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What is Ethereum (ETH)? | Simply Explained

By February 20, 2018 February 27th, 2018 One Comment

What is Ethereum?

Blockchain 2.0

If Bitcoin is the first generation of blockchain technologies, Ethereum is no doubt the next generation blockchain (2.0). It was founded in 2014 by Vitalik Buterin, an early Bitcoin enthusiast and cryptocurrency magazine contributor. Ethereum is based on Bitcoin’s blockchain architecture (like many cryptocurrencies), but it has a number of different goals – its main one being that it is a programmable blockchain platform to allow decentralised applications (known as DApps) to be built on, with the addition of what are known as ‘Smart Contracts’.

Despite popular perception, Ethereum was not intended to be a currency like Bitcoin, although it has gained some traction in being accepted for goods and services. Instead, Ethereum intends to be the platform to launch the smart economy on; applications that run on smart contracts which determine programmable conditions and then execute an outcome; whether it’s to send and receive Ether (the coin of Ethereum) or perform another function.

Smart Contracts

Smart contracts are contracts with user defined inputs and outputs that are stored and executed on the Ethereum blockchain. Perhaps one of the easiest ways to understand smart contracts is to use the analogy of a vending machine. You drop your money into the machine, choose your snack, and the machine drops it to you, having validated that the contract conditions (money paid) has been met. This is the same on the Ethereum blockchain. For example, a DApp may exist that offers flight insurance based on departure times for travellers. If a traveller purchases the insurance, the contract is created on the Ethereum blockchain and programmed to automatically download the flight departure times from airports globally. If the traveller’s flight gets delayed, the contract automatically executes and pays out an insurance claim – no human intervention is required.

Similarly, suppose Simone rents a holiday apartment from Nathaniel and they do this through a home rental platform on the Ethereum blockchain. Simone gets a receipt which is held in a smart contract; if she doesn’t receive the digital entry key to the booked apartment by her arrival date, the contract releases a refund to her automatically. There is no middleman or intermediary. And since this is the blockchain, the contract and transactions are 100% immutable. Thus, the power of smart contracts and the opportunities they bring is virtually limitless, therefore making the Ethereum blockchain one of immense value in the crypto space.

Gas in the tank

‘Gas’ is the internal pricing for running a transaction or contract on Ethereum. The gas system is not very different from the use of Kw for measuring electricity use, however, it’s the originator of the transaction that gets to set the price of gas, to which the miner on the blockchain can accept or not accept.

Similar to Bitcoin, the network assures a certain amount of Ether be awarded to a miner for each block. This creates the incentive to provide computing power to secure the blockchain. However, whereas in Bitcoin there are transaction fees paid to miners to move funds around, in Ethereum, there are blocks of code (the smart contracts) which are of indeterminate size, so a simple transaction fee won’t work. Instead, the cost of each computing cycle is calculated and the originator provides the ‘gas’ to run the contract. The correct amount of gas is used to run the contract and any remaining gas is refunded back to the originator. Gas, in essence, fulfils the same purpose as the transaction fee in Bitcoin but in a more sophisticated and perhaps fairer way.

 Features

  • Uses a ‘proof of work’ (POW) system like Bitcoin, where miners around the world use processing power to verify transactions on the network and are paid in Ether.
  • Commonly used by startups and existing companies to perform their own crowdfunding and token creation (ICOs and TGEs).
  • Startups and companies can use template smart contracts to create their own tokens which are classed as ERC20 tokens, which signifies the link to the Ethereum blockchain.
  • Can process approximately 15 transactions per second (TPS)
  • Uses a programming language known as Solidity to write smart contracts.
  • Unlike Bitcoin, Ethereum does not have a capped supply. However, Ethereum is programmed to be deflationary by using a programmed token release.
  • Backed by the Ethereum Enterprise Alliance (EEA), a conglomerate of some of the biggest companies in the world.
  • The EEA aims to exploit the use of Ethereum’s blockchain and smart contract technology to improve existing business processes.

Token Details

  • The Ethereum token is called Ether, and uses ETH as the ticker symbol.
  • The supply schedule of Ether is programmed to slow down over time as the amount of tokens created through the mining process reduces.
  • The value proposition for token value increase over time is;
    • Ether tokens are required for GAS to process transactions
    • Ether is currently used as the main entry token for buying into Initial Coin Offerings (ICOs) and Token Generation Events (TGEs)
    • Tokens are required by developers to develop and initiate smart contracts on the Ethereum Blockchain
    • Currently, Ether is also used as a medium of exchange (and currency) due to the fast transaction times and low fees
  • Blockchain size is currently 337GB.
  • First block was mined in July 2015.

Advantages

  • A legitimate cryptocurrency platform with strong backing from globally-recognised corporations.
  • Programmable transactions (smart contracts), whether simple or advanced.
  • The elimination of third parties to execute contracts when conditions are met.
  • A platform for products and services, allowing for a robust ecosystem to grow around the network.
  • A clear leader with a strong roadmap into the future and coming upgrades which will scale Ethereum and make it even more appealing.

Disadvantages

  • Founded in 2014, there are still only a limited number of DApps currently released with no ‘killer app’ on the network as yet.
  • Solidity is not an easy programming language to learn and documentation and help for the language can difficult to find.
  • The world’s demand for Solidity and blockchain expertise is at an all-time high and thus, a shortage of developers exists potentially hindering DApp growth.
  • A single DApp – CryptoKitties (see below) – significantly slowed the Ethereum network down on its release and raised scalability concerns.
  • Brand recognition not as mainstream as Bitcoin.

CryptoKitties

Cryptokitties is a cat-based trading card/collectibles platform launched on the Ethereum network in December 2017. Like most things to do with cats on the internet, it went viral and saw over 200,000 people sign up who went on to spend about $20 million in Ether, with some kitties being sold for over $100,000 (yes, you read that correctly). Each of the cartoon kitties has a unique digital DNA and no two cats are alike, hence, capturing the hearts of people who love to collect things (think Pokémon).

However, the more popular Cryptokitites became, the more people began to question Ethereum scalability. The game became so popular that it captured a significant amount of available space for transactions on the Ethereum platform and analysts asked if a superficial game was forcing out more serious use cases.

Not only did this network congestion make it hard to play the game, but the scaling issue is a real concern for the Ethereum network in general. If one viral game that hasn’t even spread beyond the tech world can slow down the network, what happens when the blockchain expands to real world applications?

Summary

Ethereum is an ecosystem for developers to build decentralised applications on using smart contracts. These DApps can create their own native ERC20 tokens and run as DAO (decentralised autonomous organisations) on Ethereum. While it’s already a powerful platform, it’s only going to become more powerful with huge upgrades in the future such the upcoming Casper project. Casper, once it’s deployed, will turn Ethereum from a Proof of Work platform into a Proof of Stake, which will make the network run faster and cheaper than it is already as it continues to grow. Casper is a major protocol upgrade which intends to make Ethereum miners redundant, which means huge electricity costs associated to mining should go away too – something many have been critical of around cryptocurrencies (and in particular, Bitcoin).

While some compare Ethereum to Bitcoin much like Coke with Pepsi, in reality they are completely different projects with different goals and uses. Like Bitcoin, however, Ethereum has seen scalability issues arise as its popularity grows, especially since it’s become the default ICO platform for hundreds of different ERC-20 tokens and startups tokenizing their businesses. Another upgrade, called Sharding, intends to address these scalability issues. Sharding is a process which splits the blockchain into separate pieces, or shards. Currently, nodes on the network store and calculate the entire blockchain. When sharding is deployed to the network, each node will only be required to store and calculate a certain shard.

If 2017 was Bitcoin’s year to go mainstream, 2018 is shaping up to be Ethereum’s turn. If planned upgrades like Casper and Sharding are successful and scalability issues addressed, Ethereum could soon see mass adoption and get that household name recognition that Bitcoin currently enjoys.

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