereum Blockchain
It is correct that many tokens have a maximum total supply, which means no new tokens can be created after that limit is reached.
This limit is typically defined in the token’s smart contract code at the time of creation. The maximum supply can be enforced by the smart contract, which governs the token’s issuance, distribution, and other functionalities.
In most cases, the code of a deployed smart contract on Ethereum is immutable, meaning it cannot be changed once it has been deployed to the blockchain.
This immutability ensures that the rules governing the token’s supply and other characteristics are fixed, creating trust and transparency for users and investors.
However, there are some cases where token creators may implement upgradable smart contracts or use proxy contracts, allowing for the possibility of changes in the contract’s logic, including supply limitations.
While this flexibility can be advantageous for addressing unforeseen issues or improving the token’s functionality, it could also introduce the risk of the token’s creators modifying the supply rules.
To mitigate this risk, reputable projects often implement governance mechanisms, giving token holders a say in major decisions, such as changes to the token’s supply or contract logic.
In summary, although it’s technically possible for a token’s supply rules to be changed if the smart contract is upgradable or uses proxies, most projects implement safeguards and governance mechanisms.
These mechanisms ensure that any changes are transparent, well-justified, and subject to community approval.
Q: The token’s supply affects its market value, so how is this fact handled in terms of the price of the token?
Q: Is it possible to increase the supply of any token this way, bitcoin for instance?
Q: Are there tokens where the codes were written to make it more difficult to manipulate later?
Q: Are there any tokens where it would be impossible to increase the supply of their token?
The token’s supply indeed affects its market value, as the relationship between supply and demand plays a significant role in determining the price of a token.
Generally, if the supply is limited and demand increases, the token’s price will likely rise. Conversely, if the supply is abundant and demand decreases, the price may fall.
Regarding the possibility of increasing the supply of a token, it depends on the token’s underlying smart contract or protocol.
For example, Bitcoin is not built on the Ethereum network; instead, it has its own blockchain and consensus mechanism.
The Bitcoin protocol has a fixed maximum supply of 21 million coins, and this limit is hardcoded into the protocol.
As the Bitcoin network is decentralized and secured by miners, any attempt to change this limit would require consensus from a majority of the network’s participants, making it highly unlikely to happen.
In the case of tokens built on Ethereum or other smart contract platforms, the ability to change the supply depends on the design of the smart contract.
As mentioned earlier, many smart contracts are immutable, making it impossible to change their rules, including the supply cap, after deployment.
However, if a token uses upgradable smart contracts or proxy contracts, it may be possible to modify the supply rules, but usually, such changes would be subject to community governance and approval.
To summarize, the possibility of increasing a token’s supply depends on the design of its underlying protocol or smart contract.
Immutable smart contracts make it virtually impossible to change the supply rules, while upgradable contracts may allow for changes subject to proper governance and community approval.
Bitcoin, being a decentralized and widely-adopted cryptocurrency, is highly resistant to any attempt to modify its maximum supply.
Upgradable smart contracts and proxy contracts on the Ethereum Blockchain
Q: So if a token uses upgradable smart contracts or proxy contracts, it may be possible to modify the supply rules? What is the difference between upgradable smart contracts and proxy contracts?
Q: This would imply that there are tokens that don’t use upgradable smart contracts, so I’m guessing there would be no way to modify their supply, but they would be able with proxy contracts?
Q: Are there tokens where it would be impossible to increase their supply through either of these methods?
Upgradable smart contracts and proxy contracts are two different methods used to enable smart contract upgrades and modifications on blockchain platforms like Ethereum.
- Upgradable smart contracts: In this approach, a smart contract is designed with built-in functionality that allows its logic to be replaced or updated by a new contract.
- Typically, the original contract includes an upgrade mechanism that permits the contract owner to point to a new contract address containing the updated logic.
- This way, the new contract takes over the functionality of the original contract without affecting the token’s balances, storage, or other data.
- However, this upgradeability feature may introduce potential risks, as it concentrates power in the hands of the contract owner.
- Proxy contracts: This method uses a separate proxy contract to handle and delegate calls to the actual implementation contract containing the token’s logic.
- The proxy contract stores the token balances, supply, and other data, while the implementation contract contains the business logic.
- When an upgrade is required, the proxy contract’s reference to the implementation contract can be changed to point to a new contract with the updated logic.
- This ensures that the token’s data remains intact during the upgrade process. Proxy contracts can provide a more modular and flexible approach to smart contract upgrades.
For tokens that do not use upgradable smart contracts or proxy contracts, their rules, including supply limits, are generally immutable, making it impossible to modify the supply once the smart contract is deployed.
But not all tokens are designed to be upgradable or use proxy contracts.
Many projects choose to deploy immutable contracts to ensure trust, transparency, and prevent potential misuse of power.
There are indeed tokens where it would be impossible to increase their supply through either of these methods.
For example, tokens built using an immutable smart contract with a hardcoded maximum supply cannot be changed once deployed.
Such tokens provide a higher level of trust and predictability, as users can be confident that the supply rules will not be altered.
Q: What are some coins that would fit the description of tokens built using an immutable smart contract with a hardcoded maximum supply, besides bitcoin?
Some examples of Ethereum-based tokens that have a hardcoded maximum supply include Basic Attention Token (BAT) and Chainlink (LINK).
These tokens are built using ERC-20 standard smart contracts, which have a fixed supply defined at the time of their creation.
Q: How is Bitcoin different from Ethereum and Ethereum based tokens? Does Bitcoin not use smart contracts? What would you call what they use?
Bitcoin and Ethereum differ in several aspects:
Purpose:
- Bitcoin was created as a digital currency to enable peer-to-peer transactions without the need for intermediaries.
- Ethereum, on the other hand, was designed as a platform for decentralized applications (dApps) and smart contracts, enabling developers to create various use cases beyond financial transactions.
Smart contracts:
- Ethereum natively supports smart contracts, which are self-executing contracts with the terms of the agreement directly written into code.
- Bitcoin does not natively support smart contracts in the same way as Ethereum. However, it has a scripting language called Bitcoin Script, which enables basic programmability for certain conditions, such as multi-signature transactions and time-locked transactions.
- Bitcoin’s scripting capabilities are limited compared to Ethereum’s Turing-complete smart contract language, Solidity.
Consensus mechanism:
- Bitcoin uses Proof of Work (PoW) as its consensus mechanism, which requires miners to solve complex mathematical problems to validate transactions and secure the network.
- Ethereum, at the time, also used PoW but has transitioned to Proof of Stake (PoS) with Ethereum 2.0, which allows validators to secure the network based on the amount of cryptocurrency they hold and are willing to “stake” as collateral.
In summary, while Bitcoin is primarily focused on being a digital currency, Ethereum is designed to be a versatile platform for dApps and smart contracts.
Ethereum-based tokens use Ethereum’s smart contract capabilities, while Bitcoin has its own scripting language with limited programmability compared to Ethereum’s smart contracts.
Q: So would it be impossible for anyone to ever create more bitcoin than the 21 million limit?
Q: What about Ethereum based tokens like Basic Attention Token (BAT) and Chainlink (LINK)? Though they have a hardcoded maximum supply, are there conceivable ways of bypassing or overriding it to add more tokens to the supply? Are there vulnerabilities anyone is concerned with?
For Bitcoin, it is nearly impossible to create more than the 21 million limit due to the decentralized nature of the network and the consensus mechanism in place.
Changing the hardcoded maximum supply would require a consensus among the network participants, which is highly unlikely, as it would undermine the trust and value proposition of Bitcoin.
As for Ethereum-based tokens like Basic Attention Token (BAT) and Chainlink (LINK), their maximum supply is determined by the smart contracts that govern their issuance.
Since these tokens use immutable smart contracts, it is generally not possible to alter the hardcoded maximum supply once the contract is deployed on the Ethereum blockchain.
However, in the unlikely event of discovering a vulnerability in the smart contract or the Ethereum network itself, attackers might attempt to exploit it, potentially affecting the token supply.
That being said, the Ethereum community and the developers of these tokens are vigilant in identifying and addressing vulnerabilities.
Regular audits, bug bounties, and the collaborative nature of the blockchain ecosystem help maintain the security and integrity of the network and the tokens built upon it.
In summary, it is nearly impossible to create more Bitcoin than the 21 million limit, and it is highly unlikely that the maximum supply of tokens like BAT and LINK, which use immutable smart contracts, can be altered.
While no system can be considered entirely immune to vulnerabilities, the collective efforts of the community and developers help minimize risks and maintain the trustworthiness of these cryptocurrencies.
Central Bank Digital Currencies (CBDCs) And The Ethereum Blockchain
Q: With all the talk about CBDCs and some countries having even put them into use, does it seem like Ethereum would be the ultimate system to have for a central bank or government?
Q: Are the potential issuers of CBDCs using a particular blockchain like Ethereum to build and test a CBDC on, or are they creating their own blockchain?
There is talk about how Central Banks could create a CBDC that is highly centralized and that they could have it programmed to control and/or have surveillance on every transaction and could even freeze or confiscate funds of dissidents or restrict what people can or cannot buy, etc.
Q: Would it be possible or likely that they could or would use Ethereum as the basis of their CBDC or would they really have to start their own from scratch? Or is some other type of chain more likely?
While Ethereum offers a powerful and versatile platform for building decentralized applications and tokens, it might not be the most suitable choice for central banks or governments looking to issue Central Bank Digital Currencies (CBDCs).
Ethereum is designed as a decentralized, permissionless platform, which might not align with the requirements of central banks that prefer a higher degree of control and privacy for their CBDCs.
Most central banks exploring CBDCs are developing their own custom blockchain platforms or utilizing permissioned blockchain systems.
These permissioned blockchains can be designed to meet the specific requirements of central banks, such as transaction privacy, selective transparency, and centralized control over monetary policy.
Some central banks may choose to build their CBDCs on existing permissioned blockchain platforms like Hyperledger Fabric or R3 Corda, which offer greater control and privacy features compared to Ethereum.
Alternatively, central banks could also develop their own custom blockchain platforms tailored to their specific needs.
Regarding concerns about surveillance, transaction control, and fund freezing, these capabilities would depend on the design and implementation of the CBDC platform chosen by the central bank.
A permissioned blockchain or a custom-built platform could potentially include these features, allowing central banks to exercise a greater level of control and oversight.
In summary, while Ethereum offers a powerful platform for decentralized applications, it is less likely to be the basis for CBDCs due to its permissionless and decentralized nature.
Instead, central banks are more likely to use permissioned blockchains or develop custom platforms that provide the desired level of control, privacy, and compliance with their monetary policies and regulations.
Ethereum is a platform for building dApps and other decentralized projects but Ethereum itself, the founders still control it themselves.
Q: What are the limits of control if any, on Ethereum that even Vitalik Buterin can not control about Ethereum, and is there some plan, or way that , in the future that Ethereum can not be further manipulated?
While it’s true that Ethereum was founded by a group of individuals, including Vitalik Buterin, the control they have over the network has significantly diminished as it has grown and matured.
Ethereum is now a decentralized platform maintained and developed by a large community of developers, researchers, and users. It operates under a decentralized governance model that relies on consensus among various stakeholders.
There are several aspects of Ethereum that even the founders, including Vitalik Buterin, cannot control:
Network consensus: Ethereum follows a consensus mechanism (Proof of Work, Proof of Stake with Ethereum 2.0) that requires validators or miners to agree on the state of the blockchain. This mechanism ensures that no single entity, including the founders, can unilaterally manipulate the blockchain.
Protocol upgrades: Changes and improvements to the Ethereum protocol are proposed as Ethereum Improvement Proposals (EIPs), which undergo thorough review and discussion within the community.
Implementing an EIP requires consensus among the network participants, including developers, miners or validators, and node operators. This prevents the founders from making arbitrary changes to the protocol.
Decentralized applications (dApps): dApps built on Ethereum are governed by their own smart contracts and are not under the control of the Ethereum founders. The developers and users of these dApps drive their governance and functionality.
Ethereum Foundation: While the Ethereum Foundation plays a significant role in funding research and development, it does not have direct control over the Ethereum network.
The foundation acts as a coordinating entity, supporting projects and initiatives that benefit the Ethereum ecosystem.
As for ensuring that Ethereum cannot be further manipulated in the future, the ongoing decentralization of its governance, development, and consensus mechanisms contribute to this goal.
The transition to Ethereum 2.0, which aims to introduce a more decentralized and energy-efficient Proof of Stake consensus, is one such step.
Additionally, the community-driven nature of Ethereum’s development and decision-making process helps to ensure that changes are made through consensus rather than by a single authority.
In summary, while the Ethereum founders initially had a significant influence on the project, their control has diminished as the platform has evolved and become more decentralized.
Ethereum’s consensus mechanism, community-driven governance, and the development of Ethereum 2.0 all contribute to reducing the potential for manipulation and further decentralizing the platform.
Explain upgradable smart contracts and proxy contracts some more.
Compare and contrast these two types of contracts.
Q: Do these contracts become a part of the chain? Or is it something else altogether? Is it something like, with the US constitution that it is immutable but amendments can be passed that override other amendments?
Upgradable smart contracts and proxy contracts are both methods to enable the modification or upgrade of smart contracts on blockchain platforms like Ethereum.
The primary purpose of both methods is to allow developers to fix bugs, add new features, or modify the contract’s logic after it has been deployed on the blockchain.
- Upgradable smart contracts: In this approach, a smart contract is designed with built-in functionality that allows its logic to be replaced or updated by a new contract.
The original contract includes an upgrade mechanism that permits the contract owner to point to a new contract address containing the updated logic.
The new contract takes over the functionality of the original contract without affecting the token’s balances, storage, or other data.
However, the upgradable smart contracts can introduce potential risks, as they concentrate power in the hands of the contract owner.
- Proxy contracts: In this method, a separate proxy contract is used to handle and delegate calls to the actual implementation contract containing the token’s logic.
The proxy contract stores the token balances, supply, and other data, while the implementation contract contains the business logic.
When an upgrade is required, the proxy contract’s reference to the implementation contract can be changed to point to a new contract with the updated logic.
This ensures that the token’s data remains intact during the upgrade process.
Proxy contracts provide a more modular and flexible approach to smart contract upgrades, but they can be more complex to implement.
Both upgradable smart contracts and proxy contracts become part of the blockchain once they are deployed.
They are written in the same language as other smart contracts (e.g., Solidity) and are stored on the blockchain like any other contract.
Comparing these methods to the US Constitution analogy, upgradable smart contracts are more akin to passing amendments that override previous amendments.
Proxy contracts represent a mechanism where the entire constitution (the implementation contract) is replaced by a new version, with the proxy contract acting as a reference to the current version.
In summary, upgradable smart contracts and proxy contracts are two methods to enable modifications or upgrades to smart contracts on blockchain platforms.
Upgradable smart contracts have built-in functionality for upgrades, while proxy contracts use a separate contract to delegate calls to the implementation contract.
Both types of contracts become part of the blockchain once deployed. The main differences lie in their implementation, flexibility, and potential risks associated with the concentration of power.
Q: Regarding coins that can be used as a currency, what are the considerations besides transaction speed that make a token a good, useful method of exchange?
Q: XRP is has a fast transaction speed and banks use it between each other. Would that be a potential modal for a CBDC? What other coins are like XRP?
Several factors make a token a good, useful method of exchange besides transaction speed. These factors contribute to the overall usability and adoption potential of a cryptocurrency:
Scalability: The ability of the network to handle an increasing number of transactions as the user base grows is crucial.
A scalable network helps ensure that the system can accommodate more users without causing bottlenecks or significant delays in processing transactions.
Security: The network must be secure and resistant to attacks, ensuring that users’ funds are protected and the integrity of the system is maintained.
Decentralization: A decentralized network reduces the risk of single points of failure and censorship. While this might not be a priority for a CBDC, decentralization is often a key consideration for cryptocurrencies.
Low transaction fees: Affordable transaction fees make it more feasible for users to conduct transactions, especially for micropayments or day-to-day expenses.
Stability: Price stability is essential for a currency to be used as a means of exchange. Users and merchants are less likely to adopt a highly volatile currency. CBDCs, by design, are expected to maintain a stable value, usually pegged to a fiat currency.
Ease of use: A user-friendly interface and seamless integration with wallets and payment systems can improve the adoption and usability of a cryptocurrency.
Regulatory compliance: For a CBDC or any currency targeting widespread adoption, compliance with regulations and the ability to prevent illegal activities (e.g., money laundering, terrorist financing) are important factors.
XRP, designed for fast and cost-effective cross-border transactions, is used by some financial institutions to facilitate international remittances.
Its fast transaction speed, low fees, and scalability make it a suitable model for certain aspects of a CBDC.
However, central banks might prefer a more controlled and permissioned system, so they would likely build their own platforms or use permissioned blockchains.
Other coins similar to XRP in terms of transaction speed and cost include Stellar Lumens (XLM) and Nano (NANO).
Stellar focuses on enabling low-cost and fast cross-border transactions, while Nano aims to provide instant and feeless transactions for day-to-day payments.
While these cryptocurrencies demonstrate desirable features, they may not fully align with the requirements of central banks for CBDCs, which would typically prioritize control, privacy, and regulatory compliance.
