What is Ethereum? Beginner’s Guide to This Decentralized Computing Platform

Bitcoin is the legacy, original cryptocurrency that launched an entire industry of innovation predicated on blockchain technology and its accompanying field of technical and economic mechanics. Primarily envisioned as a store of value and medium of value exchange outside of the jurisdiction of governments or third parties, Bitcoin’s application focuses on providing individual economic freedom through creating a novel financial technology.

However, the application of blockchain technology, cryptography, distributed computing, and economics in a system such as Bitcoin’s only was the tip of the iceberg to a future industry of vast potential. Ethereum opened the door to the potential of utilizing blockchain technology for a wide variety of applications.

What is Ethereum?

Pegged as a distributed world computer, Ethereum is an open-source, public blockchain and decentralized computing platform featuring turing-complete smart contract functionality. Proposed in late 2013, by a then 19 year old Vitalik Buterin, as a platform that could hypothetically leverage the blockchain to store and execute computer programs across an international network of distributed nodes, Ethereum has become the most well-known and established cryptocurrency outside of Bitcoin.

The History of Ethereum

Ethereum has a long, controversial, and highly significant history that has had a major impact on shaping the modern cryptocurrency sphere. The white paper proposed by Vitalik in late 2013 was the beginning of the Ethereum era.

Outlined as a distributed world computer for executing and storing computer programs, the goal was to create a distributed computing platform that took full advantage of the potential afforded by blockchain technology. As Vitalik puts it in the introduction of his paper:

“What Ethereum intends to provide is 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”

The systems that he “describes above” in the quote refer to common applications (dapps) built on top of the Ethereum blockchain today such as on-chain digital assets (ERC-20 tokens), non-fungible assets, decentralized exchanges, on-chain identity and reputation systems, peer-to-peer gambling, decentralized autonomous organizations (DAOs), and most notably, smart contracts.

Smart contracts are the primary feature of Ethereum and are basically self-executing programs that facilitate the exchange of anything of value on the network, immutably stored on the blockchain. They execute when specific conditions are met and are outside the influence of third parties or censorship and have no downtime, as long as the Ethereum network is functioning.

The general ambition of the project outlined in the white paper as well as the technical expertise of its young founder attracted the attention of many in the cryptocurrency space. The platform’s core innovation became known as the “Ethereum Virtual Machine” (EVM) and is a turing-complete software that runs on the Ethereum network, enabling anyone to run any program, regardless of the programming language, on the Ethereum blockchain. The result is the potential to create a vast array of decentralized applications all on a single platform.

The early development of Ethereum began in early 2014 with Vitalik and a small team including Anthony Di Iorio, Charles Hoskinson, and Mihai Alisie. The project began through the Swiss company Ethereum Switzerland GmbH and subsequently through the Swiss non-profit Ethereum Foundation.

Read our Profile of Vitalik Buterin

At the time, Joseph Lubin was the COO at Switzerland GmbH and helped to found the Ethereum Foundation. He remains a prominent figure in the cryptocurrency community as the founder of ConsenSys.

In July 2014, Ethereum underwent a crowdsale where more than $14 million was raised from July-August. In September of the same year, the Ether (the Ethereum currency) was distributed to the investors and development team, while the remaining funding went to the Ethereum Foundation.

In July 2015, the first mainnet, experimental release of Ethereum was launched and labeled the “Frontier” release. The first major upgrade to the Ethereum platform was released in March 2016 as “Homestead” and was the first upgrade to be considered stable, focusing on gas pricing, security, and transaction processing. At the time, critics of Ethereum were still wary about its security and stability as although being a Turing complete platform offers a substantial amount of potential development applications, it also brings with it some serious and potentially fatal security concerns.

The DAO

Despite security concerns, on the wave of excitement from the community, The DAO, a decentralized autonomous organization functioning as an investor directed VC fund was created. The DAO raised approximately $150 million through contributions from over 11,000 people and was seen as novel, self-executing combination of smart contracts designed to function as a decentralized investment vehicle.

Infamously, the DAO was hacked in June 2016 when unknown users were able to exploit a vulnerability in its code and were able to move $50 million into a different DAO (known as the Dark DAO). Further, once public, others users used the same vulnerability to divert the remaining funds into a third DAO called the White Hat DAO.

Read more about DAO’s and the DAO Hack

The resulting fallout was intense and highly polarizing. Two sides emerged with one side claiming that the immutability of the blockchain and the core tenet of “code as law” could not be broken while the other side argued for hard forking the protocol to return investors’ funds and eliminate the hackers’ access to the funds on the original Ethereum blockchain.

Eventually, Vitalik Buterin announced in July 2016 that miners had agreed on the hard fork and the fork was imminent. However, a minority of miners were still holding out and held steadfast in their convictions on not forking the protocol, which they saw us undermining the core principle of the platform. Thus, Ethereum was forked and the new chain became known as Ethereum and the old, unforked chain became known as Ethereum Classic, effectively splitting the Ethereum community.

As time progressed, the majority of businesses, developers, miners, and users favored the Ethereum (forked) chain and is the current chain named Ethereum with the 2nd highest market cap and a vast community behind it. Ethereum Classic (ETC) remains a popular cryptocurrency too, however, with the team behind ETC implementing the same upgrades as the Ethereum chain and actively developing the platform as well.

Ethereum vs Ethereum Classic: What’s the Differences

The most recent major upgrade to Ethereum came in the form of “Metropolis – Byzantium”, which is the first part of a two-part Metropolis upgrade that is supposed to lay the foundation for the transition of Ethereum to its Proof-of-Stake upgrade “Casper”, as well as its eventual sharding implementation.

Ethereum has been at the forefront of the recent scaling problems in the broader cryptocurrency industry. Plagued by high gas fees and slow transaction times, Ethereum is facing serious concerns about its ability to scale to meet the demands of thousands of dapps running on its platform and a sufficient high-throughput capacity to support a vast network of decentralized participants.

The proposed solutions are set to come in the aforementioned Casper upgrade and its eventual transition to sharding, a unique horizontal database architecture partitioning method designed to alleviate network congestion and help the network to scale.

How Does Ethereum Work?

The Ethereum Virtual Machine (EVM) is a Turing-complete software that runs on the Ethereum network. It executes scripts across a distributed network of computers and enables the execution and storage of everything from smart contracts to DAOs. Functionally, Ethereum allows developers to build decentralized applications on top of it. This can include games, distributed registries, organizations, and many more.

The design behind Ethereum, based on the white paper, is intended to follow the principles of:

• Simplicity – The protocol should be as efficient as possible, even at the cost of data storage or time inefficiencies.
• Universality – An internal Turing-complete scripting is provided language that a developer can use to program any smart contract or transaction type.
• Modularity – Ethereum protocol should be designed to be as modular and separable as possible.
• Agility – The protocol is not set in stone and any opportunities to improve the protocol architecture or the EVM in scalability or security will be exploited.
• Non-Discrimination/Non-Censorship – The protocol should not attempt to actively restrict or prevent specific categories of usage.

Benefits of Ethereum

The benefits of Ethereum not only as a blockchain-based platform itself but also compared to other blockchain-based platforms includes:

• Immutability – A third party cannot make any changes to data.
• Corruption/Tamper Proof – Censorship is unfeasible with the PoW consensus of the vast and decentralized network agreeing on its global state.
• Security – The combination of the PoW consensus, cryptographic techniques used in the transaction model, and lack of a central point of failure protects the network against hacking and manipulation.
• No Downtime – Applications, smart contracts, organizations, etc all running on the Ethereum blockchain are always running and cannot be turned off.

Disadvantages of Ethereum

As a Turing-complete platform, Ethereum is susceptible to vulnerabilities that can be exploited through the complexity of the primary programming language used in smart contracts, Solidity. Smart contract security has become a major concern and the DAO hack was the revelatory event that led to mainstream concerns of the long-term viability of smart contracts moving forward.

Ethereum also places a large focus on Security and Decentralization over Scalability. While scalability solutions are in the works and on the horizon, the low-throughput capacity and high gas costs for Ethereum at the moment make it inconvenient for mainstream users looking for free use of applications that they are accustomed too, as well as for developers building applications, where gas costs have become prohibitively high in some instances.

Transaction Model

Ethereum uses an account-based model, similar to a modern banking model for users, rather than the UTXO model of Bitcoin. The global state of Ethereum is divided into these accounts, which consist of 20-byte addresses and where each transaction of value or information between accounts is considered a state transition.

An Ethereum account contains 4 fields. The nonce, ether balance, contract code, and storage. There are two types of accounts, externally owned accounts and contract accounts. Externally owned accounts are user accounts which are controlled by private keys, does not contain any code, and can be used to create and sign transactions. A contract account is a smart contract, run by code and receives messages that allow to store messages and code as well as contact other contracts and externally owned accounts.

Ether is the currency of the Ethereum platform while Gas is the derivative of Ether used to pay for transactions and computations across the network. Ethereum chose the account-based model over the UTXO model of Bitcoin for a number of reasons, which you can find more in-depth information on here.

Ethereum Mining

Ethereum mining is in many ways similar to Bitcoin mining. However, there is a primary difference where the Ethereum blockchain not only stores the transaction list of the blockchain, but also the most recent state of the network.

Ethereum also employs the use of Patricia Trees rather than Merkle Trees as part of its blockchain state regulation. Patricia Trees are a modified form of Merkle Trees that enables Ethereum to efficiently store and adjust the state of the blockchain in each block.

Some other notable features of the Ethereum blockchain and mining include:

• 12 second block time
• Ethash Mining Algorithm (Uses DAG)
• Static Block Reward of 3 ETH
• Miners compensated for gas expended in block.
• Extra reward for including Uncles as blocks.

Find out more about Ethereum Mining in our Complete Guide

Consensus

Ethereum currently employs a modified Nakamoto Consensus Proof-of-Work (PoW) consensus model. The PoW consensus in Ethereum is extremely secure as the network consists of thousands of decentralized nodes across the world.

Mining in the PoW model of Ethereum utilizes the Ethash (DAG) algorithm which is designed to hash a fast verifiability time. Additionally, large scale miners get comparatively little benefit from larger operations due to the large memory requirements of the algorithm.

This model will eventually be replaced by a Proof-of-Stake consensus implementation with the upcoming Casper upgrade.

Read more about Ethereum Casper

Smart Contracts & Dapps

Smart contracts and the ability of developers to build decentralized applications on Ethereum is its most prominent feature. From building dapps that function as games to teams releasing their own ERC-20 tokens on Ethereum, a multitude of significant developments in the broader cryptocurrency industry have been enabled by leveraging this functionality of the EVM.

Solidity is currently the primary programming language used to write smart contracts and build dapps, however, Ethereum is currently experimenting with a new Beta programming language known as Vyper that is supposed to be a much simpler, secure, and auditable language for smart contracts in order to mitigate some of the complexity deficiencies surrounding Solidity.

If Ethereum is able to scale to meet mainstream application and throughput demands, the possible iterations of dapps on the platform are endless. Developers will have new avenues to monetize their creations, users will not be burdened with expensive and inefficient third-parties, and eventually applications (and even blockchains) will become interoperable with each other, empowering an entirely new paradigm of application development and innovation.

The Future of Ethereum

Ethereum seems invariably placed, alongside Bitcoin, as the center of the cryptocurrency world. With standards being proposed and implemented on the Ethereum network, a vast and dedicated community of developers and various other contributors behind it, and a vocal, talented leader in Vitalik Buterin leading the way, the Ethereum future looks bright.

Ethereum remains at the bleeding edge of innovation in the industry with developments such as its planned transition to sharding seen as some of the most daunting tasks out there, not just in the blockchain field either, but the larger technical community as well. Ethereum also lists a number of future technologies they are actively or potentially developing that include:

• Saving Wallets
• Crop Insurance
• Decentralized Data Feed
• Multisig Escrow
• Cloud Computing
• P2P Gambling
• Prediction Markets (i.e. Augur)
• Decentralized Marketplaces (i.e. 0x)

Not only is the Ethereum team developing groundbreaking innovations, but the larger community that participates in the network in the form of developing their own projects, within the confines of the Ethereum network, are also making significant contributions. Some interesting and exploratory uses of Ethereum include projects such as Aragon, 0x, Augur, Golem, and Loom Network.

Conclusion

Ethereum is one of the most important and popular platforms in the blockchain/cryptocurrency industry today. As tech talent continues to migrate to the space, adoption becomes more mainstream, and scaling solutions are implemented, Ethereum looks to remain the distributed world computer for the decentralized applications of tomorrow.

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