What is Ethereum?

Ethereum is the second most popular cryptocurrency in circulation currently. And, considering that it was created in 2015 - 6 years after the creation of Bitcoin and after several other cryptocurrencies like Litecoin, Namecoin, Ripple, Dogecoin, Dash and Monero, it says a lot about Ethereum and, interestingly, its future.

Ethereum in simple terms is an open-source blockchain-based network that facilitates the deployment of smart contracts and the creation of decentralised applications. Ethereum also refers to the native cryptocurrency of the Ethereum network which is used as a token for payment and reward for work done on the system although it is more accurately known as ether (ETH).

The Ethereum network is much more than just its cryptocurrency so, let's start by understanding what the Ethereum network is all about.

If you've heard about Bitcoin then almost certainly you have heard about the blockchain, which is the driving force behind Bitcoin, Ethereum and several other cryptocurrencies. 

The blockchain is a public decentralised ledger that ensures that all the work on a network is distributed and transparent. That means it takes ownership away from a single entity or a corporation or a person and basically makes it the “property” of several people while ensuring that nothing shady goes on.

This is important because a lot of systems we know on and off the Internet are centralised, and that means there is a governing body that makes decisions as to how the system works and what kind of changes can be made to it. What this also means is that, if there is going to be an attack, there is a central location that can be targeted with an assurance of making maximum damage.

There are, indeed, several familiar systems that rely on the centralised model. The traditional banking system, for instance, is one relatable system that uses a centralised system but so also do many corporations and applications. And over the years, we’ve seen that the centralised model is flawed and vulnerable. But because of its advantages, such as providing trust to facilitate transactions of various kinds between two parties who do not know each other, we have kept using them. But we are in an age where the flaws of the centralised system are rapidly outweighing its utility.

This is where the decentralised system comes in.

The blockchain makes it possible to not only make transactions more transparent but also decentralise the whole operations; it not only makes transactions faster by removing the need for a middleman but also makes it more secure.

And that is the kind of technology that Ethereum works on.

In November 2013, Russian-Canadian programmer Vitalik Buterin published a white paper explaining the idea of the Ethereum network. In the paper, Buterin wrote about the technology on which Bitcoin operates, the blockchain, and how applying that same technology to power decentralised applications that operate on the principles of simplicity, universality, modularity, agility as well as non-discrimination and non-censorship.

At the time, Buterin was a Bitcoin-enthusiast who already co-founded Bitcoin Magazine. With the belief that blockchain technology could be used for more than a payment solution, which led to the Ethereum idea, Vitalik Buterin presented at a Bitcoin conference in Miami in January 2014. The idea was well-received and began to gain attention.

Ethereum’s core team which consisted of Vitalik Buterin, Mihai Alisie, Charles Hoskinson, Amir Chetrit and Anthony Di Iorio moved to make the idea a reality and on July 6th, 2014, the Ethereum Foundation was registered in Zug, Switzerland, as a non-profit organisation.

That same month, a crowdfunding campaign -- known as an Initial Coin Offering (ICO) in the crypto space -- went live to raise money to fund the project. This sale lasted till September 2014 and by then 60 million ether tokens had been sold, initially at 2000 ETH for 1 BTC and later as low as 1,337 ETH for 1 BTC.

Ethereum’s first public Testnet was deployed in early 2015 to help prepare the Ethereum network and test its validity. However, it wasn’t until July 2015 that the Ethereum 1.0 mainnet went live.

This release was called “Frontier” and it included the genesis block which included 8893 transactions of those who bought ether during the 2014 presale. Frontier saw a major upgrade in 2016; the upgrade was dubbed “Homestead”.

In 2016, a decentralised autonomous organisation called The DAO raised US$150 million in a crowdsale to fund the Ethereum project. A DAO is a fully autonomous decentralised organisation that has no single leader. Instead, the organisation is run by smart contracts on the Ethereum network.

However, a flaw was discovered and exploited in The DAO which led to the theft of $50 million worth of ETH. In response to this hack, the Ethereum community agreed on a hard fork to restore the stolen funds and upgrade the security of the network. The new fork became the main Ethereum network while the old network became Ethereum Classic.

Since then, the Ethereum network has seen several upgrades in attempts to make it more secure and to scale the network.

While most people know Ethereum because of its cryptocurrency, ether, what is really driving the wide adoption of Ethereum is its smart contracts functionality which allows decentralised applications of various sorts to be created and to operate seamlessly without middlemen.

Ethereum operates on an open-source public blockchain. That is, some users of the Ethereum network from all over the world volunteer to download the entire Ethereum system on their computers. These computers then perform tasks that ensure the whole system is not compromised. These computers are referred to as “nodes”.

Each node is rewarded for helping maintain the integrity of the system. But what do they do? Nodes enforce consensus rules built into the system. These consensus rules are a kind of “smart contract”.

Smart contracts are computer protocols that ensure that a contract between two parties is verified and enforced without the need for or intervention of a third party.

This seemingly simple functionality is actually critical to the operations of the Ethereum network as it solves major issues that plague several existing systems. For instance, it can allow financial technologies to thrive by existing on the Ethereum decentralised network with smart contracts ensuring that regardless of where you are in the world you can use financial services that were previously available only based on locality.

What are Decentralised Applications (Dapps)?

Decentralised applications are simply applications developed on a decentralised network such as a blockchain. The main difference between Dapps and traditional applications is that no one person or entity has full control over the Dapps.

Dapps could be entirely new applications created on the Ethereum network or a distributed version of an existing centralised application. An example is Twitter - an equivalent of Twitter has been created on the Ethereum network and is called Ether Twitter. While Twitter is controlled and censored with user information managed by the owner of the website, Twitter inc., Ether Twitter is uncensored and users have more control over their data.

But that is just one example; any application that can be imagined and developed can operate on the Ethereum network.

As a global peer-to-peer system, ethereum needed both a way to facilitate transactions on the system as well as a way to reward nodes that help maintain the integrity of the system. That is what ether (ETH) is. So when Ethereum is compared to Bitcoin, it is usually as a cryptocurrency since Bitcoin is mainly a payment solution.

However, there are various noteworthy differences between Bitcoin and Ethereum that we will outline briefly:

Purpose 

Bitcoin was created as a possible replacement for fiat currency. Because it is decentralised and digital, it can facilitate financial transactions between parties from two ends of the earth within record time with very low transaction fees.

Ethereum was created to serve as the native cryptocurrency of the Ethereum network to allow for payment within the system and reward miners.
Consensus Algorithm

New Bitcoins come into circulation when miners are rewarded for solving mathematical problems with computers with high computational powers. These problems are solved so that transactions can be added to the blockchain. This is known as the Proof of Work (PoW) consensus algorithm. The flaw of PoW, however, is that it requires special computers known as ASIC (Application-Specific Integrated Circuit) miners. These miners are expensive and require a lot of electricity to work.

Ethereum, though uses PoW, went a step further by also planning the implementation of the Proof of Stake (PoS) consensus algorithm. For PoS, a miner is selected to validate a block based on their stake - that is, the amount of that cryptocurrency they own. Rather than rewarding miners with newly created cryptocurrency as in PoW, miners are rewarded with transaction fees. This does not require as much power consumption as PoW.

Transaction Time

On average, Bitcoin transactions take about 10 minutes to be confirmed and added to the Blockchain while Ethereum transactions are added in just about 15 seconds. The implication of this is that transactions are completed faster on the Ethereum network.

Supply Limit

While there can only be 21 million Bitcoins in circulation, there is currently no set limit to the amount of ether that can be mined and circulated

Due to the vast utility of the Ethereum network, the popularity of its native coin, ether, has grown. In fact, the market capitalisation of Ethereum has gone up from $19.149 million in the third quarter of 2019 to $40.6 million in the third quarter of 2020.

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