What is Ethereum? How does it work? What can this new blockchain platform do for me?
Ethereum is the blockchain-based platform, powered by the cryptocurrency token “Ether,” that executes smart contracts and can be used as the foundation for decentralized applications. Some people have referred to it as “Internet 2.0” because of the possibilities that it presents in developing a new way for computers to interact in a trustless environment. But if you’re new to the world of digital currencies (cryptocurrencies) then that answer might need further explanation.
Let’s break it down in some detail.
-Ethereum is a smart contract platform
-Vitalik Buterin is the creator, and co-founder
-The Network runs the cryptocurrency Ether
-Many think that Ethereum could be a prototype for a new kind of internet
-Currently, the majority of decentralized applications (dApps) run on Ethereum
– Ethereum is the fork of the Ethereum Blockchain
-Ethereum Classic is the original Ethereum Blockchain
-Ethereum does not have a capped currency supply
What is Ethereum?
As I stated above, Ethereum is a blockchain-based platform, powered by the cryptocurrency token “Ether,” that executes smart contracts and can be used as a foundation for decentralized applications.
When you hear that without an explanation of the terms, however, it sounds like gibberish. Below the following video, I attempt to explain each of the questions I think you may have when you’re just getting started on understanding how Ethereum works.
Open this video in a new tab, then continue reading. Once you’re done with this article, watch the video to bring it all together in your mind.
What is a smart contract?
A smart contract is essentially what it sounds like. It is a contract, written in computer code, that self-executes. This means that once you create a contract, all of the details are handled directly by the code. There is no need for paper files to be mailed, file cabinets to be accessed, or even to use a third-party escrow guarantor.
The execution of smart contracts is the fundamental underpinning of Ethereum.
Say you wanted to complete a real estate transaction using an Ethereum smart contract. How would that work?
- First you would need to put the house up for sale and find a buyer.
Once you have a buyer and you’ve agreed on the price, the next logical step is to draw up a contract. Normally, you would go to a title company, real estate agent, or lawyer. But with a smart contract you need someone who understands how to code.
2. The coder would write computer code in the form of a smart contract that aligns with the specifications of the deal.
3. Once all parties are happy with the contract, the purchasing party would send the agreed upon amount of money to the Ethereum wallet address in the smart contract.
4. The smart contract would then execute and transfer ownership to the new buyer, and the process would be complete.
This is just one example, but it’s the one that I think the most people can relate to. Real estate is part of everyone’s lives, and that isn’t going to change. We’ll always need places to live.
Obviously, the need for contracts isn’t going anywhere, either. The thing that is going to change is HOW we use them. Instead of shuffling paper around, and paying ridiculous fees to third-parties in every transaction, now all we need is the code.
Without Ether, (the cryptocurrency issued by Ethereum) however, there is still no way to pay for your smart contract.
What is Ether?
Ether is the cryptocurrency token used as the “gas” of the Ethereum network.
Whenever a smart contract is executed, computer power is needed to process it. Since computers run on electricity, there are costs involved with executing these contracts.
To pay for those contracts to be executed, you are “charged” Ether when executing. This Ether is paid to the node that processes the contract as a reward for contributing their computing power to the Ethereum network.
In other words, Ether is used to provide incentive for people who run Ethereum nodes to process contracts on the network. They receive a financial asset in exchange for the electricity and time they consume to provide this service.
That’s all well and good, but it still doesn’t explain exactly WHAT Ethereum is. There is something in the background running everything, processing these smart contracts, and consuming Ether, and it’s called the Ethereum Virtual Machine.
What is the Ethereum Virtual Machine?
The Ethereum Virtual Machine is the virtual (meaning NOT physical) environment in which smart contracts are executed on top of Ethereum.
In order to understand the EVM fully, you need to have a basic grasp of concepts such as “Turing completeness,” and since this is a beginners guide we aren’t going to go too far down the rabbit hole.
What you need to know about the EVM is that it is the digital space in which smart contracts are executed on the Ethereum Network. It allows computers to interact and communicate in a trustless way while still completing the actions they need to complete.
Who founded Ethereum?
The founder of Ethereum is named Vitalik Buterin. He is the cat-and-unicorn-surfing-a-rainbow-tshirt wearing boy wonder that invented Ethereum.
Born in Russia, Buterin moved to Canada at the age of 6. His parents were seeking better work opportunities.
In his teens, he learned about and became fascinated with Bitcoin. In his opinion, however, Bitcoin needed a coding language that would make it open for development by other coders. He wanted people to be able to launch applications on top of Bitcoin in the same way people build extensions for the Chrome browser.
When this idea failed to gain traction in the Bitcoin community, he launched the Ethereum project along with Joseph Lubin.
To see the shirt I am referring to Vitalik wearing, check out the video below.
The Ethereum Classic Hardfork
Hard forks are a tough concept for blockchain newbies to understand.
Blockchains are digital chains of data packets referred to as blocks. These blocks are cryptographically protected from tampering by being stored in a chain that cannot be reversed…or should I say….shouldn’t be able to be reversed.
This debate was at the center of the Ethereum Classic hardfork, which saw the Ethereum community nearly split in two after a massive software attack called the DAO attack.
What is the DAO, you ask?
DAO stands for Decentralized Autonomous Organization, and was a project run by a group called Slock.IT. The goal of the DAO was to create a venture capital firm that employed no people, and was fully executed using smart contracts.
The DAO raised their money through a token sale that wound up totaling approximately $150 million dollars. However, shortly after the funds were raised, the project was subjected to an anonymous attack that succesfully stole around $50 million dollars worth of Ether.
The attack left people with questions about how much they could trust Ethereum, and so the Ethereum leadership made a drastic decision. They decided to commit a hard fork (a split in the blockchain) and set up a smart contract that could return the funds to the rightful owners.
This has raised many questions about the real immutability and decentralized nature of Ethereum, and has created a robust developer community around the Ethereum classic cryptocurrency that maintains the original Ethereum blockchain.
Examples of Decentralized Applications Built on Ethereum
After hearing me mention decentralized applications, you’re probably wondering what they are. Instead of trying to explain the complex structure of these things, I thought examples would help you see how they work much more efficiently.
Here’s a list of some of the biggest dApps being built today.
Golem is a project attempting to create easy-access to the power of a supercomputer.
They’re doing this by creating a decentralized structure that allows any person to access latent computer power that is going unused on other computers on the network.
When you need to render lots of information, you simply plugin to the network and buy the computing power you need for the moment. You get your task done faster, and the person lending computing power gets paid in Golem. Check out the video for Golem’s own explanation.
One of the first decentralized exchanges to be functional and go live, IDEX runs on the Ethereum blockchain and allows people to exchange ERC-20 tokens.
IDEX is nested inside of the Aurora project, a collection of protocols and applications that hope to create a platform for decentralized banking and finance.
Cryptokitties sounds like a joke when you say the word out loud to yourself. And in some ways, it was when it first got started.
But recently, things have gotten a little out of hand, with one CryptoKitty selling for $170,000. Yes. You read that right.
To learn more about CryptoKitties, check out their website, get your own, and start breeding. You know. If you’re into that sort of thing.
This is my personal favorite among the dApps currently being built on top of Ethereum.
The idea of Decentraland is to create a virtual reality world that lives on the blockchain and runs on open standards that individual creators and developers can interact with. This allows for the creation of an open, virtual economy where the creators are able to build virtual products that others can then purchase.
While these dApps have yet to really prove themselves, they are simply the tip of the spear when it comes to the economy of tomorrow.
What we are witnessing now is not the creation of the most fully-fledged dApps, but rather the beginning of a new age of computer science, economics, and the digitized economy of the future.
Do I Really Need to Understand Ethereum?
After reading everything above, you may be wondering if you’ll ever really understand how Ethereum works in a comprehensive way.
You may also wonder if it’s even necessary to do so.
Here’s the thing…
The reality of modern existence is that we don’t actually understand the majority of technologies that we interact with – phones, cars, computers, microwaves. Average citizens don’t usually understand how these things work in any detailed way.
I mean…I have no idea how a microwave works and I use one every day.
Blockchain technologies will be no different.
We will sign smart contracts without understanding what is happening in the background. We will send Ether to our friends for Christmas without understand the Ethereum Virtual Machine.
Our interactions will be with the “front end” of these products and services. All of the digital plumbing will be developed and managed by people who specialize in it.
Is this bad?
I would argue that it is not. When people specialize it gives them a service, a way to provide value, that they can offer to other people. If you think about it long enough, this is likely how you earn your living.
So don’t fret about knowing every tiny detail of the inner workings of Ethereum before getting some for yourself.
If cryptocurrencies are interesting to you, open an account on an exchange. Get $20 of your favorite crypto. Send it to a friend. You’ll see what people are talking about when they say that crypto eliminates the need for banks and middlemen. Nothing is better than hands on experience when it comes to learning something new.
(No information, product, or service produced or sold by Koin Keys is meant to be construed as financial advice. It is possible that the author of this, and any other article on Koin Keys, owns the cryptocurrency they are writing about, or discussing. Neither the owners of Koin Keys, the employees of Koin Keys, nor the contractors of Koin Keys are financial advisors. Therefore, neither Koin Keys, nor the owners thereof may be held liable for any financial or personal decisions made by our readers. Cryptocurrencies are volatile assets, and caution should be exercised in the decision to make any purchases.)