In general, there are three types of applications on top of Ethereum. The first category is
financial applications, providing users with more powerful ways of managing and entering
into contracts using their money. This includes sub-currencies, financial derivatives,
hedging contracts, savings wallets, wills, and ultimately even some classes of full-scale
employment contracts. The second category is semi-financial applications, where money
is involved but there is also a heavy non-monetary side to what is being done; a perfect
example is self-enforcing bounties for solutions to computational problems. Finally, there
are applications such as online voting and decentralized governance that are not financial
at all.
Token Systems
On-blockchain token systems have many applications ranging from sub-currencies
representing assets such as USD or gold to company stocks, individual tokens
representing smart property, secure unforgeable coupons, and even token systems with
no ties to conventional value at all, used as point systems for incentivization. Token
systems are surprisingly easy to implement in Ethereum. The key point to understand is
that a currency, or token system, fundamentally is a database with one operation: subtract
X units from A and give X units to B, with the provision that (1) A had at least X units
before the transaction and (2) the transaction is approved by A. All that it takes to
implement a token system is to implement this logic into a contract.
The basic code for implementing a token system in Serpent looks as follows:
def send(to, value):
if self.storage[msg.sender] >= value:
self.storage[msg.sender] = self.storage[msg.sender] - value
self.storage[to] = self.storage[to] + value
This is essentially a literal implementation of the "banking system" state transition function
described further above in this document. A few extra lines of code need to be added to
provide for the initial step of distributing the currency units in the first place and a few
other edge cases, and ideally a function would be added to let other contracts query for
the balance of an address. But that's all there is to it. Theoretically, Ethereum-based token
systems acting as sub-currencies can potentially include another important feature that
on-chain Bitcoin-based meta-currencies lack: the ability to pay transaction fees directly in
that currency. The way this would be implemented is that the contract would maintain an
ether balance with which it would refund ether used to pay fees to the sender, and it would
refill this balance by collecting the internal currency units that it takes in fees and reselling
them in a constant running auction. Users would thus need to "activate" their accounts
with ether, but once the ether is there it would be reusable because the contract would
refund it each time.
Financial derivatives and Stable-Value Currencies
Financial derivatives are the most common application of a "smart contract", and one of
the simplest to implement in code. The main challenge in implementing financial contracts
is that the majority of them require reference to an external price ticker; for example, a
very desirable application is a smart contract that hedges against the volatility of ether (or
another cryptocurrency) with respect to the US dollar, but doing this requires the contract
to know what the value of ETH/USD is. The simplest way to do this is through a "data
feed" contract maintained by a specific party (eg. NASDAQ) designed so that that party
has the ability to update the contract as needed, and providing an interface that allows
other contracts to send a message to that contract and get back a response that provides
the price.
Given that critical ingredient, the hedging contract would look as follows:
1. Wait for party A to input 1000 ether.
2. Wait for party B to input 1000 ether.
3. Record the USD value of 1000 ether, calculated by querying the data feed contract, in
storage, say this is $x.
4. After 30 days, allow A or B to "reactivate" the contract in order to send $x worth of
ether (calculated by querying the data feed contract again to get the new price) to A
and the rest to B.
Such a contract would have significant potential in crypto-commerce. One of the main
problems cited about cryptocurrency is the fact that it's volatile; although many users and