What is Ethereum?
After the appearance of Bitcoin, a long line of cryptocurrencies with different purposes and uses has followed. But if anyone has managed to position itself in the crypto world, that has been Ethereum development, which has long been occupying the second place in popularity among current Blockchain options.
To know what Ethereum is, we must know what Blockchain is. Thus we can define it as an open software platform based precisely on the blockchain, which also allows developers to create and implement decentralized applications. That is, Ethereum is a Blockchain on which different projects can be created.
Although Ethereum is a distributed blockchain network like Bitcoin, it has important technical differences and a different purpose as well.
In fact, its developer, the Russian writer, and programmer Vitalik Buterin , mentioned this project in 2013, when he was working on Bitcoin. For him, this Blockchain had to be more customizable and have smart contracts, which automatically determine when payments had to occur. That is why Buterin decided to step aside from the Blockchain pioneer and create Ethereum.
The creation of Ethereum also gave rise to a term widely used today in the crypto world: the Initial Coin Offering ( ICO ), which consists of raising funds for the application of a project based on Blockchain. After selling 60,000 million tokens, called Ethers (we will see them later), the entire Ethereum ecosystem was developed.
Today this platform has given rise to multiple projects with blockchain technology and has become a reference within the industry. So let's take a deep dive into what Ethereum is and what it offers.
Ethereum, a Blockchain beyond money
As we already know, Ethereum is also a Blockchain or distributed ledger technology, but it has a Turing programming language and allows anyone to create smart contracts or decentralized applications just by writing the logic in few lines of code.
The idea that Vitalik Buterin had with Ethereum was to improve the version of Bitcoin in terms of custody of the blockchain, withdrawal limits, financial contracts or random gaming market, and all this through a very generalized programming language.
But both cryptocurrencies are closely related.
At its core, the development of Ethereum protocol moves far beyond the currency. Today its platform serves as decentralized file storage, decentralized computing, decentralized prediction markets, and non-money-related applications.
That is why this new technology maintains a certain distance from the target of Bitcoin. But what are the most prominent differences between Bitcoin and Ethereum? Let's see them below.
4. Bitcoin and Ethereum, sister Blockchains but with different approaches
Practically Bitcoin pretends to be a deposit of wealth, something like a new digital gold, with which people can progressively replace conventional money. Instead, in the field of smart contracts and decentralized applications, Ethereum wants to become a great platform. In other words, a new world computer.
While Bitcoin stores balances and transactions on the blockchain; Ethereum stores other data related to finances, personal information, health or governance. This data is accessible and usable from running computer programs called decentralized apps or “dapps”.
Among the main differences between Bitcoin and Ethereum, the following stand out:
Bitcoin applies the blockchain to make online Bitcoin payments between peers, while Ethereum development uses its blockchain to create new decentralized applications.
Although both have their tradable cryptocurrencies, Ether (Ethereum's cryptocurrency) is mined so that application developers can pay transaction and service fees on the Ethereum network. Bitcoin is only mined to preserve its value.
Within Ethereum there is a second token: Gas. It is used for the payment of miners that include transactions in their block. Each smart contract execution requires a certain amount of gas to entice miners to take the transaction and include it in their blocks.
Bitcoin has a fixed number of production: 21 million. For Ethereum there is only an annual production ceiling of 18 million.
Both Bitcoin and Ether result from a process called mining. However, Ethereum wants to migrate to a new consensus algorithm in development, called Casper, which should be more environmentally aware than mining is.
Now that we know the main differences between both cryptocurrency models, it will be important to know how Ethereum works.
4. How does Ethereum work?
Ethereum bases its operation on a virtual machine or ethereum Virtual Machine (EVM), which executes an intermediate code or bytecode, which is a mixture of LISP, E nsamblador, and Bitcoin script.
This machine allows anyone to run any program regardless of the programming language they use. The creation process for blockchain applications is much easier because, instead of having to create a completely original blockchain, it allows the development of thousands of different applications on the same platform.
The programs that carry out smart contracts are written in complete Turing- like high-level programming languages, such as Serpent or Solidity. But what is a smart contract?
A smart contract is a term used to describe a computer code that can facilitate the exchange of anything of value: money, content, property, or shares. Applying a smart contract on the blockchain implies that this self-operated computer program will run automatically when certain specific conditions are met. As these contracts are executed within the Blockchain they will be executed as they were programmed, without the possibility of censorship, unavailability, fraud, or interference from third parties.
For example, if Juan has his identity document, will, and property of his house registered in the Ethereum blockchain, it is expected that when he dies, his death letter will be uploaded to the network. With it, Ethereum could automatically start another series of procedures thanks to the programming of smart contracts: your will and the transfer by inheritance of your house, to say the least.
Ethereum smart contracts claim to make daily life simpler, more efficient, and less expensive. How? Automating common processes and eliminating intermediaries that delay these procedures so much.
With Ethereum, any centralized service can be decentralized, from financial services to the registration of titles or elections at different levels. But it can also be used to create Decentralized Autonomous Organizations (DAO ). These are organizations without a single leader, which are executed by programming code, on a collection of smart contracts written on the Ethereum blockchain. This code replaces the rules of a work organization chart and thus eliminates the need for certain personnel. The DAO is owned by everyone who buys tokens, but these do not amount to shares of equity or property, but rather grant voting rights to their owners.
Currently, Ethereum is also used as a platform to launch other cryptocurrencies. Based on the ERC20 token standard, defined by the Ethereum Foundation, any developer can issue their own token versions and collect funds with an ICO. In this way, fund collectors establish their collection strategy, the goal to be achieved, and receive Ethers in return during said collection. With that financing model, Ethereum has raised billions of dollars from ICOs on its platform. Even EOS, one of the most valuable cryptocurrencies in the world, is an ERC20 token.
We already know that Ethereum is not just a network to reflect transactions of monetary value; it is a network that feeds contracts based on its protocol. These contracts are open source that can be used to securely run various services: financial exchanges, trade agreements, voting systems, intellectual property, and decentralized organizations.
5. Ether, the fuel of Ethereum
If Ethereum works that is thanks to Ether, the cryptocurrency used by the platform's clients to pay other people or machines that execute the requested operations. It ends up being the incentive to ensure that developers write quality applications and that the network remains in balance.
Ethers were first offered in a presale in 2014, under the already seen ICO model. At that time, the agreement for its production and distribution was as follows:
60 million for the taxpayers of the presale.
12 million (20% of the 60 million) were destined for a development fund (apart for taxpayers and another for the Ethereum Foundation ).
3 Ethers were created for each block (approximately 15 seconds).
If a miner found the solution to the transactions and their block was not included, Ethereum gave them a reward of 2 or 3 Ethers. This was called the “Uncle / Aunt Reward”).
Within the terms agreed by all parties at the 2014 ICO, Ether limited its production to 18 million per year (30% of the initial offering).
The platform hopes to move to a new consensus algorithm in development, called Casper, which is intended to be more effective and less subsidized by miners. The exact method of issuance is still unknown but the maximum annual production originally set has been guaranteed to be a limit that Casper will not exceed.
The Ethereum network works on computers around the world. For this reason, the system rewards the team that was able to create the last block in the chain . Through this process, which occurs approximately every 15 seconds, the computer that generated this block will receive 3 Ethers. This process is random and allows to reward in proportion to the computing power that each machine has. These storing, calculating, and rewarding tasks are known as "mining."
In addition to Ether, in Ethereum there is Gas, the fundamental unit of computing within the network . This number was created to avoid any computational waste in the code. For this reason, each transaction is obliged to establish a limit to the number of computational steps of code execution that the machine can do.
There is a 5 gas fee for each byte in the transaction data. However, there are higher prices because some operations are more computationally expensive or because they increase the amount of data that must be stored as part of the state.
What Ethereum seeks with gas is to force each user to pay proportionally for each resource they consume, including computing, bandwidth and storage.
Those who need Ethers are mainly developers who want to build decentralized applications on top of Ethereum and users who want to access it and interact with smart contracts. However, buying Ether can be quite an interesting investment opportunity.