To fully understand what Ethereum is, you need to know a little about blockchain, a word that cryptocurrency followers have been taking for granted.
The easiest way to explain blockchain is with an analogy from your daily life. If cryptocurrency is e-mail, blockchain is the Internet.
What Is Ethereum?
At its basic level, Ethereum is a software platform based on blockchain technology. The platform allows for the building and deployment of decentralized applications.
Until very recently, building blockchain applications used to require significant resources and a specialized understanding of mathematics, coding, and cryptography.
But, thanks to Ethereum and its tools to build decentralized applications, previously unimagined applications can now be actively developed and deployed faster than ever before.
What Is the “Ether” in Ethereum
People interested in Ethereum often ask “What is Ether?” Understanding Ether is very crucial, because it is fundamental to the functioning of Ethereum.
Just as all machines use some sort of fuel, so do blockchains. Ethereum uses Ether, a unique code that can be used as a way to pay for running an application or a program. Just like a slot machine requires coins (or these days, a prepaid card) to run it, clients must use Ether as payment to run their requested operations on Ethereum.
Ethereum History: Who Invented Ethereum and Why?
According to the man who invented Bitcoin, Ethereum’s history is directly linked to Bitcoin. Four years after Bitcoin was launched, Vitalik Buterin, a 19-year-old programmer from Canada, dreamed up a new platform based on Bitcoin. Buterin’s idea was to create an alternative platform that would go beyond the financial uses allowed by Bitcoin.
Vitalik released a white paper about Ethereum in 2013, explaining how developers can build any type of decentralized application on it. Ethereum facilitates the easy creation of smart contracts, with the help of self-enforcing code that developers can tap for a range of applications.
Vitalik was assisted by co-founder Dr. Gavin Wood, who wrote Ethereum’s “technical bible.” This book outlines the specifications for the Ethereum virtual machine (EVM), which handles the state of the ledger and runs smart contracts.
In July 2014, Buterin and his co-founders launched a crowdfunding campaign in which participants purchased Ether as shares in the project. The campaign raised more than $18.0 million and, within a year, they set up a smart contract platform on which developers could create their own decentralized apps.
The smart contract platform took off, creating an ecosystem of hundreds of developers and even drawing the attention of tech giants like International Business Machines Corp. (NYSE: IBM) and Microsoft Corporation (NASDAQ: MSFT).
How Ethereum Is Different from Bitcoin
Ethereum, like Bitcoin, is a distributed public blockchain network, but they differ substantially in purpose and in capability. While Bitcoin is a currency, Ethereum is a token. What Bitcoin does for money, Ethereum does for contracts.
Ethereum allows you to write a digital agreement in which every command will result in a precise action and nothing else. Up until now, you wrote your signature on a page to declare that you agreed to the terms of the contract. Ethereum significantly improves on this archaic system by making the proof of transaction digital and forever indelible.
Bitcoin vs Ethereum
In addition to this huge difference on a broad level, there are other factors that set Bitcoin and Ethereum apart.
1. With Ethereum, the block time is set as 14–15 seconds, as opposed to 10 minutes with Bitcoin. So clearly, Ethereum allows for faster transaction times.
2. Ethereum releases the same amount of Ether year after year, whereas the Bitcoin block rewards halve every four years.
3. The cost for Bitcoin transactions are standardized, whereas, with Ethereum, the costs may change according to the computational complexity, bandwidth use, and storage needs.
4. Ethereum’s very own Turing complete internal code allows for anything to be calculated, provided that there is computing power and time. This manner of flexibility is absent in Bitcoin.
5. Ethereum was crowdfunded, whereas Bitcoin was released—with most of the 21 million Bitcoins in existence being owned by early miners.
6. Unlike Bitcoin, Ethereum discourages centralized pool mining through its Ghost protocol.
7. Ethereum uses Ethash, a memory hard hashing algorithm. Bitcoin uses centralized application-specific integrated circuits (ASICs).
How Ethereum Works
The Ethereum blockchain is an ever-growing database of a certain kind of data. Once data is stored in the database, it can never be modified or deleted.
Several thousand individuals maintain the database, and everyone has a copy of that database. Whenever anyone does something important in the network, like transferring money, everyone in the network is intimated.
What Are Smart Contracts?
Ethereum, like any other blockchain, needs thousands of people running software on their computers (nodes) to power the network. Every computer in the network runs something called Ethereum Virtual Machine (EVM).
The best way to understand EVM is to think of it as an operating system that understands and executes contracts written in smart contract-specific programming languages that are compiled into “bytecode,” which EVM can read and execute.
The apps/software/contracts executed by EVM are called “smart contracts.”
Now, to get anything done on this world computer, you need to pay a price with a cryptocurrency native to Ethereum, called Ether. As more smart contracts get developed, the potential value of Ether will be significantly boosted.
Once the contract is commissioned, all the nodes execute this contract using their EVM. The EVM executes the contract with the initial rules programmed by the developer of the contract.
Liken it to a bet placed on a horse at a derby. Ordinarily, when a horse wins, the people who put money on that horse need to go to the bookie to collect their money. The bookie (provided he is straight shooter) makes sure the right amount of money goes to the right person.
A smart contract takes away the middleman (the bookie). When a bet is placed, the contract is written on the blockchain. And every EVM has a copy of the contract. When a horse wins, the money automatically goes to the bet winners. And nobody can change the contract.
Ethereum’s smart contract is like a trusted mutual friend, written in code.
Just like in any other blockchain, whenever a transaction happens, it’s announced to the whole network and everyone makes a note of it. In addition, every node on the network executes the instructed smart contract to synchronize their EVM with the network. Every tiny execution is then stored on the blockchain to make it permanent.
Is There an Ethereum Supply Cap?
There is no Ethereum supply cap. This is different from Bitcoin, which has a pre-set mining limit of 21.0 million bitcoins.
Though there is no fixed supply cap for Ethereum right now, the number of coins added per year varies a bit, and is currently roughly 20% of the supply. Although the annual Ether circulation limit could go up or down, Ethereum investors are not overly concerned about the supply. As of this writing, there are more than 96.0 million Ethers in circulation. (Source: “Total Ether Supply and Market Capitalization,” Etherscan, last accessed November 28, 2017.)
Also remember, a larger supply means that more people will have a chance to own some Ethereum at affordable prices.
Ethereum Pros and Cons
The cryptocurrency market is currently flooded with more than 1,300 cryptocurrencies, and each one of them has some great advantages, as well as some disadvantages. Ethereum is no different, so it makes for a good strategy to weigh the Ethereum advantages and the Ethereum limitations against your individual needs.
- Uses the Turing language, which allows the exchange of contracts on the network without the help of third parties.
- Very strong corporate banking, thanks to the Ethereum Alliance Enterprise. Among cryptocurrencies, it’s next to Bitcoin in corporate buy-in.
- Good strategic roadmap with three-year and five-year targets.
- The pro-active development team working on new technologies to boost stability, security, scalability, and functionality. The team is currently working on the ERC223 token standard, which is upgradeable from ERC20.
- New entrants can piggyback off Ethereum’s blockchain; they do not need to build their own blockchain. By syncing your system to Ethereum’s existing blockchain, you save time, effort, and money.
- Enables you to launch your offering (ICO) faster, so you get back to your business quicker.
- It is a platform, so it will never be seen as efficient as other blockchains like Ripple.
- If Ethereum goes down, it will take all the smart contracts down with it.
- If you want to improve the functionality of your blockchain, you can’t. In fact, you have no say in the future development plans of the blockchain you are using.
- Ether requires “gas” to complete transactions. At first, the gas fees might not feel like much, but, as your platform scales up, the gas fees will multiply.
- Launching an ICO using a smart contract token from Ethereum might make it seem like you’re being lazy, greedy, or lacking the desire to build your own product for the long term.
Ethereum Potential: What’s in Store for ETH Future Value
With many innovative applications for services such as “Uber,” Ethereum has big ambitions to be an enabler of the decentralized cyber economy. With this in mind, the ETH future value is set to take off.
Even though Ethereum started as a supporter of only financial applications, it soon expanded into the non-financial space.
A sneaker startup using both Bitcoin and Ethereum blockchains preferred the Ethereum framework and coding language, since it was more user-friendly and flexible.
But there is more to it. For developers, it means greater efficiency and cost savings while writing new applications. For business users, it means a chance to create new opportunities by redesigning their existing business structure. When a program can allow all that on its blockchain, the future sure looks good.