What is Ethereum? A Beginner’s Guide

Ethereum is open-source, a distributed software platform that runs smart contracts and has Ether (ETH) as its native token.

By · Aug 3, 2020 . 20min read

What is Ethereum

Quick Takes:

In this piece, you’ll learn

  • What is Ethereum?
  • Who created Ethereum?
  • Applications of Ethereum
  • Advantages and Disadvantages of Ethereum
  • Future Prospects of Ethereum 

Let’s dive in.

A Brief History before Ethereum

The Bitcoin network went live on January 3, 2010, and had since continued to grab attention. Earlier, the Bitcoin network made the first commercial transaction entirely peer-to-peer possible. The possibilities of the blockchain as to facilitating financial transactions while enhancing transparency, trust and devoid of any need for a middleman had become the mainstay. Bitcoin falls among the first generation blockchains.

However, just as the blockchain is a distributed network of computers able to communicate with themselves and attain consensus without the need for a central authority, it’s application as to other areas that are non-financial were being studied and discovered with the vast opportunities it presents.

There was a need even though Bitcoin was revolutionary, a gap still existed. A world computer where anyone can build an application on the internet but would not have to depend on a central server was still missing. The world needed a second-generation blockchain. Ethereum creators brought their idea to life in an attempt to plug this gap.

“Did you know Ethereum is called Second Generation blockchain because it allows developers to program decentralized applications on it?”

Ethereum Timeline 

  • November 2013: Vitalik Buterin publishes the Ethereum whitepaper.
  • January 2014: Vitalik Buterin, Mihai Alisie, Anthony Di Iorio, and Charles Hoskinson were announced as the original development team of the platform was publicly announced. 
  • August 2014: It ends its ICO having raised $18.4 million.
  • May 2015: Ethereum testnet dubbed “Olympic” was released. 
  • July 30, 2015: The first stage of Ethereum’s development, “Frontier” was released.
  • March 14, 2016: Homestead, the first “stable” ethereum release, went out on block 1,150,000.
  • June 2016: The epic DAO hack happens and the $50 million worth of Ether, which was 15% of the total Ether in circulation back at the time.
  • October 25, 2016: Ethereum Classic forks away from the original Ethereum protocol.
  • October 16, 2017: The Metropolis Byzantium hardfork update happens.
  • February 28, 2019: The Metropolis Constantinople hardfork update happens.
  • 2020: Ethereum to release Eth 2.0 update

“Did you know the DAO hack of 2016 led to the split of Ethereum blockchain into Ethereum Network and Ethereum Classic?”

Who Created Ethereum?

Vitalik Buterin was 17 years old when he created the Ethereum network. Buterin was an active contributor to the Bitcoin Magazine. That’s a publication where early cypherpunks and bitcoin enthusiast contributed periodically in furtherance of the decentralized dream. He observed that developers could also program similar applications on a distributed ledger.

Similar to developing and hosting apps on Google and iOS stores. The striking difference would be in the way they are hosted. Companies like Facebook, Amazon, Google, Microsoft all run and host applications on centralized servers. The implication is that there could be data breach by an intruder or even in-house.

Moreso, the government of nations, may decide to roll out unfavourable legislation sometimes in the target of those it brands as dissenting voices specifically targeting their products or services that run on central servers. Many times censorship from these tech giants might even be the more significant danger to the data owners or developers.

“Did you know that the reason Vitalik Buterin founded Ethereum alongside others such as Charles Hoskinson, Gavin Wood et. all was that the bitcoin community refused to implement his suggestions on the bitcoin network?”

What Really is Ethereum?

Ethereum is open-source, a distributed software platform that runs smart contracts and has Ether (ETH) as its native token. It’s distributed nature prevents any downtime and fraud as well as the risks of being hijacked or controlled by a central third party. Software developers can build distributed/decentralized applications called Dapps on it due to its programmable nature.

How Does it Work?

Vitalik found out the blockchain as the technological base layer for storing the database in a decentralized network can also be programmed to run applications. However, these applications would not have a single source of storing and calling their information but rather in a distributed manner where nodes communicate among themselves. Dapps – decentralized applications get their name because they built on top of the blockchain. 

These Dapps work based on Smart contracts. Transactions on the network trigger smart contracts. When a user sends a transaction to a contract, every node on the network runs the contract’s code and records the output. It does this by using the Ethereum Virtual Machine (EVM), which converts the smart contracts into instructions the computer can read.

Applications of Ethereum

Developers can build decentralized applications – Dapps on the public Ethereum network. Some of these applications are classified into the following

Smart Contracts: Ethereum is the leader in smart contract technology. Smart contracts are digitally signed and self-executable agreements between two or more parties that are stored on a decentralized ledger for verification between transacting parties. It is applicable in several other areas such as crowdfunding, insurance, governance, decentralized finance etc. 

DeFi: DeFi stands for decentralized finance. This is a new industry ambitiously pursuing to decentralize core traditional financial use cases like trading, lending, investment, wealth management, payment and insurance on the blockchain. Examples of companies applying DeFi solutions include Compound, Celsius, Aave etc. 

Crowdfunding: Through smart contract technology, individuals can contribute to any project of their choice and receive almost immediately tokens which are held for financial considerations. Another is where more than 18,000 individuals to support invested. It was the DAO program of the Ethereum Network. The DAO raised around $200 million worth of Ether at that time whose initial target was just $20 million. Amazingly, it was the first to raise such an amount after which several other ICOs have raised more than $30 billion.

Pros and Cons of Ethereum

Advantages

One of the striking advantages of the Ethereum platform is its decentralization. After Bitcoin, unarguably with the most significant number of public nodes making it the hallmark of decentralization within the blockchain and cryptocurrency industry, Ethereum exhibits high decentralization meaning it is not under the control of a single or central party. Due to this, enthusiasts tout DeFi – Decentralized Finance as one of the substantial use cases of the blockchain. And without any surprise, Ethereum is the network fuelling these innovations.

It runs on a distributed infrastructure meaning the Dapps built on it will not experience downtimes as observed in centralized server infrastructures and the accompanying applications it houses. 

As with all distributed networks which run on a peer-to-peer basis, Ethereum eliminates possibilities of fraud, corruption and makes the network tamper-proof.

Disadvantages

The popular notion that anything connected to the internet is pretty much hackable holds strong. This is especially true if a smart contract is poorly written and deployed on mainnet. Although the actions of a smart contract are meant to be irreversible, there is always room for human error. Hackers with malicious intents may exploit this error in code. This was the case of the DAO hack of 2016, where the hacker siphoned as much as $50 million. Unfortunately, the DAO project representing an immaculate conception died prematurely. This led to a bitter fork of the Ethereum network. The only possible way to avoid this is to ensure codes deployed on the blockchain such as Ethereum are error-proof. 

Another obvious disadvantage of Ethereum is its slowness in transaction confirmation which makes it unappealing for enterprise speed transactions need such as Visa. Ethereum is only able to confirm roughly 15 transactions per second, whereas Visa’s throughput sits around 1,700 transactions per second. It faces even more threats from Sybil attacks making the network slower. Cryptokitties a game layered on Ethereum network almost brought the network to a halt during a spike in the interest from players. As Ethereum transitions to PoS and several other aggressive second layer solutions, perhaps this disadvantage may no longer exist.

Future Prospects of Ethereum

Ethereum plans to move to Proof of Stake. Casper is the name of the Ethereum implementation that will turn Ethereum into a PoS blockchain dubbed Ethereum 2.0. This transition will take place in 3 separate phases, two of which has already been done. Proof of Stake is expected to radically change the inner workings of the Ethereum solidifying its lead not just as the Smart Contract technology pioneer in the decentralized space but also newer frontiers likely to foster the faster actualization of Industry 4.0

In Vitalik Buterin words, “Ethereum 1.0 is a couple of people’s scrappy attempt to build the world computer; Ethereum 2.0 [with PoS] will actually be the world computer”

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