What is Ethereum in simple words
Ethereum — is both a cryptocurrency and a functional decentralized environment that has truly revolutionized the entire IT sphere.
The creators of the ether, among whom Vitalik Buterin stands out, when launching this platform pursued the standard goals for cryptocurrency authors – to improve Bitcoin. However, ether can hardly be called Bitcoin 2.0. They are somewhat similar, but there are a number of conceptual differences between them.
Few people talk about this, but the cryptocurrency boom of 2016-2017 is associated precisely with the launch and popularization of Ethereum. The new environment maximized the potential of blockchain and gave impetus to the launch of new startups and projects, which in turn attracted huge investments.
ETH has tightly grabbed the status of the second most popular cryptocurrency in the world and the most revolutionary. In this article, we will talk about the features of Ethereum in a language that is understandable to an ordinary reader, without delving into technical subtleties.
What is Ethereum?
If we adhere to dogmatic terminology, the Ethereum platform is designed to create and operate decentralized blockchain-based applications using smart contracts.
The internal currency of the platform is ether. Abbreviated designation – ETH. Ethers are used not only as a unit of account. They also guarantee the execution of smart contracts, playing the role of such a “fuel” for the network.
Who created Ethereum?
The creator and main ideological inspirer of Ethereum is a Canadian developer of Russian origin Vitalik Buterin. He became interested in cryptocurrencies back in 2011, for some time publishing Bitcoin Magazine. At the same time, he closely studies programming and thinks about creating an improved platform that works on the blockchain.
This is how Buterin himself recalls it:
The idea to create Ethereum did not come immediately. At first I tried to promote it in the project I worked for. But I was told that it takes a year for implementation. Then I quit. I remember walking around San Francisco, thinking, and then I took and wrote a white paper, sent it to my friends, and they to theirs. This is how it all began.
It was 2013. Already in 2014, fundraising for the development of the platform began through crowdfunding. The Ethereum ICO raised 31,191 BTC (over $ 18 million), and the project itself also attracted banks and financial institutions. The platform was launched in July 2015. However, it did not fully work until March 2016 with the release of the Homestead protocol.
What was Ethereum created for?
Ethereum has provided completely new opportunities for creating decentralized projects and startups based on blockchain and smart contracts. One of these startups is The DAO. It is a platform for finding projects for investment, built on smart contracts. ICO The DAO has become one of the most successful in history. During the crowdfunding, we managed to raise $ 150 million in investments. However, due to an error in the source code, part of the funds (60 million) were stolen.
In order to recover the stolen funds, it was proposed to roll back the network through a hard fork. This would make it possible to backup the blockchain to its initial state – even before the theft from The DAO. It was not possible to achieve full consensus in the network, therefore, in parallel with Ethereum, Ethereum Classic appeared – the “before rollback” version. Despite the fact that the hard fork made it possible to return the stolen investments, it was criticized, as it violated one of the main principles of the blockchain – the irreversibility of operations.
The launch of Ethereum has seriously revitalized the entire cryptocurrency world, showing the versatility and flexibility of the blockchain. The authors of the platform have implemented an environment with convenient tools, in which a person can create a startup or an application of a decentralized nature without serious technical training. For example, the source code of the Namecoin cryptocurrency takes only 5 lines. Therefore, Ethereum can be called an adapted framework in which all development is based on smart contracts.
How Ethereum works?
Earlier we mentioned the concept of a smart contract as one of the foundations of Ethereum. It is a computer algorithm that ensures the execution of contracts within the blockchain. Smart contracts are built in such a way that the execution of a certain action occurs only when certain conditions are reached.
The smart contract can be explained using a simple example of renting an apartment. A prerequisite for the use of housing is payment. If the tenant pays, he can easily use the property. If not, then, in theory, a smart contract could be programmed to lock door locks. And a person simply cannot get into an apartment until the moment he pays the rent. The example is conditional, but it explains the purpose and principle of smart contracts in an understandable format. It guarantees decentralization as the tenant and landlord cooperate directly. No bank checks, bills, and so on.
To summarize, the main objects of smart contracts can be distinguished:
- Interacting parties or signatories;
- Subject of the agreement (rent, service, money transfer);
- Condition for execution (described mathematically and programmatically).
It is smart contracts that underlie all ICOs, guaranteeing automatic crediting of tokens to investors after the transfer of ether to specified wallets.
The Ethereum blockchain is supported by miners. The platform uses a Proof-of-Work algorithm – a proof of work that requires the computing power of the participants for the secure functioning of the network. Miners receive a reward for finding a block signature – all this is very similar to Bitcoin.
Ethereum opportunities and uses
Ethereum, or as it is also called, ether, is one of the most flexible and popular cryptocurrencies. It is capable of performing all the same functions as Bitcoin, Litecoin, Dash, Ripple:
- Payment instrument;
- Asset storage form;
- Investment asset.
In terms of support and prevalence, ETH is among the TOP existing digital currencies on the market. At the same time, ether functions also affect internal settlements and registration of transactions in the platform.
However, Ethereum’s main value is not in its “cryptocurrency” properties. This platform allows the creation of decentralized blockchain projects, ranging from charitable foundations to sports betting applications or poker rooms. At the same time, the platform is open, so everyone can get access to it. To do this, just download the Mist browser or a special extension for Google Chrome MetaMask.
Interesting applications / projects implemented on the Ethereum blockchain:
Platforms for banks and investment funds;
- BackFeed is a socio-economic platform that compiles various ratings;
- FreeMyVunk – a program for monetizing ratings in video games;
- The Rudimental is a crowdfunding environment for writers, journalists and other creative people;
- First Blood is a platform for gamers and eSports bettors.
Difference between Bitcoin and Ethereum
Bitcoin and Ethereum are somewhat similar, as both are blockchain platforms. Only now the scope and functionality of bitcoin is much more limited. This platform is designed to conduct pseudo-anonymous transactions. While Ethereum is a complete environment for implementing decentralized applications (Dapps) using smart contracts.
The features of the platform’s internal currency also differ. In Bitcoin, it is called bitcoin and primarily serves as an electronic payment method. That is, it is a cryptocurrency in the full sense of the word. Ethereum uses ether (ether), which in concept is a token used to conduct smart contracts.
Here’s how Bitcoin can be described:
- A global digital currency that can be stored and for which goods and services can be purchased;
- Decentralized financial environment without intermediaries with minimal fees;
- “Digital gold” with anonymous transactions and mechanisms to protect people’s money in unstable economies.
That is, Bitcoin is primarily a functional financial instrument with elements of anonymity and decentralization. But Ethereum is a platform for creating decentralized programs and applications on the blockchain. The smart contracts that underlie the network are universal. In Bitcoin, a smart contract guarantees only payment transactions. And in Ethereum, they can be applied in a wide variety of areas.
Both networks use the same Proof-of-Work protocol. This means that the computing power of computers is used for mining, guaranteeing protection against double spending and hacker attacks. And if Bitcoin has an established emission ceiling (21,000,000), then Ethereum does not. It is for this reason that the Ethereum team is considering options with the transition to the Proof-of-Stake algorithm (proof of stake) and the possible “burning” of a part of the mined coins. Conversations like this show another difference between Ethereum and Bitcoin – flexibility. The platform is easier to modify, update and upgrade.
Ethereum advantages and disadvantages
When it comes to the advantages and disadvantages of Ethereum, it is important to clarify here whether it is about the platform or about cryptocurrency (ether).
To begin with, let’s talk specifically about ether – a token (cryptocurrency). Ether has no serious drawbacks in comparison with Bitcoin and other popular coins. What’s more, the network processes transactions quickly, potentially increasing the payment potential of ETH.
There are no problems in order to buy this cryptocurrency or exchange it for other coins. However, from an economic point of view, ether has several disadvantages. First, it is the course and the mechanisms that influence it. If in the case of Bitcoin we can talk about market formation of prices, then in the case of Ethereum there is a direct relationship with the success of the platform itself. Should someone release an improved version or find a flaw in Ethereum, it will bring down the value of tokens.
Secondly, there is no emission ceiling. This “devalues” the cryptocurrency and makes us talk about a possible transition to Proof-of-Stake or the development of a mechanism for burning tokens.
- Versatility – supports various programming languages and algorithms of varying complexity, and smart contracts are used in different areas;
- Flexibility – the platform is open to improvements, upgrades, updates;
- Publicity – Ethereum has a leader in the person of Vitalik Buterin, details of updates and innovations are announced in advance;
- Accessibility – Ethereum is an open platform for developing decentralized applications. And almost anyone can act as a developer.
- Centralization – although Ethereum positions itself as a DAO (decentralized autonomous organization), the case with the network’s hard fork in 2016 shows that the platform has elements of centralization;
- Vulnerabilities – The DAO case shows that the platform can “skip” imperfect projects;
- Documentation – Developers complain about the lack of clear documentation, which complicates interaction with the platform.
Ethereum’s future prospects
Many people underestimate the moment when the full version of the Ethereum network (Homestead) came out. This became the starting point for the entire cryptocurrency market and triggered a boom that has been going on for several years. The Ethereum platform allowed the development of decentralized projects in a distributed ledger using smart contracts. And in fact, it became a catalyst for the inflow of investments (ICO) into the crypto world and as a result of a serious increase in the exchange rate of major currencies.
Ethereum allows you to use the blockchain for more than recording and storing transaction data. She opened it to new areas, laying the building block for a potential IT revolution. A revolution that decentralizes a number of processes and abolishes mediation in many areas. This is why Ethereum is so popular. And the fact that the network is constantly evolving only adds to its prestige.
A new era of Ethereum will come with the transition to the Serenity version. The release of Metropolis is also planned before that. However, it is in Serenity that the transition from PoW to PoS is being implemented, which should reduce the costs of maintaining the network and protect it from the notorious “51% Attack (when 51% of all cryptocurrency belongs to one owner). In addition to this, an option is being considered with scaling the network by sharding, that is, dividing into smaller parts.
If the new items are successfully implemented, then this will be positively reflected on the ether rate. Some experts speculate that ETH has the potential to overtake Bitcoin. True, the Ethereum team is not chasing the status of the main cryptocurrency on the market. Their main goal is the development of the platform, the creation of mechanisms to combat inflation of the internal token. This token, according to Buterin, should carry real value, and not be the subject of speculation. This is another direction of the ether development.
The Ethereum blockchain with smart contracts is the prospect that makes ETH attractive in terms of investment. The future will show how powerful the platform will become. But even now such giants as Microsoft, Santander, JP Morgan, Intel, Sberbank believe in it. They are all part of the Enterprise Ethereum Alliance, actively exploring the use cases of blockchain in their work.
This guide described in simple words the key features of the Ethereum platform and cryptocurrency. In the article, we noted several times that the Ethereum environment is fickle – it is actively updated and improved. This makes it a revolutionary in the cryptocurrency market. To keep track of the latest platform transformations, use the official Ethereum.org website.