What is Ethereum? An Explanation for Beginners

Ethereum is a cryptocurrency like Bitcoin, but it is very different from Bitcoin. They’re both blockchain technologies, but where Bitcoin is an open source peer-to-peer payment platform, Ethereum is an open source decentralised application (dApp) platform.

Ethereum’s model enables developers to create their own dApps without having to create their own blockchain. What does that mean, I hear you asking.

Well, if we think of blockchain as the Internet 3.0, then Ethereum is kind of like an operating system, like Apple and the App store. It has actually made it much easier, faster and cheaper for any company wanting to create their own blockchain application. But let’s take a deeper look at what Ethereum is…

Who Created Ethereum?

Ethereum was first conceived by Russian Candaian Vitalik Buterin who wrote and released the whitepaper in 2013. The whitepaper described Ethereum as an alternative platform designed for any type of decentralized application developers would want to build.

Vitalik

After releasing the whitepaper, other developers Mark Wood and Joe Lubin joined ranks, and after a crowdfunding round which made $18m, they launched Ethereum in July 2018. SInce its launch Ethereum has become the second biggest cryptocurrency by market cap, and is the most built on platform in the blockchain space.

What is Ethereum?

Ethereum is decentralized on thousands of different computers, so unlike the Internet we know today, there is no central point of failure. Unfortunately, this is what slows Ethereum and all other blockchains down, but these issues are being worked on and will be sorted.

Like all blockchains, the highly decentralized and cryptographic nature of Ethereum makes it much more secure than any IPS.

If you look at the Internet and how it is now, all data is stored in clouds and servers by companies like Amazon and Google. It may seem fine to some, but our very data that these servers hold is vulnerable to hackers or governments.

The platform Ethereum is creating, however, is a decentralized blockchain “Internet”. This basically means that all the data is stored on all the computers that run the protocol, and to be able to hack it means you will have to take more than 50% control of all the network.

ETH is Ethereum’s Currency

Like Bitcoin, Ethereum needs a currency to generate the network. It’s needed by any developer wanting to build on Ethereum, and it’s also used to pay for transactions, which goes to the miners who help verify all transactions.

Miners are also rewarded with newly minted ETH for every block that is added to the blockchain. For now it’s 2 ETH for every block that’s added. For a full look at ETH, click here.

Ethereum Virtual Machine (EVM)

The core innovation of Ethereum – the Ethereum Virtual Machine (EVM), a Turing complete software generates the Ethereum network. It allows anyone to run any program, regardless of the programming language and the language is converted into a language the EVM can read.

This makes it possible for any developer to code any program in any language and install it on Ethereum. This flexibility has opened many doors for developers and companies wishing to break into the blockchain space.

And we have seen Microsoft and Ernst Young partner with Ethereum Development Studio ConsenSys to create a middleware solution for large companies to exchange data privately via the public Ethereum blockchain, which will allow businesses to use the blockchain in a private manner.

Proof-of-Work or Proof-of-Stake

Ethereum is like Bitcoin in that it’s a proof-of-work consensus mechanism. This means that every transaction that goes through the Ethereum blockchain, it’s verified by miners and nodes.

PoS vs PoW

These miners and nodes are decentralized around the world, and because the network has to be in full agreement before any transaction can be added to the blockchain it causes a backlog, and at the moment only 15 transactions a second are possible on Ethereum.

To combat this, Ethereum devolpers are actively developing a proof-of-stake system. When it’s developed, Ethereum will gradually evolve from a PoW to a PoS network. Once it’s a fully PoS blockchain, it’s believed Ethereum will be able to handle unlimited transactions per second.

For a deeper look at Ethereum PoS upgrade, look here.

As well as PoS being faster another major difference is that Ethereum will no longer use miners to validate transactions. Instead people who hold ETH will be able to stake it, and they will be the ones who validate transactions.

Stakers will be rewarded with the block reward and transaction fee, just as miners are today. It’s not clear how many ETH you will need to stake, but you can be sure, the more ETH you stake with, the more ETH you will earn.

Smart Contracts

One of the main differences with Ethereum and Bitcoin is Ethereum’s smart contract capabilities. Bitcoin can host smart contracts but in a much simpler form. Ethereum, however, was designed specifically for smart contracts.

A smart contract is a computer-coded exchange that is agreed upon by two or more parties, and it can only be executed when all terms of the smart contract are met. They run exactly how they are programmed to run, and with the decentralized, immutability of Ethereum it eradicates any possibility of fraud.

 Smart contracts can be used for many things, such as money lending, property and even voting. In fact all dApps built on Ethereum are basically smart contracts.

What are dApps?

Think of apps in the App Store or Google Play and you have part of your answer. They’re applications built on a blockchain, or should that be decentralized apps (dApps). The fact they’re decentralized, also means they’re unstoppable applications.

Any dApp built on Ethereum will be like a democratized version of what we have today. Ethereum blockchain is immutable and any data that is input by a user within these dApps and ultimately on Ethereum will be owned by the user.



Nobody will be able to stop it, because any data that is added to Ethereum cannot be erased. It’s immutable and uncensorable. So, let’s say there’s a decentralized YouTube. We will know the heavy handed role Google is playing by removing accounts or shadow banning etcetera. Well, this won’t be possible by any dApp creator.

All content will be immutable and completely owned by the creator and any dApp, whatever it is, will not have control of the data.

Conclusion

Ethereum is a cryptocurrency, but is much more than a currency. The currency ETH is needed to power and secure the network, but the Ethereum blockchain makes it much more accessible for anybody wanting to create a secure dApp.

Smart contracts power dApps and many different types of dApps are being created by many different sized startups. For them to realise their potential, however, Ethereum needs to scale. The scaling issue is being worked on and once Ethereum can scale we could quite well see the Internet move onto the blockchain.

We are in the very early stages of Ethereum, and nobody knows exactly what it’s capable of. But huge corporations are taking note, and are building on it. They can see the potential of Ethereum, and the more you look into it, so will you.

Author: Tommy Limpitlaw

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When I came up with Ethereum, my first first thought was, 'Okay, this thing is too good to be true.' As it turned out, the core Ethereum idea was good - fundamentally, completely sound

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