Ethereum is considered a decentralized system, which means that it is not under the control of any single governing entity. An absolute majority of online services, businesses and companies are built on a centralized management system. This approach has been used for hundreds of years, and while history has repeatedly proven itself flawed, its application is still necessary when both parties do not trust each other.
A centralized approach means control by a single entity, but it also means a single point of failure, making online applications and servers that use this system extremely vulnerable to hack attacks and even power outages. Furthermore, most social networks and other online servers require users to provide some degree of personal information, which is stored on their servers. From there, it can easily be stolen by the company itself or by dodgy workers or hackers.
But Ethereum, being a decentralized system, is completely independent and is not under anyone’s control whatsoever. It also has no central point of failure, as it runs from thousands of volunteer computers around the world, which means it can never stop working. Furthermore, users’ personal information remains on their computers, while content, such as apps, videos, etc. remains completely under the control of the content creators without having to comply with the rules imposed by hosting services such as the App Store and YouTube.
Second, it is important to understand that despite the constant comparison with each other, Ethereum and Bitcoin are two completely different projects with completely different goals. Bitcoin is the first ever digital currency and money transfer system, based on a distributed public ledger technology called Blockchain.
While Ethereum took the technology behind Bitcoin and worked to expand its capabilities exponentially. It is a complete network, with its own web browser, coding language and payment system. Most importantly, it enables users to create decentralized applications on the Ethereum blockchain.
These applications can be either entirely new ideas or a decentralized reworking of already existing concepts. This basically removes the middlemen and all the expenses associated with third party involvement.
For example, the only profit from users ‘like’ and ‘share’ their favorite music posts on Facebook comes from an ad placed on their Page that goes directly to Facebook. In an Ethereum version of such a social network, both artists and audiences will receive prizes for positive communication and support.
Similarly, in a decentralized version of Kickstarter, you will not only get some valuable pieces for your contribution to the company, but you will also receive a portion of the company’s future profits.
Finally, Ethereum-based applications will remove all kinds of payments to third parties in order to trigger any kind of service.
In short, Ethereum is a public, open-source software platform based on the Blockchain that allows developers to build and deploy decentralized applications.
As mentioned earlier, Ethereum is a decentralized system, which means that it uses a peer-to-peer approach. Every single interaction takes place between the users participating in it and is supported only by them, with no external authority controlling the matter.
The entire Ethereum system is also backed by a global system called Contract.
The nodes are volunteers who download the entire Ethereum blockchain to their computers and fully implement all consensus rules of the system, keeping the network honest and receiving rewards in return.
These consensus rules, as well as many other aspects of the network, are dictated by “smart contracts”. It is designed to automatically perform transactions and other specified actions within the network with parties who should not necessarily be trusted.
The terms for both parties are preprogrammed into the contract. Completing these terms will then result in a transaction or other specified action. Many people believe that smart contracts are the future, and will eventually replace all other contractual agreements, because the implementation of smart contracts provides security that outperforms traditional contract law, reduces transaction costs associated with a contract, and establishes trust between two parties.
Furthermore, the system also provides its users with an Ethereum Virtual Machine (EVM), which basically serves as a running environment for Ethereum-based smart contracts.
It provides users with protection for untrusted code execution while ensuring that programs do not interfere with each other. The Ethereum virtual machine is completely isolated from the main Ethereum network, making it an ideal tool for developing, testing and optimizing smart contracts.
The platform also offers a cryptocurrency token called Ether.
Who created Ethereum?
In late 2013, Vitalik Buterin described his idea in a release paper, which he sent to a few of his friends, who in turn sent it further. As a result, about 30 people reached out to Vitalik to discuss the concept.
He was waiting for critical reviews and people pointing out critical errors in the concept, but that never happened.
The project was publicly announced in January 2014, with the core team of Vitalik Buterin, Miahi Alessi, Anthony D’Iorio, Charles Hoskinson, Joey Lubin and Gavin Wood. Buterin also introduced Ethereum on stage at the Bitcoin Conference in Miami, and a few months later the team decided to hold a mass sale of Ether, the network’s original token, to fund development.
Is it a digital currency?
By definition, Ethereum is a software platform that aims to function as a decentralized internet as well as a store for decentralized applications. Such a system needs currency to pay for the computational resources required to run any application or program. This is where Ether comes in.
Ether is a digital asset that carries value and does not require a third party to process payments.
However, it not only acts as a digital currency, but also serves as a fuel for decentralized applications within the network. If a user wants to change something in an application within Ethereum, they must pay a transaction fee so that the network can process the change.
The transaction fee is calculated automatically based on how much ‘fuel’ an action requires. The amount of fuel required is calculated based on the amount of energy needed for computing and how long it has been running.
Is Ethereum Like Bitcoin?
Ethereum and Bitcoin may be somewhat similar when it comes to cryptocurrency, but in fact they are two completely different projects with completely different goals.
While Bitcoin has established itself as a relatively stable and most successful cryptocurrency, Ethereum is a multi-purpose platform, as its cryptocurrency Ether is just a part of its smart contract applications.
Even when comparing the crypto aspect, the two projects seem to be quite different. For example, Bitcoin has a maximum of 21 million Bitcoins that can ever be created, while the potential supply of Ether can be virtually endless.
Furthermore, the average Bitcoin block mining time is 10 minutes, while Ethereum aims to not exceed 12 seconds, which means faster confirmation.
Another key difference is that successful Bitcoin mining these days requires huge amounts of computing power and electricity, and is only possible if industrial mining farms are used. On the other hand, the Ethereum Proof of Work algorithm encourages decentralized mining by individuals.
Perhaps the most important difference between the two projects is that Ethereum’s internal code is Turing-complete, which means that everything can be calculated literally as long as there is enough computing power and time to do so. While Bitcoin does not have this capability.
Although the complete Turing code provides Ethereum users with virtually unlimited possibilities, its complexity also means potential security complications.
How does Ethereum work?
As mentioned earlier, Ethereum is based on the Bitcoin protocol and its blockchain network is designed to be modified so that it can support applications that bypass financial systems.
The only similarity between the two blockchains is that they store entire transaction records of their own networks, but the Ethereum blockchain does much more than that.
In addition to the transaction history, each node on the Ethereum network also needs to download the latest state, or current information, of each smart contract within the network, the balance of each user and all the smart contract code and where it is stored.
Essentially, the Ethereum blockchain can be described as a transaction-based state machine. When it comes to computer science, a state machine is defined as something capable of reading a series of inputs and moving to a new state based on those inputs. When the transactions are executed, the device moves to another state.
Each Ethereum case consists of millions of transactions. These transactions are grouped to form ‘blocks’, with each block linked to the previous ones.
But before a transaction can be added to the ledger, it must be validated, and this goes through a process called mining
Mining is a process in which a group of nodes apply their computing power to complete a “Proof of Work” challenge, which is essentially a math puzzle.
The more powerful the computer, the faster it can solve the puzzle. The answer to this puzzle is in itself a proof of work, and the correctness of the block is guaranteed.
A large number of miners around the world compete with each other in an attempt to create and validate a block, as each miner proves that a set of new Ether tokens is generated and awarded to the said miner.
Miners are the backbone of the Ethereum network, as they not only confirm and verify transactions and any other operations within the network but also create new tokens for the network’s currency.
Advantages of Ethereum
The Ethereum platform takes advantage of all the characteristics of the blockchain technology it is running on. It is completely immune to any third-party interferences, which means that all decentralized applications and DAOs deployed within the network cannot be controlled by anyone at all.
Likewise, any blockchain network is formed around the principle of consensus, meaning that all nodes within the system need to agree on every change within it. This eliminates the potential for fraud and corruption and makes the network tamper-proof.
The entire platform is decentralized, which means that there is not a single potential point of failure. Thus, all applications will always remain online and never stop working. Furthermore, the decentralized nature and cryptographic security makes the Ethereum network well protected against hack attacks and potential fraudulent activities.
What applications are developed on Ethereum?
Ethereum has the potential to open up the world of decentralized applications even for people without any technical background. And if this happens, it could become a revolutionary leap for blockchain technology that will bring it closer to mass adoption.
Currently, the network is easily accessible through the native Mist browser, which provides an easy-to-use interface, as well as a digital wallet for storing and trading Ether. Most importantly, users can write, manage and publish smart contracts.
Alternatively, the Ethereum network can be accessed via the MetaMask extension extension for Google Chrome and Firefox.
The Ethereum platform also has the potential to disrupt hundreds of industries that currently rely on centralized control, such as insurance, finance, real estate, etc.
Currently, the platform is used to create decentralized applications for a wide range of services and industries. Below is a list of some of the most notable.
- Gnosys – a decentralized prediction marketplace that enables users to vote on anything from weather to election results.
- Ether Tweet – This app takes its functionality from Twitter, providing users with a completely censorship-free communication platform.
- Etheria – It is very similar to Minecraft, but it is entirely on the Ethereum blockchain.
- Wevand – an open platform for crowdfunding campaigns that implement smart contracts.
- UPort – Provides users with a sovereign self-identifier that enables them to collect verifications, login without passwords, digitally sign transactions, and interact with Ethereum applications.
Despite the fact that Ethereum, like Bitcoin, has been around for several years, it has only just begun to gain the attention of the general media and the general public.
Many experts agree that it is a fantastic technology that is set to not only completely change the way the Internet works but also revolutionize services and industries that have been around for hundreds of years.
Vitalik Buterin, the creator of Ethereum, is extremely cautious and modest with his expectations. In a recent interview, he said that he intends to keep Ethereum as a leading blockchain platform, focusing on technical issues and improving security in the new future.
Balaji Srinivasan, CEO of TwentyOne.co, recently expressed his firm belief that Ethereum will be around for the next five to ten years.
Blockchain founder Peter Smith also described Ethereum’s infrastructure applications as “fantastic” and stated that the platform has a very strong point in reforming property insurance, which includes policies related to real estate, as just one example.
In general, opinions about the future of Ethereum among cryptocurrency experts are usually positive.
However, there are many old-school financial experts who, despite the extraordinary success and relative stability of Bitcoin and Ether, as well as the undeniable importance of the technologies behind the projects, still predict their imminent downfall.