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What is Ethereum?

What-is-Ethereum

One of the most exciting features of Ethereum is the various types of uses that it could potentially have.

 

Here is our quick overview of what Ethereum is:

 

It is important to reiterate the fact that ETH was not founded to serve as a currency, although many people use it as a link between fiat currencies and altcoins.

 

What is Ethereum?

Simply explained, Ethereum is a platform that is open-source and based on blockchain technology. Ethereum is a cryptocurrency that is one of two of the biggest and most popular cryptocurrencies alongside Bitcoin.

 

The Ethereum official website contains a simple, yet straightforward description of Ethereum as a decentralized platform that runs smart contracts which are applications that run precisely as they are programmed without the possibility of any downtime, censorship, fraud, or interference from a third party.

 

 

Overview of Blockchain

Blockchain is a list of records that is continuously growing and is referred to merely as blocks.

 

There is a cryptographic hash contained in each block associated with the previous block along with a timestamp and relevant transaction data which is normally represented as Merkle tree.

 

One of the main features attributable to a blockchain is that it is resistant to all modifications of data. Blockchain is generally managed by a peer-to-peer, or P2P, a network that collectively adheres to a protocol associated with internode communication in addition to the validation of new blocks.

 

Blockchain was founded, albeit invented, by a person, or a group of individuals who were using the name, Satoshi Nakamoto. Both the invention of blockchain and that of Bitcoin made Bitcoin the first currency which solved the problem associated with double-spending without making use of the services of a trusted authority or a central server.

 

There are numerous types of blockchain including public and private, hybrid, and lastly, sidechains.

 

Other uses of blockchain, other than in cryptocurrency, include:

  • Financial services
  • Video games
  • Energy trading
  • Supply chain
  • Domain use, and more.

 

The History of Ethereum

It all started with one person by the name of Vitalik Buterin. Ethereum has a real name associated with it, unlike Bitcoin which has none. Buterin was a Russian-Canadian programmer and writer who became well-known for the work he had done with Ethereum.

 

He is also the co-founder of Bitcoin Magazine whose involvement in Bitcoin became more prominent in 2011. Although known for numerous other things such as developing a fork of bitcoin-lib, and Egora, Ethereum was what pushed Buterin to significant fame.

 

At the age of 19, Buterin came up with the idea of Ethereum and started the development thereof after receiving the Thiel Fellowship. In 2013, while working on Bitcoin, Buterin noticed that there was a lack of scripting language which was much needed for application development.

 

Arguing that it was a golden opportunity that required immediate action, Buterin failed to obtain broader support for his idea which led to him drafting his own whitepaper on Ethereum which outlined Buterin’s vision.

 

His vision involved the provision of a blockchain that contained a fully-fledged and built-in Turing-complete programming language that could be used to create ‘contracts’.

 

The contracts that Buterin had been referring to be the same ‘smart contracts’ which Ethereum has become famous for. These smart contracts can simply be described as a contract that executes itself and which is written into code and stored on the blockchain.

 

This ensures that transactions are traceable in addition to being transparent and irreversible.

 

Ethereum was announced in January 2014 during a Bitcoin Conference which was held in Miami. Although Buterin had expected a substantial amount of opposition based on his previous experience, there were however numerous people who warmed up to his idea which resulted in the gathering of momentum behind the project.

 

The Growth of Ethereum

To guide the further development of Ethereum, the Ethereum Foundation, a non-profit foundation, was started in mid-2014. This event was also the first initial coin offering, or ICO, which is similar to an IPO, but is aimed at cryptocurrencies.

 

Ethereum also received its own native token called ether or more commonly referred to as ETH. ETH is a digital currency that subsequently rules everything in the ecosystem concerned with Ethereum

 

During the ICO, the initial allocation of ETH was distributed through public presale and around 31,591 Bitcoin, or BTC, was made in exchange for approximately 50,102,216 ETH.

 

The second half of 2014 showed the buzz retarding ETH beginning to build as more nodes, responsible for running the protocol associated with Ethereum, were taken online.

 

During intervening years, numerous developers wanted to join in working on the core technology of Ethereum in an attempt to build their own applications on the blockchain which had been created.

 

By 2018, State of the DApps, which is a not-for-profit curated directory for Decentralization Applications on the Ethereum Blockchain, confirmed that there had already been 950 projects which had been running on Ethereum.

 

Ethereum blockchain saw a variety of ICOs, or fundraisers, which were held with the forecast indicating that the trend was set to continue for the foreseeable future. There are, as with everything, some obstacles involved with the progress that Ethereum had made.

 

The DAO Hack

The DAO is a significant part of Ethereum history that is noteworthy as it was an event that threatened to spell the end of the entire Ethereum project.

 

A decentralized Autonomous Organization, or DOA, is an entity that runs on rules which have been encoded into smart contracts located on the blockchain.

 

Christoph Jentzsch was the founder of The DAO which was a complicated smart contract that was created to create a venture fund that would be decentralized and work to seed venture capital into a variety of development projects.

 

The purpose of The DAO code was to eliminate the need which existed in trusting humans and instead, that it would function autonomously, however, humans are much harder to remove from such an equation and it is easier said than done.

 

The methodology of The DAO is straightforward and easy to understand; should an individual wish to influence the direction in which development was heading, that individual had to buy DAO tokens using ETH.

 

To obtain funding, an individual would have to go through the process involved with providing a proposal that was subsequently voted on. To proceed, an individual or a proposal had to receive 20% of the vote from all DAO holders.

 

The more funds were put towards the DAO, the more weight would be held by individuals who sat at the DAO voting table.

 

This idea was taken up with a significant amount of excitement and numerous investors rushed to buy tokens. This resulted in an investment of more than US Dollar 150 million at the crowd sale. However, shortly after this, the DAO was under a cyber-attack.

 

There are numerous speculations, rumors, and theories over how this happened, but there was never any substantial evidence that could detail how the event occurred. However, in 2016, a loophole in The DAO was exploited by an individual.

 

This loophole was a vulnerability that was noticed in the smart contract code which resulted in one-third of the funds which were held in the DAO being taken, resulting in a US Dollar 50,000 loss.

 

This significant event dealt a staggering blow to the technology which was still fairly young at the time of the event. As a result of this, the Ethereum community devised a solution that would, for lack of better words, erase the attack that had occurred.

 

Hard Fork, Soft Fork, and Ethereum Classic

‘Hard Fork’ is blockchain ‘speak’ which refers to any radical change to the protocol which, subsequently and as result, renders previously invalid blocks or transactions valid. The process works the same vice versa and it required that all nodes, and/or users, upgrade their software to the latest version thereof.

 

Blockchain forks and how they work can be explained simply in the following manner:

  • A hard fork is an upcoming software update that will conflict with the network’s current version, and
  • A soft fork is an upcoming software update that will not conflict with the network’s current version.

 

The DAO hack which had occurred had caused a hard fork which resulted in the community deciding to roll back history so that the record would never show that the attack happened. This was a significant change that was not agreed upon by everyone.

 

Due to the controversy associated with the proposal, there was a substantial division that produced two different branches of Ethereum. These two branches are essentially two completely different versions of the same original network.

 

Ethereum, as it is known today, is the version that includes the majority of users, even the founder, Buterin, who opted for the adoption of an altered transaction history while the other, Ethereum Classic, is the minority that did not endorse the idea.

 

Although Ethereum Classic has never been able to reach the same heights that Ethereum has, the currency still exists.

 

Ethereum Mining Explained

As soon as one individual wants to send etherium to another or they wish to execute a smart contract, the decentralized ledger is required to record and confirm the event and the accuracy which surrounds it.

 

This task is taken on by thousands of computers from around the globe that are connected to the Ethereum network instead of being performed by people or a company, which further ensures complete transparency associated with executions, amidst other factors.

 

The computers which are used are referred to as ‘miners’ although a more accurate term for them may be ‘transaction processors’ as the term ‘miners’ often tends to be misleading and cause confusion.

 

The computers that are tasked to ensure that transactions are both securely and properly recorded use a substantial amount of computing power so that complex algorithms can be solved in a short amount of time so that a reward, which is paid in ETH, can be obtained.

 

Proof-of-Work, or more commonly known as PoW, is what this process is known as and it ensures both the integrity and the vitality of the network holistically.

 

However, some drawbacks can be identified where PoW is concerned. One of the most notable drawbacks is that it consumes a substantial amount of electricity in addition to the process being highly competitive.

 

This has resulted in costs that cannot be afforded by people in addition to the reason why mining pools have started emerging more, which goes against the decentralized nature associated with cryptocurrencies.

 

In 2017 the announcement of plans to move away from PoW was made by Buterin. He proposed, referred to as Casper, in which he stated that Ethereum would transition from PoW to a more hybrid solution combining PoW with Proof-of-Stake.

 

In this announcement, Buterin also explained that the Proof-of-Stake or PoS protocol would validate transactions by making use of the efforts of ‘validators’, who are known by numerous other names in the community.

 

These validators are individuals of computers who put up their coins by locking the coins in special wallets. Through the PoS protocol, these computers or individuals commit funds to the system while simultaneously acknowledging that they will forfeit their deposits should they neglect to follow the rules.

 

As opposed to PoW, PoS allows for validators to place bets on blocks that they think will be added to the chain instead of an algorithm paying miners who work to solve complex mathematical problems to validate transactions and subsequently, create new blocks.

 

Validators are, instead, rewarded in proportion to their bets or ‘Stakes’ should they bet accurately on the block added to the chain.

 

The purpose and result behind the proposal made by Buterin, or Casper, is that it was meant to be a PoW similar to that of Bitcoin mining with an additional, and much-anticipated, PoS system, which is experimental.

 

This would allow for Ethereum to oscillate between the two and subsequently become completely dependent on PoS to arrive at consensus across the Ethereum Network.

 

As with most things, there are both supporters and detractors of the proposal. Those who supported Casper hoped that the change will bring about a protocol that would be more eco-friendly.

 

The detractors, on the other hand, pointed to the fact that the release of the proposal had been delayed numerous times and that this served as proof that PoS would not be successful on the Ethereum network.

 

There are, however, also others who are concerned about a more imperative issue concerning security. However, developers have assured such individuals that PoS is set to be significantly more secure than PoW.

 

A closer look at how Ethereum really works

Blockchain acts as a public ledger that lists every transaction that is executed in the network in real-time in addition to being the one thing that makes such transactions possible.

 

There is a fundamental blockchain technology that allows for both Bitcoin and Ethereum to function. The Ethereum blockchain is similar to Bitcoin as there is a copy distributed through the entire network once a transaction goes through. Subsequently, every node, or computer, on the network shares a copy of the history of this transaction.

 

Regardless of where traders reside, as long as they have internet, they will be able to access Ethereum as the distributed digital ledger is easily synchronized over a large, decentralized network.

 

Numerous blocks of data consist of both transactions and smart contracts which can be found on the Ethereum network. These blocks are then chained together and represent Ethereum’s entire history right back to the very first block.

 

These blocks are created, or mined, by users and subsequently distributed to others for validation to ensure that they are legitimate. There is a type of algorithm for reaching consensus featured on each blockchain and these algorithms are used by the network to agree on a single value associated with a data point across the whole system.

 

Key Aspects of Ethereum

The Ethereum Virtual Machine

The EVM is one of the most imperative innovations associated with Ethereum.

 

Before Ethereum was established, there was an extremely limited range of functions attributable to cryptocurrencies which would mean that Bitcoin could only operate as a digital currency, and nothing more than that.

 

This led to the crossroads where developers had to consider expanding the functionality of Bitcoin onto the existing blockchain, or they had to start anew with the entire platform.

 

This impasse was noticed by Buterin who stepped in and started pioneering EVM. Which was developed to prevent Denial-of-service attacks which had become popular in the cryptocurrency industry.

 

Also, EVM ensured that programs would not access the state of another which furthermore ensured that communication was established without there being any potential for interference.

 

When considering Ethereum, whenever a program or a transaction is executed on the network, this has to be processed. Numerous contracts were written in a variety of programming languages which were compiled into what is known as ‘bytecode’.

 

This could be deciphered and executed by the EVM which resulted in the running of the various programs despite the programming language tied to it given that there was adequate time and memory for this to be processed efficiently.

 

Contracts are executed by Ethereum nodes, or computers, which make use of EVMs. The provision and development of EVM ensured that various developers were able to build more efficient applications as they can be constructed in a centralized location, such as on the Ethereum blockchain, without requiring an original blockchain for each.

 

Smart Contracts

For those who do not have an in-depth knowledge of Ethereum, who start learning more about it, it becomes apparent that the ability to power smart contracts is a substantial power.

 

The term ‘smart contracts’ was originally and initially coined by Nick Szabo, a computer scientist, in 1996. Numerous rumors were circulating that it may have been Satoshi Nakamoto under a different alias.

 

These smart contracts can be defined as computer programs that control the transfer of digital currencies, or assets, directly between parties, or participants, but only if certain conditions are met.

 

The protocol that these smart contracts follow is based on ‘if-then statements which surround the concept that one condition must be met for an action to take place, such as selecting a product on a vending machine, inserting money into the machine, and receiving the product requested.

 

This type of basis is provided by Ethereum through these contracts as it is software that has the ability to host other software. This type of functionality is one that is not possessed by other cryptocurrencies.

 

Ethereum has the ability to handle identity systems, insurance payments, the management of permissions, and numerous other functions, which are all possible due to smart contracts found on the Ethereum network.

 

These contracts serve the purpose of a contract in an environment that is purely digital. Ethereum has the ability to make daily life more efficient in addition to being cost-effective by promoting the automation of everyday processes along with removing middlemen that are present in human systems.

 

What is an ERC20 Token?

Ethereum Request for Comments, or ERC20, is the name that is given for the standard requirements which apply to anyone who wishes to introduce a new token onto the Ethereum blockchain.

 

This was introduced in late 2015, ERC20 used to exist as mere unofficial guidelines until they were formalized on the page dedicated to Ethereum GitHub. The existence of ERC20 is attributable to the need to ensure that Ethereum-based tokens perform in a way that is consistent and predictable across the entire ecosystem.

 

When considering the sheer amount of ERC20 token contracts that existed by 2018, it is clear that there was a great need to standardize such a requirement.

 

The supply of Ether and ‘Gas’

The Ethereum system is run by an ether token or currency. It is an element that is deemed necessary or seen as a type of fuel, which is used to operate the distributed application platform known as Ethereum. It can be ascribed as a type of payment that is made by clients using the platform to machines that execute requested operations.

 

The degree of computation for an action that is performed by the network determines the cost of fuel. Everything costs an amount of ‘gas’ however, there are some things that cost more than others.

 

Whereas the supply of Bitcoin is capped, it is not the case with Ethereum. The supply along with the rate of issuance was determined by initial donations which were made during the presale in 2014, and it can be broken down as follows:

  • 72 million ether was created and provided to the contributors involved with the presale.
  • 24 million ether was created and provided to the development fund with most of it being given to early contributors and/or developers, with the remaining going towards the Ethereum Foundation.
  • 1.4 million ether was created in ‘Uncle Rewards’ – which are rewards that were provided for alternative blocks recorded that were ‘remarkably close, but not quite right’.
  • There is approximately 113,029,531.91 ether in current circulation at the time and on the day that this article was written.

 

What can Ethereum be used for?

Others use ETH mainly as the fuel of the Ethereum ecosystem. ETH is also traded, bought, and sold by various participants, speculators, and investors who passionately believe that Ethereum in addition to the network of DApps will increase in value over time.

 

Other, common uses for Ethereum include:

  • ICOs – with numerous ICOs which have taken place are located on the Ethereum blockchain, which clearly indicates that, where open-source projects and startup funding are concerned, Ethereum is a preferred option.
  • DApps – with numerous having been built on Ethereum, with numerous others joining these ranks such as Augur, enter tweet, TenX, Uport, and numerous others.
  • DAOs – apart from the infamous DAO, numerous other examples are featuring decentralized autonomous organizations that end up on Ethereum. The cryptocurrency, Dash, is technically a DAO in addition to Digix.io being another example.

 

The future uses of Ethereum, when taken into consideration, can be described at a point where it is merely the tip of the iceberg’. There is the realization of the potential that the technology has; it could support various programs that handle any financial services, information about health, organizational tools, and more.

 

How to get started with Ethereum

To get started, an Ethereum client must be downloaded as it connects to all other computers in the world which are running Ethereum.

 

The software associated with Ethereum allows the user to do a few things including:

  • Establish a connection to the Ethereum network
  • Explore the Ethereum blockchain
  • Create new transactions and/or smart contracts
  • Run smart contracts, and
  • Mine for new blocks, or stake ether PoS.

 

After having downloaded and installed the client, the computer of the user will subsequently become a ‘node’ on the network as it is running EVM, as previously mentioned and explained.

 

The user’s computer will therefore behave in the same manner as all other nodes which run the software.

 

How can I buy Ether?

The process involved with buying ether is quite simple and it involves the following steps to be followed to create a link between the user’s fiat currency and the Ethereum exchange. This process is as follows:

 

  1. The user must create an account on a cryptocurrency exchange such as Coinbase amidst numerous others including Binance, Kraken, and several others. The user must research each and decide on one before creating an account.
  2. Complete the verification process involved with registering for an account. This is a requirement from most, if not all, reputable exchanges where the user’s identity must be verified through a series of processes.
  3. After the user has been verified, they can fund their exchange account with fiat currency by making use of either of the payment options that the exchange offers.
  4. Begin to purchase ether. Users should note that exchanges do not all feature the same interface, and it may be a learning curve to navigate these, however, there are numerous YouTube tutorials should the user get stuck.

 

Secure storage of ether

There is only one way to keep ETH safe, and that is by ensuring that there is tight control over private keys. These involve asymmetric cryptography, or, more specifically, involves Elliptic Curve Digital Signature algorithms, which generate a string of numbers that act as ‘keys’.

 

The public key that the user receives is generated by their wallet and it is also tied to the user’s private key. This is what is used when receiving ETH and it is also the address of the user on the Ethereum blockchain.

 

A private key is yet another string of numbers that is generated at random which allows the user to authorize ETH transactions. A key can be perceived the same way that a PIN code is, and it should be treated accordingly.

 

Once ETH has been purchased, the owner of the ETH, or the user, has a few options of where they could keep it. It can remain on the exchange account, which is not recommended as exchanges are often targets of cyber-attacks, it can be moved into an offline wallet, hardware, or a paper wallet.

 

Offline wallets are always recommended for the storage of a majority of crypto funds as they are considered the most secure. Funds can be moved between the offline and online wallets for purchases and other transactions.

 

In addition to keeping the tokens safe, users should also be very mindful of their personal information as well. Users also need to heed caution where scams are concerned as numerous scams appear to be legitimate exchanges.

 

What are the differences between Ethereum and Bicton?

Bitcoin Ethereum
Bitcoin aims to become a store of wealth and a currency that will be adopted worldwide Ethereum aims to become the one platform for decentralized apps and smart contracts
Bitcoin was established in 2008 by Satoshi Nakamoto Established in 2015 by Vitalik Buterin
Capped at a total supply of 21 million total 18 million generated per year
Bitcoin is deflationary Ethereum is inflationary
Initial distribution is based on mining Initial distribution is based on ICO
Consensus is Proof-of-Work The consensus is predominantly Proof-of-Work but there is a move towards Proof-of-Stake
Bitcoin has used a currency Ethereum is mainly used as a token
There is a new coin issued every 10 minutes There is a new coin issued every 10 to 20 seconds

 

What are the main competitors and challenges associated with Ethereum?

There are a lot of Ethereum resources such as the first-mover advantage in addition to a development team that is growing and a substantial amount of momentum. That, however, does not mean that Ethereum does not have its fair share of challenges.

 

The Ethereum Classic fork is viewed by numerous people as a precedent that is positive for decision-making in the community however, it was a great obstacle. Another area of struggle that Ethereum has faced was the rollout of the PoW/PoS switch in addition to the inability for developers to get involved with Ethereum.

 

Another challenge faced is the inability with which Ethereum is scaling. It is in no position to run an app with, for instance, 10 million users.

 

Despite these challenges, there are solutions in progress however, their estimated time of arrival is anyone’s guess and whether they arrive at some point where they can be put in place is something that remains to be seen.

 

Ethereum also has the fact that numerous other blockchains are nipping at its heels to worry about as these blockchains aim for the same goals.

 

Some of Ethereum’s greatest competitors include:

  • QTUM – which was developed to act as a bridge between Bitcoin and Ethereum functionalities.
  • Cardano – which was founded by the original members of Ethereum which is another blockchain that is focused on smart contracts.
  • NEO – which is also known as ‘China’s Ethereum’ which was developed to digitize numerous amounts of assets that were kept in more conventional means, so that they can be used in smart contracts.
  • Ethereum Classic which is hard work for Ethereum. As Ethereum Classic is now at odds with Ethereum, it has now become a competitor that aims to achieve the same with less amount of clout and with a more divergent cloud base.
  • Lisk – which is a smart contract and DApp platform which pins its success on the development and implementation of sidechains.

 

What does the future entail for Ethereum?

Ethereum has already reached some degree of success and it is impossible to argue that Ethereum has been, and is, a substantial innovator within the space occupied by cryptocurrencies.

 

There are, however, numerous factors that may determine the direction that Ethereum will head towards.

 

Ethereum shows steady growth, but there are times when cryptocurrency markets are hit by substantial downturns. Although volatility in the crypto market is normal and is set to continue, the technologies hold the most value in addition to increasing efficiency and solving problems, which is what ultimately determines which survives and which does not.

 

Ethereum has shown that it stands firm in this category based on some of the following factors:

  • The number of Ethereum-based tokens soars in value in addition to the underlying asset showing growth.
  • Some numerous entrepreneurs and developers need substantial amounts of ‘gas’ to make use of the network which may inevitably drive the demand for ETH and subsequently increase the value thereof.
  • There are several companies such as JPMorgan Chase & Co, BBVA, and others who have joined and formed a group known as Enterprise Ethereum Alliance, or EEA, which is involved with the development of applications that utilizes the Ethereum blockchain.
  • There are numerous use cases associated with DApps which continue to show expansion in addition to the technology growing to meet consistently growing demands, with Ethereum in the first place to take advantage as it has the most evolved network.
  • The Ethereum community is not only smart, but also innovative, vibrant, and dedicated to the cause.

 

There are, however, less optimistic views that also need to be taken into consideration where Ethereum’s future is concerned, including:

  • That Ethereum cannot deal with network congestion quickly enough.
  • Vitalik Buterin, the founder of Ethereum, is a single point of failure as he is indispensable, and should anything happen to him, the failure of the project may be unavoidable and inevitable.
  • Many of the use cases, and DApps, associated with Ethereum are either merely theoretical or just impractical.
  • Community politics have the potential to turn toxic.

 

How Ethereum evolves may be the key to how quickly a decentralized future will be seen, regardless of how few people understand what it entails.

 

Pros and Cons of Ethereum

Pros Cons
The data which is written on the blockchain cannot be changed nor can it be deleted by any third-party The smart contract code is not flawless, as proven by the DAO event
Ethereum is censorship-free as Ethereum apps are based on a network that is formed according to the principle of consensus Transactions on Ethereum are not executed fast
Transparency – all records are available publicly to anyone who wishes to view it Scaling remains a challenge in every blockchain with Ethereum not being an exception to the rule
Security – blockchain is protected by cryptography and has, thus far, been immune to both tampering and hacking

 

Ethereum has had numerous achievements and obstacles that it has faced since it was founded, but it is still in its infancy when speaking in crypto-relative terms. One of the most important innovations of its time is the approach associated with smart contracts.

 

The foreseeable future for Ethereum may go either way depending on the numerous factors which have been mentioned, and whether the world profoundly moves over into an all-digital-currency monetary system is yet to be seen.

Author Details

Louis Schoeman

Louis Schoeman

Featured Forex and Stocks writer

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