What Is Ethereum?
You might think that Ethereum is just one of nearly 2,000 cryptocurrencies that are currently out there, but that couldn’t be farther from the truth. Let talk about what makes Ethereum so special and so valuable (for you technical readers out there you can find all the nitty gritty details at the Ethereum white paper).
A Short History of Ethereum
The history of Ethereum starts with Bitcoin, the first cryptocurrency in the world. As you may know, Bitcoin was created by an unknown person or group of people using the name Satoshi Nakamoto and released as open source software in 2009.
Bitcoin’s main contribution was a public distributed ledger called a blockchain. This revolutionary technology made it possible to record transactions between two parties efficiently and in a verifiable and permanent way by linking a growing list of records, called blocks, using cryptography.
In a sense, Bitcoin is just an application powered by blockchain technology. “[Blockchain] is to Bitcoin, what the internet is to email. A big electronic system, on top of which you can build applications. Currency is just one,” explained Sally Davies, FT Technology Reporter.
The problem with blockchain applications was that building them required a background in coding and advanced cryptography, and it also required significant resources. The barrier to entry was simply too high to make the technology interesting to the masses.
This changed in late 2013 when Russian-Canadian programmer Vitalik Buterin, who was at the time writing for Bitcoin Magazine, which he co-founded with Mihai Alisie, published the Ethereum white paper, describing Ethereum as “a decentralized mining network and software development platform rolled into one.”
For the first two years, Ethereum’s price remained below $10, but it exploded in 2017 and continued to surge in value until it was worth around $1,400 at its peak in January 2018. Today, Ethereum is the second biggest cryptocurrency, right after Bitcoin, and many experts believe that it will once become the largest cryptocurrency in the world and make its early adopters obscenely rich.
How Is Ethereum Different from Bitcoin?
When compared from a distance, Ethereum and Bitcoin might seem somewhat similar. In reality, the latter is a widely accepted cryptocurrency, while the former is a multipurpose platform whose token, Ether, is just one of its many components.
“Bitcoin is first and foremost a currency; this is one particular application of a blockchain. However, it is far from the only application. To take a past example of a similar situation, e-mail is one particular use of the internet, and for sure helped popularize it, but there are many others,” said Gavin Wood, Ethereum Co-Founder.
Ethereum expanded the technology behind Bitcoin and made it Turing-complete, meaning it can solve any problem that a Turing machine can, given an appropriate algorithm and the necessary time and memory. In other words, Ethereum enables developers to create just about any application imaginable and run it on its decentralized public blockchain network.
“I thought [those in the Bitcoin community] weren’t approaching the problem in the right way. I thought they were going after individual applications; they were trying to kind of explicitly support each [use case] in a sort of Swiss Army knife protocol,” Vitalik Buterin described his initial thought process when creating Ethereum.
Ethereum Under the Hood
To understand how Ethereum works under the hood, you need to understand the individual components its made of. At the core of Ethereum is the Ethereum Virtual Machine (EVM), which is the component from which Ethereum’s Turing completeness comes from. In simple terms, the EVM is the run time environment for smart contracts in Ethereum.
“[Ethereum] blockchain has some extraordinary capabilities. One of them is that you can build smart contracts. It’s kind of what it sounds like. It’s a contract that self-executes, and the contract handles the enforcement, the management, performance, and payment,” said Don Tapscott, a Canadian business executive, author, consultant and speaker.
Ethereum developers describe smart contracts as applications that run exactly as programmed without any possibility of downtime, censorship, fraud or, third-party interference. Smart contracts were first proposed in the year 1994 by computer scientist, legal scholar, and cryptographer Nick Szabo in his essay entitled simply “Smart Contracts.”
The use cases of smart contracts cover everything from digital identity management to international transfers of goods to mortgage contracts to supply chain management to auto insurance to clinical trials or cancer research, just to give a few examples.
Let’s say you own a business and want to order goods from your supplier. Typically, both parties would sign an agreement for shared peace of mind. You would then pay in advance, inspect your order when it arrives, and possibly contact the supplier if the order arrives damaged or with items missing. Smart contracts can simplify this process by automatically transferring money to the supplier as soon as the delivery has been made and the goods have been confirmed to be in acceptable condition.
Smart contracts in Ethereum are based on different computer languages, and they can be written in Solidity, a contract-oriented programming language for writing smart contracts developed by Gavin Wood, Christian Reitwiessner, Alex Beregszaszi, Liana Husikyan, Yoichi Hirai, and several former Ethereum core contributors.
What Else Can Ethereum Be Used for?
Besides smart contracts, Ethereum can also be used for implementing new cryptocurrency tokens. In 2015, Fabian Vogelsteller, the creator of Feindura, proposed a technical standard that would allow developers to create new tokens within the Ethereum ecosystem. He called the standard ERC-20, and it quickly became popular with crowdfunding companies working on initial coin offerings (ICOs).
Initial Coin Offerings (ICOs)
Initial coin offerings, or ICOs for short, are a type of, often unregulated, crowdfunding using cryptocurrencies sold in the form of tokens to speculators and investors alike. Companies that decide to sell shares through an ICO don’t have to go through traditional funding channels and give away a portion of ownership stake. ICOs additionally allow companies to avoid regulatory compliance and intermediaries, which makes them a very agile fundraising method but also creates a huge opportunity for scammers.
As of 2018, over 80 percent of all ICOs happen on the Ethereum platform. Some of the most notable past ICOs include the ICO for a new web browser called Brave, which generated about $35 million in under 30 seconds, the ICO for a cloud-based instant messaging and voice over IP service called Telegram, which amounted to over $1.7 billion, and the ICO for a decentralized data storage solution called Filecoin, which raised over $257 million.
Decentralized Applications (DApps)
Ethereum enables developers to build and deploy much more than new cryptocurrency tokens. Ethereum’s platform can also be used to create decentralized applications, usually referred to as DApps, which are run by many users on a decentralized network with trustless protocols and are designed to avoid any single point of failure.
There are currently almost 2,000 DApps on Ethereum, and the number is growing nearly every day. There is, for example, the tokenized video platform Viewly, the P2P mobile prediction exchange Ninja Prediction, the lending platform EthLend, the trading card game Darkwinds, the distributed social network ribbit, or the virtual mining platform Partial Basic.
A great example of what’s achievable on the Ethereum platform and how far the concept of decentralized applications can be taken is the DAO, a digital decentralized autonomous organization. Intended as a form of investor-directed venture capital fund, DAO was written in Solidity and crowdfunded via a token sale in 2016.
DAO had no leader, and its code, which was really a collection of smart contracts, was designed to replace the governing structures of a traditional organization. Everyone who purchased DAO tokens during its crowdfunding campaign owned a certain part of it.
“A DAO consists of one or more contracts and could be funded by a group of like-minded individuals. A DAO operates completely transparently and completely independently of any human intervention, including its original creators. A DAO will stay on the network as long as it covers its survival costs and provides a useful service to its customer base,” described the project Stephen Tual, Slock.it Founder and Ethereum’s former CCO, at the time.
Unfortunately, the dream of a digital decentralized autonomous organization came crashing down just a few months after the project started. Users discovered a flaw in one of the many smart contracts behind DAO and used it to siphon off one-third of the DAO’s funds.
The Ethereum community responded with a hard-fork of the Ethereum blockchain to restore almost all funds that were stolen. This controversial move split the Ethereum community, part of which decided to maintain the original blockchain as Ethereum Classic.
Future of Ethereum
To achieve its ultimate ambition of becoming a planet-scale computing platform that enables developers to create markets, store registries of debts or promises, move funds in accordance with instructions given long in the past, and do many other things, Ethereum developers must first increase Ethereum’s computing capacity.
“Bitcoin is currently processing a bit less than three transactions a second; and if it goes close to four, it’s already at peak capacity. Ethereum over the last few days, it’s been doing five a second. And if it goes above six, then it’s also at peak capacity. On the other hand, Uber on average—12 rides a second, PayPal—several hundred, Visa—several thousand, major stock exchanges—tens of thousands. And if you want to go up to IoT, then you’re talking hundreds of thousands,” said Vitalik Buterin in an interview with Naval Ravikant at the Disrupt SF 2017 conference.
To address the limited computing capacity of Ethereum, Buterin and other Ethereum developers have been working on a solution that would make it possible to split the Ethereum blockchain into many smaller subsets, called shards.
“Currently, in all blockchain protocols each node stores all states (account balances, contract code and storage, etc.) and processes all transactions. This provides a large amount of security, but greatly limits scalability: a blockchain cannot process more transactions than a single node can,” write Ethereum developers on GitHub.
Splitting the Ethereum network into specific shards and allowing nodes to process transactions only for certain shards would significantly increase the throughput of transactions processed in total across all shards than having a single shard do all the work.
Unfortunately, sharding is far from easy to implement, and it’s currently scheduled to take place after the Casper upgrade.
At the moment, Ethereum uses the same consensus protocol as Bitcoin, Proof-of-Work (PoW). Simply put, the PoW protocol requires a certain amount of effort from each member of the network to prevent denial of service attacks and other possible service abuses. The effort required of network members is commonly called mining, and it consists of performing countless complex calculations.
While mining keeps the Ethereum blockchain consistent, complete, and unalterable by repeatedly grouping newly broadcast transactions into a block, it’s also intentionally designed to be extremely resource-intensive and difficult. Right now, the power consumption of the entire Ethereum network is close to the power consumption of Azerbaijan, which is not a good thing considering how limited Ethereum’s computing capacity is.
To solve this problem, Ethereum developers would like to transition to Proof-of-Stake (PoS), a more progressive consensus protocol that states that a person can mine or validate block transactions according to how many coins he or she holds. Ethereum developers call its implementation Casper, after Casper the Friendly Ghost (welcome to crypto).
“Nodes, so-called ‘bonded validators,’ have to place a security deposit in order to serve the consensus by producing blocks. The protocol’s direct control of these security deposits is the primary way in which Casper affects the incentives of validators,” explains PoS Vlad Zamfir, a Blockchain architect at Ethereum.
“Specifically, if a validator produces anything that Casper considers ‘invalid,’ their deposits are forfeited along with the privilege of participating in the consensus process. The use of security deposits addresses the ‘nothing at stake’ problem; that behaving badly is not expensive. There is something at stake, and bonded validators who misbehave in an objectively verifiable manner will lose it.”
If everything goes according to plan, the foundations for the transition to Casper should be laid in the platform’s next hard fork, Constantinople, which is expected to go live in October 2018.
To Sum It Up
Ethereum is not just the second largest cryptocurrency in the world by market capitalization but it’s also a visionary platform that can already be used to power the next generation of applications. The team behind Ethereum has proved that they can deal with unexpected challenges, and it will be interesting to watch where they manage to take Ethereum in the future.