Generating a Seal (aka Proof-of-Work)
We’ll use this magic machine to generate a seal for our page. Like always, we’ll start with an imaginary situation.
Imagine you're given two boxes. The first box contains the number 20893. I, then, ask you, “Can you figure out a number that when added to the number in the first box and fed to the machine will give us a word that starts with three leading zeroes?”
Before we learn how we can seal the page, we need to know how the seal works, in general. And as a pre-requisite, we will introduce…
The Magic Machine
Imagine a machine surrounded by thick walls. If you send a box with something inside it from the left, it will spit out a word containing something else.
[Jargon Box] This machine is called ‘Hash Function’. So, for today, these are ‘The Magic Machines.’
The requirement of this method is that there must be enough people who don't want to depend on a third-party. Only then can this group can maintain the register on their own.
“It might make sense just to get some Bitcoin in case it catches on. If enough people think the same way, that becomes a self-fulfilling prophecy.” ~ Satoshi Nakamoto in 2009
How many are enough? At least three. But for our example, we will assume ten individuals want to give up on banks or any other third-party that manages transactions. Upon mutual agreement, they have details of each other’s accounts all the time — without knowing the other’s identity.
For every complex problem there is an answer that is clear, simple, and wrong. — H. L. Mencken
The Current System
Imagine Joe is your best friend. He’s traveling overseas and on the fifth day of his vacation he calls you and says: “Dude, I need some money. I’ve completely run out.”
You, being the nice person you are, reply “sending some right away,” and hang up.
In the last section we learned that the software and apps executed by Ethereum Virtual Machine are called smart contracts. A human being and a smart contract are both seen as users on Ethereum. Whatever a human user can do, a smart contract can do too, and then some.
Smart contracts act exactly like any other human user in the network. Both of them can send and receive ether just like any other currency.
If you are in the startup ecosystem — or just a casual reader of tech sites — you must have seen that the majority of the fundraising stories in the past few months had a new term attached to them — ICO, short for Initial Coin Offering. The fundraising didn’t happen by selling out the equity of the company but by selling something called ‘tokens.’
It might be hard to believe for some, but companies have actually raised more money through ICOs than from VCs in 2017. Getting money for your business is of course awesome, but we believe that ICOs are more than just a tool to raise some capital.
To explain the economics and incentives behind the ICOs, we’ve put together this ultimate guide for you to understand ICOs.
