What Is Ethereum? An Introduction To ETH
Ethereum is considered the most important blockchain behind Bitcoin – and that may be due only to Bitcoin’s network effect, massive capitalization, and name recognition. The combined value of all the applications and tokens running on Ethereum far outweigh the value of Ether (ETH), the base token, itself.
So what is Ethereum? According to the Ethereum project, it is:
“…a decentralized platform for applications that run exactly as programmed without any chance of fraud, censorship or third-party interference.”
No discussion of Ethereum is complete without mentioning Vitalik Buterin, the project’s creator and de facto leader. Buterin came up with the idea of Ethereum a couple years after he learned about Bitcoin. Not even a legal adult when he took an interest in cryptocurrency, Buterin co-founded Bitcoin Magazine.
Buterin authored the Ethereum white paper in 2013, noting that while Bitcoin was a great invention, a blockchain which better supported “colored coins” or “tokens” was necessary. The concept of “smart contracts” is key to an understanding of the ETH token:
[…] a blockchain with a built-in fully fledged Turing-complete programming language that can be used to create “contracts” that can be used to encode arbitrary state transition functions, allowing users to create any of the systems described above, as well as many others that we have not yet imagined, simply by writing up the logic in a few lines of code.
What Does Ethereum Do?
Like similar blockchains, Ethereum makes virtually any type of application possible in a decentralized, tokenized way. Ethereum’s purposes are open-ended. It sports a Turing-complete programming language called Solidity. This means that programs (or “smart contracts”) can solve the same computational problems as other platforms and languages.
While it has a primary token called Ether, without which no transactions on the network are possible, it underpins a massive number of other tokens and applications. Some examples of tokens are:
- Aragon, a business-oriented decentralized application
- Status and EOS, both mobile-oriented Ethereum applications, the latter of which enables new types of applications to be built on mobile platforms.
- Power Ledger, one of a few inititatives to allow consumers to buy and sell electricity from each other as well as to businesses.
- In fact, the majority of ICOs are ‘ERC-20’ compatible, meaning they abide by a certain set of Ethereum-compatible rules that allow them to be stored in ETH wallets. These rules help ensure that developers can focus on what makes their tokens unique, and not the basic rules that underpin any smart contract.
Decentralized Applications (DAPPS)
Perhaps the most innovative idea fomented by the establishment of Ethereum, decentralized applications do not require centralized servers and, therefore, control. Decentralization in itself is a concept the reader may want to investigate further, but essentially, decentralization offers the following benefits (as a start) over alternative designs:
Decentralized applications are still very nascent and the breadth of their usefulness will take several years to fully realize. From the perspective of investors, developers, and users, they represent an exciting gateway to a future that may solve some of the most insidious technology problems we all experience today. For instance, data hacks could conceivably be a thing of the past… medical records might be both secure and easy to find for medical personnel… even something as significant as slowing climate change or tracking disease outbreaks could be more effective with decentralized apps.
While Ethereum’s longest chain has been mined by GPUs and other mining hardware for much of its history, in the near future Ethereum will switch to proof-of-stake. This will mean that specialized hardware will no longer be required to earn transaction fees and block rewards — instead, people who hold Ether and a current copy of the blockchain will be able to earn rewards, almost like interest on a savings account.
The DAO Hack
Ethereum is an ideal tool for both Decentralized Autonomous Organizations and Decentralized Applications. Smart contracts can be authored by anyone, however, and their security is of the utmost importance. This has never been demonstrated more clearly than in the case of “The DAO,” a venture capital fund which forever changed the Ethereum community.
Shortly after its funding (through the Ethereum platform), a hacker managed to steal around $50 million worth of Ether. The Ethereum community decided to hard-fork the Ethereum blockchain at block 1428757, effectively undoing the hack. However, not everyone agreed with this decision and continued mining the original Ethereum blockchain, calling their chain Ethereum Classic.
Ethereum Classic (ETC) has all the same functionality of Ethereum and is largely compatible. The important difference is that on the Ethereum Classic chain, the DAO hacker retained his/her/their theft of around 3.6 million Ether – at the time of writing, that’s worth almost $3 billion. No wonder there was an argument…
The Benefits of Ethereum
Ethereum is still relatively new in both technology and finance. As a platform, the future is quite unwritten as to the interesting uses it may find. As a currency and investment instrument, Ether has already performed fabulously well, having grown more than 30 fold from its initial value of around .005 bitcoins.
Ethereum’s base currency Ether makes a good investment because, due to the high number of new tokens and initial coin offerings which require Ether in order to make transactions. So the token is continually in high demand.
Ethereum is highly accessible to users, relatively easy to understand, and has a massive developer community surrounding it.
21st-century businesses can find in Ethereum a number of valuable applications. As well as raising money for new ventures, it may not be too far-fetched to imagine standard practices of the future involving launching DAPPs on the Ethereum protocol in the future in the same way that companies today have websites and mobile applications.
Additionally, things like rewards programs can be modernized with Ethereum tokens, and be assigned real-world, transferrable value, opening up new avenues of monetization and engagement for businesses and consumers.
The Drawbacks To Ethereum
Not The Only Game In Town
Interesting and potentially disruptive alternatives to Ethereum have come to the fore, most notably Chinese-based NEO. This is only a drawback in the sense that an alternative could become a more attractive development platform, potentially lowering the desirability of Ether tokens.
At Present, Somewhat Ahead of its Time
Ethereum requires massive computing and financial resources as well as electricity to effectively run. This is a drawback in that it puts a ceiling on the number of people who can participate effectively. This type of drawback generally dissipates as time goes and the effects of Moore’s Law make technology cheaper and resources more efficiently used.
It Can Be Slow… Really, Really Slow
The Ethereum network has a maximum capacity that often tests the patiences of those who use it – especially when something as seemingly-harmless as few cute kittens can almost bring it to a standstill.
Multiple efforts to solve the problem of scaling the network are in development – the Ethereum core team is working on a native solution called Plasma, while a token called Zilliqa aims to speed it up drastically through a highly-technical approach called ‘sharding’. Meanwhile, another project – Raiden – is endeavoring to take some of the less mission-critical transactions ‘off-chain’ altogether: instead of an app asking for 0.00001 cent every second from a power consumer, for example, it might ask for one cent every 2.77 hours – thus keeping the network mostly unclogged.
The answer to the question “What Is Ethereum” really does depend on who’s asking. It’s so flexible, so important to the current state of blockchain technology, and has been such a great investment, that every answer is likely to be different.
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