Understanding Ethereum


       Turner Schumann
Crypto Analyst | Blockchain investor

 

Ethereum has well established itself as the #2 player in the cryptoasset market, behind none other than Bitcoin. In short Ethereum is meant to be a ‘World Computer’, providing the ability to replace centralized servers with thousands of nodes (individual computers) across the world.

A common misconception is that Ethereum is a currency in the same sense as Bitcoin. Ethereum is not a currency, it is an open-source blockchain-based platform that anyone is able to develop decentralized applications (Dapps) upon. Within the Ethereum platform is a native currency called ether that is used to fuel the applications built on the platform.

Data as at February 18, 2018. Retrieved from: bitinfocharts.com

Origin

Blockchain technology was first introduced by Bitcoin as a way to keep track of digital cash ownership in a tamper proof way through a shared ledger. Many soon realized blockchain technology was not limited to a peer to peer digital cash system, it could be used to store any information of value. This opened blockchain technology to a plethora of use cases beyond digital currencies. People began developing a wide variety decentralized applications, however it required significant resources as well as experience in advanced coding and cryptography.

In 2013, Vitalik Buterin proposed Ethereum as an open source platform that would significantly lower the entry barrier for programmers to develop their own decentralized applications. The development of the platform was funded through a crowdsale in the summer of 2014 and Ethereum went live on July 30th, 2015.

Smart Contracts

Similar to how the internet protocol HTTP (Hypertext Transfer Protocol) facilitates communication over computer networks, Bitcoin and Ethereum are considered protocol layers because they are what facilitate actions on the blockchain. On top of the protocol layer third party developers can develop their own programs on what is called the application layer. A primary difference between Bitcoin and Ethereum is the ease of developing on the application layer. Ethereum’s primary programming language, Solidity, is less restrictive compared to developing on the Bitcoin platform and notably allows for developers to program smart contracts. A smart contract is computer code that can facilitate the exchange of any information of value such as money or property ownership. Smart contracts are called “smart” because they can self-operate when specified conditions are met, this allows middlemen to be cut out of transactions. The fact these smart contracts run on the blockchain is attractive because they can operate in a transparent and conflict-free way, without the risk of fraud, censorship, or interference.

A real world example of smart contracts being used is in crowdfunding. The incumbent crowdfunding platforms such as Kickstarter and Indiegogo act as the middlemen in crowdfunding transactions. They collect money from public supporters and pay it out to the project if the funding goal was reached before the deadline. These organizations are useful but they take a high fee for their services and there is an inherent risk of human error. Ethereum allows these types of platforms to be replaced by autonomous smart contracts. The entire crowdfunding transaction can be written into smart contracts as demonstrated here. This allows for middlemen along with their high fees to be cut out as well as a much lower risk of error because smart contracts are made available for public scrutiny.

Ether

As noted in the introduction, Ethereum is the platform and ether is the fuel used to power applications built on the platform. Although ether is now commonly used as a digital currency in peer to peer transactions, it is intended to be a digital commodity. Just as a car requires gasoline to power its engine, applications built on the Ethereum platform require ether to obtain computational power. Ethereum miners provide processing power to these DApps and, in return, are compensated with ether.

ICOs and Ethereum Tokens

Applications built on Ethereum use ether to run, however they are also able to issue their own cryptotokens with the Ethereum Token Standard. The applications that issue their own token may then require users to obtain these tokens before they are able to access or interact with their application.

Initial Coin Offerings (ICOs), a form of crowdfunding through issuance of tokens, exploded in popularity in 2017. This was largely in part due to the Ethereum Token Standard making it possible for developers to create their own token without having to code their own blockchain from scratch. Additionally, developers building on the Ethereum platform are not required to gain their own miners, they are able to rely on the thousands of miners already processing transactions on the Ethereum blockchain. Because so many tokens are built using the Ethereum Token Standard, the Ethereum blockchain now processes close to half of all USD value across all blockchain platforms, significantly more than Bitcoin.

Ethereum Classic and DAO Hack

The DAO (Decentralized Autonomous Organization) was a DApp built on Ethereum that enabled crowd based venture capital. It was the most popular project on Ethereum at the time and because it was built on the Ethereum blockchain the code was publicly visible. A hacker (or multiple) noticed a flaw in the DAO code and was able to route 3.3 million ether into an account under their control. As this was about 15% of all circulating ether at the time, the Ethereum team decided to undergo a hard fork. They effectively created a new official blockchain, one in which the hack had never occurred. However, the original blockchain, the one in which the hack occured, still exists and many choose to keep supporting it. To reduce confusion, the original blockchain is now called Ethereum Classic while the new and officially endorsed blockchain is known simply as Ethereum.

References:
Ethereum Foundation. (2018). Ethereum. Retrieved from: https://www.ethereum.org/
Ethereum Foundation. (2018). Ether. Retrieved from: https://www.ethereum.org/ether
A Next-Generation Smart Contract and Decentralized Application Platform. Retrieved February 11 , 2018 from: https://github.com/ethereum/wiki/wiki/White-Paper
etherchain.org. Ethereum Contract. Retrieved from: https://www.etherchain.org/account/0x304a554a310c7e546dfe434669c62820b7d83490

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One comment on “Understanding Ethereum

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