What on earth is Ethereum? I mean, I keep hearing about it all the time, I’ve seen it’s the second-largest cryptocurrency around but I just can’t seem to wrap my head around it. Is it as revolutionary as Bitcoin? Can it actually change the world as we know it? If you want to have a better understanding of Ethereum, but are tired of an explanation that sounds technical, I am going to explain it for you.
1. Explanation about other Cryptocurrencies.
Before we get into Ethereum we need to do a quick recap about Bitcoin, since it’s the basis from which Ethereum was born. By now you probably know that Bitcoin is a form of decentralized money. Before Bitcoin was invented, the only way to use money digitally was through an intermediary like a bank or Paypal. Even then, the money used was still a government-issued and controlled currency. However, Bitcoin changed all that by creating a decentralized form of currency that individuals could trade directly without the need for an intermediary. Each Bitcoin transaction is validated and confirmed by the entire Bitcoin network. There’s no single point of failure so the system is virtually impossible to shut down, manipulate or control.
Well, now that we know that money can be decentralized, what other functions of society that is centralized today would be better served on a decentralized system? Some Examples: Real estate transfer records currently use centralized property registration authorities. Social networks like Facebook are based on centralized servers that control all of the data we upload to them. What if we could use the technology behind Bitcoin, more commonly known as Blockchain, to decentralize other things as well? The interesting thing about Blockchain technology is that it’s actually the by-product of the Bitcoin invention.
2. What is Blockchain Technology?
Blockchain technology was created by fusing already existing technologies like Cryptography, proof of work, and decentralized network architecture together in order to create a system that can reach decisions without a central authority. There was no such thing as “blockchain technology” before Bitcoin was invented. But once Bitcoin became a reality, people started noticing how and why it works and named this “thing” blockchain technology. Blockchain is to Bitcoin what the Internet is to email; a system on top of which you can build applications and programs. A currency like Bitcoin is just one of the options. So this got people very excited, and they began to explore what else we can decentralize. However, in order for a system to be truly decentralized, it needs a large network of computers to run it. Back then the only network that existed was Bitcoin and it was pretty limited. Bitcoin is written in what is known as a “Turing incomplete” language which makes it understand only a small set of orders, like who sent how much money to whom. If you want to create a more complex system, you’ll need a different programming language, which means a different network of computers. Imagine for a second you wanted to build your own decentralized program, just like Bitcoin, at home. You’d need to understand how Bitcoin’s decentralization works, write code that mimics the same behavior, and get a huge network of computers to run this code and so on.
3. Revolution Of Ethereum.
Enter Ethereum. Ethereum was first proposed in late 2013 and then brought to life in 2014 by Vitalik Buterin who at the time was the co-founder of Bitcoin Magazine. Ethereum is the Do It Yourself platform for decentralized programs also known as Dapps - decentralized apps.
If you want to create a decentralized program that no single person controls, not even you even though you wrote it, all you have to do is learn the Ethereum programming language called Solidity and begin coding. The Ethereum platform has thousands of independent computers running it meaning it’s fully decentralized. Once a program is deployed to the Ethereum network these computers, also known as nodes, will make sure it executes as written. Ethereum is the infrastructure for running Dapps worldwide. It’s not a currency, it’s a platform.
Ethereum’s goal is to truly decentralize the Internet. Once the concept of digital decentralization was demonstrated by Bitcoin, a whole new array of opportunities became available. We can finally start to imagine and design an Internet that connects users directly without the need for a centralized 3rd party. People can “rent” hard drive space directly to other people and make Dropbox obsolete. Drivers can offer their services directly to passengers and remove “Uber” as the middleman. People can buy cryptocurrencies directly from one another without the need for an exchange that can get hacked or steal your money. Ethereum allows people to connect directly with each other without a central authority to take care of things. It’s a network of computers that together combine into one powerful, decentralized supercomputer.
So now you know what Ethereum does but we haven’t touched upon HOW it does it. Ethereum’s coding language, Solidity, is used to write “Smart Contracts” that are the logic that runs Dapps. In real life, all a contract is a set of “Ifs” and “Thens”. For example, if I pay my landlord $1500 on the 1st of the month then he lets me use my apartment. That’s exactly how smart contracts work on Ethereum. Ethereum developers write the conditions for their program or Dapp and then the Ethereum network executes it. They are called smart contracts because they deal with all of the aspects of the contract - enforcement, management, performance, and payment.
In other words, it would act like a really good judge. Instead, a “smart contract” in the context of Ethereum is not intelligent at all. It’s actually uncompromisingly lettered strictly.
It follows the rules down to a T and can’t take any secondary considerations or the “spirit” of the law into account like what commonly happens with real-world contracts. Once a smart contract is deployed on the Ethereum network, it cannot be edited or corrected, even by its original author. It’s immutable. The only way to change this contract would be to convince the entire Ethereum network that a change should be made and that’s virtually impossible. This creates a very serious problem since, unlike Bitcoin, Ethereum was built with the ability to create really complex contracts, and complex contracts are very difficult to secure.
With any contract, the more complicated it is, the harder it is to enforce as more room is left for interpretations, or more clauses must be written to deal with contingencies.
With smart contracts, security means handling with perfect accuracy every possible way in which a contract could be executed in order to make sure that the contract does only what the author intended. Ethereum launched with the idea that “code is law”. That is, a contract on Ethereum is the ultimate authority and nobody could overrule the contract. Well, that all came to a crashing halt when the DAO event happened. DAO stands for “Decentralized Autonomous Organization” which allowed users to deposit money and get returns based on the investments that the DAO made. The decisions themselves would be crowd-sourced and decentralized.. While this all sounded very good, the code wasn’t secured very well and resulted in someone figuring out a way to drain the DAO out of money.
4. Conclusion
Ethereum is basically a large bunch of computers working together like one supercomputer to execute code that powers Dapps. However this costs money - Money to get the machines, to power them up, store them and cool them if needed.
That’s why Ether was invented. When people talk about the price of Ethereum they actually are referring to Ether - the currency that incentivizes people to run the Ethereum protocol on their computer. This is very similar to the way Bitcoin miners get paid for maintaining the Bitcoin blockchain. In order to deploy a smart contract to the Ethereum platform, its author must pay to do so. That payment is made in the form of ether. This is done so that people will write optimized and efficient code and won’t waste the Ethereum network computing power on unnecessary tasks. Ether was first distributed in Ethereum’s original Initial Coin Offering back in 2014. Back then it cost around 40 cents to buy one Ether. Today, one Ether is valued in hundreds of dollars since the use of the Ethereum network has grown immensely due to the ICO hype that started in 2017.