Ethereum was created by Vitalik Buterin in 2013. Vitalik and his team of developers continue to improve the system to this day, unlike Bitcoin, which was abandoned by its creator(s). In 2021, Ethereum will update to version 2.0. This update will bring several benefits, including more transactions per second, increased security and reduced carbon footprint.
While some consider Ethereum as the silver to Bitcoin’s gold, this is a massive oversimplification. Both are valuable tools, but for different reasons. Bitcoin is a store of value, like digital gold. Ether is also a store of value, but when combined with Solidity, Ethereum becomes so much more.
Ethereum is a decentralized platform with its own programming language, Solidity, and cryptocurrency, Ether. If that sounds like gibberish, here’s a quick recap of some frequently used blockchain terminology:
- Blockchain: An umbrella term for a variety of technologies that distribute control across a large network of individual actors, called “miners,” for security purposes.
- Decentralized: Anything not controlled by a single central entity or group.
- Cryptocurrency: A digital currency secured with cryptography, often decentralized using blockchain technology.
- Platform: A structure for creating applications.
If the platform for a painter is a canvas, think of the blockchain as Ethereum’s canvas and Solidity as the paint — a special kind of paint that you can only purchase with Ether. The final product is not a painting, but a smart contract.
Many altcoins on the market today, such as 0x and Maker, are actually just Ethereum smart contracts.
Ethereum is supported by the nonprofit Ethereum Foundation and the Ethereum community at large. Developers across the world contribute to improving the product and making the platform more accessible for creators and end users.
Ethereum is a Platform
Ethereum is more than a cryptocurrency — it’s a development platform. Ethereum comes with its own programming language, Solidity, which enables developers to create its own apps on top of Ethereum’s blockchain. The cost for operating on the Ethereum blockchain is Ethereum’s token, Ether.
Ethereum is Decentralized, Kind of
The Ethereum blockchain is maintained by a decentralized group of miners, similar to Bitcoin.
Unlike Bitcoin, however, Ethereum has a known creator and an active development community. This gives Ethereum a unique advantage over Bitcoin: Ethereum has the ability to fix bugs and upgrade the software over time.
Despite the benefits, many people argue that having a centralized development team defies the core principles of decentralization.
A smart contract is a legal or business agreement written in code and executed across Ethereum’s blockchain. If the end result for a painter is a painting, the end result for an ethereum developer is a smart contract.
Smart contracts have many advantages over traditional contracts:
- Smart contracts can execute complicated tasks automatically.
- Developers can easily reuse and repurpose well-written smart contracts for an extremely low cost (especially when compared to legal fees).
- Smart contracts are enforced using collateral instead of the judicial system, making them ideal for low-cost, high-frequency transactions.
What is Ethereum Gas?
To execute your smart contract on Ethereum’s blockchain, you must pay the miners according to the complexity of your contract. This way, accidental or malicious infinite loops coded within smart contracts cannot freely dominate computational power on the blockchain.
This processing fee is called gas and is paid in Ethereum’s cryptocurrency, Ether. Gas prices fluctuate based on how busy the network is at any given time. You can pay more than the current rate, depending on how quickly you need your smart contract executed. You choose the gas price you’re willing to pay when making a transaction. Gas prices too far below going-rate get rejected entirely.
Ethereum 2.0: Serenity
Big changes will sweep Ethereum in 2021, including the transition to Ethereum 2.0. Ethereum 2.0 will allow Ethereum to process 150,000 transactions per second, whereas the current version of Ethereum is bottlenecked at 30.
It will also change the verification method used by the miners, dramatically decreasing the need for computer power and slashing energy consumption. Ethereum 2.0 promises to help Ethereum scale to serve a much larger market, while increasing speed and security and decreasing its carbon footprint.
Data Sharding: Faster Transactions and More Security
Data sharding is the process of splitting large chunks of data into smaller shards, and the shards are easier to share around the network.
Currently, in Ethereum 1.0, each miner (a person who dedicates computer power to authenticating the Ethereum network) must validate every transaction that comes across the network. This means miners duplicate work for security purposes and suck up a lot of energy in the process.
By sharding the data, each miner shrinks his work load down to a few randomized transactions moving across the network at a time.
Proof of Stake: Going Green
In the cryptocurrency development and mining community there is an ongoing debate between two verification methods. The verification method determines how the operations on the network are legitimized. There are 2 camps in this debate: proof of work (PoW) and proof of stake (PoS).
Proof of work uses computational puzzles to verify the legitimacy of incoming transactions. This means that the miners will buy expensive, dedicated computer hardware in order to be the fastest at solving these puzzles. Bitcoin and Ethereum both currently use PoW. The downside of this approach is the massive energy consumption required for miners to constantly solve these puzzles.
Proof of stake drastically reduces the need for energy and expensive computing hardware by eliminating the “puzzle.” Instead of competing to solve the puzzle, miners lock up, or “stake” their Ether for the chance to validate a portion of the transactions. Stakers are compensated for the transactions they authenticate and are rewarded with additional Ether. At the end of the staking period, the owner gets the staked Ether plus the rewards back. Think of this like a bank certificate of deposit that earns interest.
Interested in trying it yourself? Jump to How to Stake Ethereum.
PoS 51% attack
In order to hijack a proof of stake network, you would need to own the majority stake on the network. A hacker would have to purchase billions of dollars of Ether, just to destroy its value in the end. This is a beautiful example of utilizing game theory tactics for security.
Decentralized Applications: Ethereum in Action
A decentralized application (DApp) is any product or service that runs on a distributed computing system, most often the Ethereum blockchain. The blockchain provides applications with the added security and trust. One of the most popular DApps is called Uniswap, which allows for simple exchange between cryptocurrencies.
Another type of DApp is a decentralized autonomous organization (DAO). Just as the name suggests, a DAO uses smart contracts instead of employees to operate autonomously. A DAO is owned and run entirely by its shareholders, who propose smart contracts to make things happen.
DAO Example: The Power of Smart Contracts
Imagine you want to create an investment fund with your 10 closest friends. Each week, you and your friends meet to propose new investments. Each person has the opportunity to propose as many investment ideas as she would like and a vote will determine whether or not a proposal is accepted. Once a proposal has won a majority vote, your group plans to execute the trade in 24 hours, giving anyone who disagrees the opportunity to leave the fund and pull her money out.
Now, imagine letting 100 complete strangers join the fund. Problems arise immediately due to a lack of trust. Who gets to control the primary account with everyone’s money? What happens if someone goes rogue? What if half the team never shows up to vote? What if 1 member is not who he says he is? Without trust, the fund would likely fall apart.
Ethereum Smart Contracts
Using a DAO powered by smart contracts on Ethereum’s blockchain to facilitate trust, the investment fund with strangers has a great chance of success. In fact, many of these funds already exist. The most successful is the Moloch DAO, with over $2.4 million invested.
Shareholders receive voting rights equivalent to their stake in the DAO and any DAO member can submit a proposal which goes through an automated voting process and grace period before automatically executing.
The concept of a DAO is incredibly powerful and hundreds of applications remain undiscovered. One thing is certain — all will be powered by Ethereum.
Want to dive deeper? Read the Ethereum White Paper.