What is Ethereum?

What is Ethereum?

Whereas the Bitcoin blockchain was primarily designed to keep track of transactions and ownership of digital currencies, the Ethereum blockchain was developed to run decentralised applications. The easiest way to understand the Ethereum platform is to think of it as a shared supercomputer, which allows various apps to run simultaneously. As everyone makes use of the same global supercomputer and has agreed to establish standard rules regarding its code execution, developers can use the platform to build decentralised applications. In other words: all platform users assist in keeping the system in the air; the applications are not located on the servers of one particular organisation.

The blockchain’s very own token, which serves as the platform’s metaphorical fuel, is called ether. Ether is a necessity for processing transactions and publishing applications using smart contracts. It enables miners to take up the transactions and process them.

The history of Ethereum and the ETH price

Ethereum was first envisioned in a white paper forwarded by Vitalik Buterin to a small group of friends by the end of 2013. The Russian programmer argued that Bitcoin needed an additional feature called scripting language. This is a programming language that allows the execution of specific applications. Unfortunate for Buterin, he did not manage to convince the Bitcoin community of this necessity. He then decided to build his very own platform. Two months later, the project had attracted eight co-founders and a growing army of developers and backers. Ethereum was publicly announced later that month at the North American Bitcoin Conference.

The project was initially financed by co-founders Anthony Di Ioro and Joseph Lubin, who provided the project with capital of their own. Their initial idea was to launch Ethereum as a commercial company. Hence, in February 2014, they set up a Swiss legal entity under the name ‘EthSuisse’. Shortly after, Buterin changed his mind, and he unilaterally decided to continue the project as a non-profit organisation. Within this context, he founded the now well-known Ethereum Foundation in July 2014.

The launch of the Ethereum Initial Coin Offering (ICO), which occurred in the same month, lasted for a total of 42 days. It allowed people to exchange their bitcoins for Ether, the unit that serves as the platform’s fuel. The ICO was a huge success: Ethereum collected more than 18 million dollars in Bitcoin. In total, users exchanged about 31,000 bitcoins for 60 million ethers. ICO participants paid an average of $0.30 per ether. It is hard to imagine that it was possible to gain ether against this price, only a little over five years ago.

Approximately a year after the ICO, the Ethereum platform went live. A couple of exchange platforms have allowed trading in ether since August 7, 2015. In the following year, the ethereum price surged to $10. The rest is history. People initially thought that the project was primarily in need of a well-functioning application to attract more users to its platform. But Ethereum’s main contribution so far lies in its facilitation of other ICO’s. The development of the ERC-20 token standard made it much easier to use the platform to publish native tokens. All users have to do is to copy-paste a piece of code and to write a white paper. Due to Ethereum’s success as a crowdfunding platform, ICO’s acquired a large share of the ether pool.

Probably one of the most well-known applications on the platform was the DAO (decentralised autonomous organisation). This project was promoted as the first investment fund without an identifiable leader. The company would be run by its investors, with a focus on democratic decision-making. The smart contract enabled investors to cast their votes on Ethereum projects that appeared profitable. The DAO project collected over 150 million dollars in ether. Approximately 11,000 investors pitched in. People became so enthusiastic about the project that they started to acquire ethers, just to be able to invest in the DAO. By May 2016, this development caused a new record high of $14 per ether. Unfortunately, the success of DAO did not last for long. In June, a hacker managed to expose an error in the project’s code. He then cleverly extracted about a third of the DAO’s assets. As blockchains are irreversible by design, the transaction could not be annulled. For part of the Ethereum community, the hack did not pose a significant problem. They argued that its developers should have been a bit more careful with the code. But the Ethereum Foundation disagreed. It decided to implement a software update that erased the DAO’s entire existence. This allowed the return of funds to their original owners, but part of the community did not agree with this measure. They argued that the idea behind blockchain was to develop a market economy that explicitly excludes intervention by central authorities. This group considered the decision of the Ethereum Foundation to violate this principle. Hence, they decided to split off from the rest of the Ethereum community. It resulted in a blockchain fork and the creation of Ethereum Classic, which nowadays exists alongside the Ethereum blockchain. The DAO hack can still be found in the Ethereum Classic blockchain’s transaction history.

Why should I buy Ethereum – ETH?

Ethereum is one of the two most successful projects in the industry. In terms of net market value, it firmly retains its second place. People constantly buy Ethereum and sell Ethereum for it’s potential. Ethereum has the highest number of programmers working on the development of its platform of all cryptocurrencies. Besides, several major companies are currently developing applications for the Ethereum blockchain or are aiding in the platform’s growth. The well-known consultancy firm Ernst & Young, for instance, announced in April 2019 that they were engaged in a project that would allow anonymous transactions on the Ethereum blockchain. It shows that aside from the developers working on the platform, Ethereum’s potential is also recognised by major commercial parties.

Who came up with Ethereum?

It is impossible to decouple Ethereum from the project’s conceiver, Vitalik Buterin. This Russian programmer started his career in the industry in 2011. He was the co-founder of Bitcoin Magazine. He had been interested in programming, mathematics, and economy from a young age. Obviously, having these interests is extremely helpful when working in the crypto environment. By now, Buterin has become somewhat of a legend; only second to Satoshi Nakamoto, he is probably the most famous individual within the entire crypto community. He published his Ethereum white paper in 2013, and since then the young programmer’s reputation has skyrocketed. In 2018, he received an honorary doctorate from the Faculty of Business and Economics of the University of Basel, for his contributions to the industry and the discipline of computer science.

How does Ethereum work?

The Ethereum platform is best described as a globally decentralised computer hosting user-developed applications. The application ruleset is defined decentrally by the publication of smart contracts on the platform. This means that everyone who contributes to the validation of the blockchain will receive these rules, which allows them to verify the application. Consider that the Ethereum network consists of six participants, who are coincidentally all located within the same room. Alice, one of the six participants, would like to make a wager with Bob. They want to predict which team will win the English Premier League this year. Both of them decide to put a one ether deposit. Alice thinks Manchester City will win the league; Bob is convinced Arsenal will grab the title. Next, Alice and Bob draft a document with the agreed-upon rules of the wager (i.e., the smart contract). All six participants receive a copy of the smart contract. When the season has drawn to a close, and Manchester City managed to grab the title, the participants confirm that Alice will now have two ethers, whereas Bob is left with none.

This is a simple briefer on how the Ethereum platform works in practice. It also exemplifies what a simple decentralised application could look like. Essentially, it is just a set of standard rules and agreements that are continuously verified by the entire network. If two participants agree to exchange tokens, everyone will need to take a note of it in their respective ledgers.

The example also makes it easier to understand the importance of decentralisation. It involves six participants in one room, who all know each other in person, and can directly interact with one another. Now, imagine that Bob manages to bribe some of the participants and convinces them to disburse the winnings of the wager to him, regardless of the bet’s outcome. If he manages to convince more than half of the participants, he will be able to influence the result of the smart contract. The more participants are engaged in the platform, the more difficult it will be for Bob to approach them and to cheat the system. Ethereum currently holds about 9000 nodes. Nodes are computers that help keep the network up. You can imagine that it is practically impossible to cheat with such a sizeable user base.

Which problem does Ethereum solve?

Ethereum is a platform that can be used to host decentralised applications. It provides both the users and developers of applications with a certain degree of assurance and freedom that cannot be offered by centralised platforms that already exist. For instance, have you ever published content on a social media platform that might not be to the liking of its administrators? If so, then you are in risk of your content being removed by them, or even account closure. Decentralised applications, however, return the power that usually lies with companies to its users.

Another problem that decentralised applications solve is downtime. In theory, decentralised applications should always be online. Typically, a company’s servers are located in one particular place, which makes them vulnerable to external attacks or downtime. Ethereum’s decentralised applications run on all 9000 nodes currently occupying the network. If a few of these nodes temporarily disappear, nothing terrible will happen, as the application will remain accessible for all.

What are the pros and cons of Ethereum?

The main advantage of Ethereum is that it provides developers with a place to build decentralised applications. These applications contain specific rulesets that are shared with the entire network. This renders the platform much more robust than a platform with centralised applications. The rules are predetermined: they cannot be altered retrospectively by a central authority. The idea is that this will help return the power of major platforms to its users. Whereas Bitcoin is typical of the democratisation of our money, Ethereum symbolises the democratisation of the platform economy.

Currently, the main disadvantage of Ethereum is its limited platform scalability. This became painfully obvious following the arrival of CryptoKitties, a decentralised application for raising and grooming cats. The app became so incredibly popular in a short period that the network became overloaded and was no longer able to process all transactions properly. People had to queue up before their transactions were finally processed. They also often paid high transaction fees. The fact that a seemingly harmless app was able to paralyse the Ethereum blockchain completely caused a lot of concern within the community. If Ethereum is ever to become a platform for dealing in stocks and other financial products, it will need to improve its scalability.

What makes Ethereum unique?

Whereas Bitcoin is essentially just a digital payment network, the Ethereum blockchain functions as a shared computer hosting applications that are managed decentrally. Vitalik Buterin wanted to add this particular functionality to Bitcoin, evoking a great deal of resistance within the community. Therefore, he decided to launch his own project. Buterin refers to Ethereum as the ‘computer of the world,’ a platform allowing applications to run independently of central authorities.