What is Ethereum (ETH)


23. Feb 2021

If you want to fully understand what Ethereum is without getting too technical, you’ve come to the right place. Keep reading to find out everything you need to know about Ethereum, what it does, and how you can use it in your everyday life. Let’s get started with the basics.

What is Ethereum?

Ethereum is one of the biggest (if not the biggest) global and decentralized cryptocurrency operating systems. It allows you to build decentralized DApps (Digital Applications) and smart contracts without any third-party interference or downtime. Ethereum offers a decentralized virtual machine, which is known as EVM (Ethereum Virtual Machine). You can use it to run different types of scripts on the international public nodes network. Applications on Ethereum are accessible around the globe, and you can even code on this platform to control the money.

 

Decentralized Solution: What Does it Really Mean?

As mentioned, Ethereum is a decentralized platform. In simple terms, this means that there is no single authority controlling the creation, trade, or administration of the exchange. It’s entirely opposite to the centralized approach, which means single-entity control. The reason why Ethereum is a decentralized system is that the majority of online enterprises, businesses, and services are developed and running on a centralized system. Moreover, history has shown us many times that a centralized system is flawed. That’s because single entity control also signifies a single point of failure. 

On the other hand, the decentralized approach has no reliance on any centralized back end. Systems on this approach directly interact with the blockchain, and there is no single point of failure there, either.

Blockchain is run on the computers of volunteers and enthusiasts around the world. This way, it can never go offline. Unlike centralized systems, users don’t need to provide their personal information to use a decentralized system. If you're already wondering whether Ethereum is comparable with Bitcoin, then keep in mind that both of them are entirely different projects. Not only is their nature different, but they also have different goals. Keep reading to learn more.

 

A Brief History of Ethereum

In 2013, Vitalik Buterin shared this revolutionary idea with his friends in a white paper. As the idea floated more, around 30 people contacted Buterin to talk about the concept, and it was publicly announced one year later in 2014. Buterin also presented his ideal in Miami at the Bitcoin conference, and later in 2015, the very first version of Ethereum named "Frontier" was launched successfully.

 

Ethereum Key Terms

In order to understand Ethereum better, you need to understand the following key terminologies.

 

Decentralized Autonomous

It’s a digital organization that focuses on working without any hierarchical management.

 

Organizations DAO

It’s a combination of people, smart contracts, blockchain, and code.

 

Smart Contracts

One of the most important parts of the Ethereum platform is the smart contract. It’s an agreement that is digitally signed between two or more parties and relies on a consensus system. In order to understand it better, let's compare it with the traditional contact.

Property

Smart Contract

Traditional Contract

Cost

A fraction of the cost

Very expensive

Duration

Minutes

Months

Escrow

Necessary

Necessary

Remittance

Automatic

Manual

Lawyers

Virtual presence

Physical presence

Presence

Might not be necessary

Important

 

Smart Property

In order to save and maintain your smart property, the platform comes with an Ethereum wallet. You can also use this wallet to even hold other cryptocurrencies. It’s basically the gateway to all the decentralized applications present on the Ethereum blockchain.

 

Solidity

Solidity is used in Ethereum as the smart contract programming language, which is specifically designed to run in EVM. You can use this language to run arbitrary calculations.

 

Transactions

On the Ethereum system, the transaction is a simple message that’s transmitted from one to another account. It can be empty but can also have binary data known as Ether.

 

EVM (Ethereum Virtual Machine)

As mentioned earlier, EVM is used for smart contracts as a runtime environment. The most important factor about the EVM is that the code it runs has no access to any type of connection to the Ethereum filesystem, network, or any other process. That’s why it’s an excellent sandbox tool for smart contracts.

 

Ether

The Ethereum operating system comes with a cryptocurrency value token, and on the cryptocurrency exchanges, it is listed as ETH. It allows you to pay for computational services and transaction fees on the Ethereum blockchain network. In simple words, every time Ether is paid when a smart contract takes place.

 

Gas

There is also an intermediary token known as Gas that allows you to make payment. It’s a unit that you can use to calculate all the computational work that you need to seamlessly run your transactions or a smart contract. The following equation will allow you to understand both Ether and Gas in a better way.

Ether = Tx Fees = Gas Limit x Gas Price

Here:

  • Gas Price is equal to the Ether amount that you need to pay
  • The gas limit is equal to the gas amount that is spent on the computation

 

Is Ethereum a Cryptocurrency?

At this point, you must be wondering whether Ethereum is a cryptocurrency or not. If you look at the definition of Ethereum, it explains that Ethereum is basically a software portal that offers the services of a decentralized app store as well as a decentralized internet. You need to pay in a specific type of currency for the computational resources that you use in order to run a program or an application. That's where Ether comes in.

Ether doesn’t require any third-party software or bridge in order to process your payments as it acts as a digital bearer asset. Not only does it work as fuel for all the decentralized programs present in the network, but it also acts as a digital currency.

 

Ethereum Vs. Bitcoin

In a way, it’s safe to say that Ethereum is somewhat similar to Bitcoin but only when observing it from a cryptocurrency perspective. But the fact remains the same as stated earlier, that both of them are entirely different projects with different goals. Undoubtedly, to date, there is not better and more successful cryptocurrency than Bitcoin, but Ethereum is not only about cryptocurrency. It's a multi-purpose platform, and digital currency is its one part.

Even if you only compare both of them from a cryptocurrency perspective, both of them, even then, are vastly different. For instance, Ether practically doesn't have any hard cap, but that's not the case with Bitcoin as it comes with a hard cap of 21 million. Moreover, it takes no more than 10 seconds to mine Ethereum. On the other hand, the average block mining time of Bitcoin is about 10 minutes.

Another very important difference between the two is that you need a lot of computing power in order to mine Bitcoin. Now it’s only possible for the industrial-scale mining farms, while Ethereum encourages decentralized mining that any individual can perform. The biggest difference between Bitcoin and Ethereum is that the internal code of Ethereum is Turing complete. In simple words, you can literally calculate every single thing if you have time and computing power. It provides the users of the Ethereum platform with endless possibilities, and this capability is not present with Bitcoin. The following table will allow you to understand the difference between Ethereum and Bitcoin better.

 

Ethereum Vs. Bitcoin Comparison Table

Property

Ethereum

Bitcoin

Founder

Vitalik Buterin

Satoshi Nakamoto

Definition

Ethereum is a decentralized world computer

Bitcoin is a digital currency

Average Block Time

10 to 12 seconds

10 minutes

Hashing Algorithm

SHA-256 algorithm

Each algorithm

Release Date

30 July 2015

9 Jan 2008

Blockchain

Planning for POS - Proof of work

Proof of work

Release Method

Prasala

Genesis Block Mind

Usage

Digital Currency

Smart Contracts Digital Currency

Cryptocurrency

Ether

Bitcoin – Satoshi

Scalable

Yes

Not at the moment

Concept

World Computer

Digital money

Turing

Turing complete

Turing incomplete

Mining

GPUs

ASIC miners

Cryptocurrency Token

Ether

BTC

Protocol

Ghost Protocol

Pool Mining Concept

Coin Release Method

Through ICO

Early Mining

 

How Does Ethereum Work?

As mentioned, Ethereum supports applications beyond money systems. Other than storing the complete transaction history, all the nodes on this platform need to download the current or most recent information/state regarding the respective smart contract. It also downloads the code of the smart contract and information about the balance of both the parties of the agreement.

Basically, you can define the Ethereum network as a state machine based on transactions. You can understand the concept of a state machine as something that reads an input series and changes its state on the basis of those inputs. Keep in mind that every Ethereum state consists of tens of millions of different transactions that are grouped together to make blocks. All the blocks form a chain as they are linked together. Moreover, each and every transaction is validated by a process that is known as mining before it’s added to the ledger.

 

What is Mining?

It's a computational process in which a specific group of nodes completes a challenge called "Proof of Work" - basically a mathematical puzzle. The completion time of each puzzle is directly proportional to the computational power that you have. Countless people around the world try to compete with each other in creating and validating a block because every time a miner is awarded and Ether tokens are created if they prove a block. It means that miners are the real backbone of the Ethereum platform as they generate new tokens and validate operations such as confirming and validating transactions.

 

How to Use Ethereum

In software applications and solutions, centralized systems are widespread, but they come with several issues such as:

  • A single point of control which is also a single point of failure
  • Silo effect
  • A single cyberattack can corrupt the whole system easily
  • There can be many performance bottlenecks

 

How Does Ethereum Addresses Such Issues?

First of all, you can develop and deploy decentralized programs and applications using Ethereum. Moreover, you can literally make any centralized program decentralized as well with the Ethereum operating system.

The benefits of a decentralized system are endless. One of the most important ones is that it entirely transforms the relationship between people and companies. It allows the people (customers) to exactly trace the very origin of any products or services they want to buy. On top of that, smart contracts ensure safety and make the trading experience more effective and seamless.

 

Advantages of Ethereum

As we have discussed already, no third-party interventions are possible when you’re working on the Ethereum platform. It brings all the advantages of blockchain technology to the table, and some of the most important ones are as following:

  • DDOS (Distributed Denial of Service) resistant and 100 percent uptime
  • You can request and upload your own programs to execute
  • You can create your tradable token usable as a virtual share or even a new currency
  • It offers permanent and persistent data storage
  • Allows you to develop highly secure, fault tolerance and decentralized programs and applications
  • You can even create your personal virtual organizations

 

Disadvantages of Ethereum

Just like all the other things that we deal with in our lives, the Ethereum platform also has some downsides. But the fact of the matter is that the advantages that it offers are far more useful. Here are some of the disadvantages of using the Ethereum platform.

  • The EVM (Ethereum Virtual Machine) is a little slow, which is not the best solution to perform large computations.
  • The applications and programs are only as good as the coders who write them.
  • Deploying upgrades or fixing the existing bugs is not an easy task as all the peers present in the Ethereum network also need to comply with the updates with their respective node software.
  • Swarm scalability is not seamless.
  • Doesn't offer any functionality to verify the personal information of any user, but some applications and programs need it.

 

Applications of Ethereum

There are many applications for which Ethereum is being used, and some of the most important ones are as following:

 

Banking

As Ethereum is a decentralized platform, it offers an extremely safe and secure banking experience. Moreover, it’s almost impossible for any cybercriminal to access someone’s personal information without authorization.

 

Prediction Market

The prediction market is yet another excellent application of the Ethereum platform as it offers smart contacts.

 

Agreements

The smart contract functionality makes the agreement process seamless, and it can easily be executed and maintained without altering anything.

 

DIM (Digital Identity Management)

Ethereum solves all types of data monopolies and identity theft issues with its smart contracts, which can easily manage digital identities.

 

Examples of Ethereum

People who don’t even have any technical background can use the Ethereum platform to open a decentralized application. It has the potential to become a revolutionary platform, especially for blockchain technology. You can easily access this network by using Mist Browser. This browser comes with a user-friendly and responsive interface and also offers a digital wallet that you can use to trade and store Ether. You can also use it to write and deploy your smart contracts. But if you want to use the Ethereum network with your traditional browsers such as Firefox or Google Chrome, you can use the MetaMask extension for that. Here are some of the examples of Ethereum.

  • Gnosis: It's a decentralized prediction market, and it allows you to post your vote on anything from election results to weather.
  • EtherTweet: As the name suggests, this application provides you with completely uncensored communication and takes functionality from the world-known social platform Twitter.
  • Etheria: If you are familiar with Minecraft, then you can say that Etheria is Ethereum’s version.
  • Weifund: You can use this open platform that you can use for crowdfunding campaigns with smart contracts.
  • Provenance: As mentioned that Ethereum allows you to locate the very origin of the services and products. This platform is developed on that functionality that provides you with valuable information that you can use to make informed purchasing decisions.
  • Alice: It’s a platform that utilizes blockchain technology to bring transparency to charity and social funding.
  • Ethlance: It’s a freelance platform that you can use to work in order to earn Ether.

 

How to Get Ether

Primarily there is a couple of different ways that you can use to obtain Ether, which are:

  • Buy it
  • Mine it

 

Buying Process

The easier way, especially if you're a beginner, is to buy it from exchanges. It's important to keep in mind that you must choose only that exchange that works within your specific jurisdiction. Then you'll need to set up your account to buy Ethereum. Moreover, you can also use the native Mist browser if you want to make your whole process easier and more efficient. We recommend you go to exchanges like Coinbase that offer a super easy account setup process.

On the other hand, you can get Ether by P2P (Peer to Peer) trading that allows you to pay with any current on which both parties agree. You can even use other cryptocurrencies for that as well, such as Bitcoin. Bitcoin users like peer-to-peer trading approaches more, but people obtain Ethereum mostly via exchanges. That's because the Ethereum network doesn't put full user anonymity because of the unlimited supply.

 

Mining Process

The second way of getting Ethereum is to mine them, which means that you'll need to contribute your computing power. It uses proof of work, and your computing power solves complicated mathematical puzzles. This way, you confirm a block of action present in the Ethereum's network, and you get your reward in the form of Ether.

 

What can You Buy with Ethereum?

It was almost impossible to use cryptocurrency to buy things on the World Wide Web. But now, the landscape is entirely different as more and more platforms (such as Coinsbee) are integrating cryptocurrencies as an acceptable payment method. It means you can actually consume your Ether to buy a range of services and products.

At Coinsbee, you can buy mobile top-ups, payment cards, gift cards, etcetera. This platform also accepts more than 50 different cryptocurrencies in over 165 countries. What's more is the range of eCommerce vouchers for platforms like Amazon, Netflix, Spotify, eBay, iTunes, and more. Not to mention, it also allows you to buy gift cards for the many popular games, and all the major game distributors such as Xbox Live, PlayStation, Steam, etcetera are also available.

 

Future of Ethereum

It has been a few years since Ethereum started its journey. But the fact of the matter is that it's just started getting popular, and the general public and mainstream media are now paying attention to this platform more than ever. Critics and experts suggest that this technology is disruptive to the status quo, so much so that it has the potential to revolutionize industries and services. It may even change the way the internet works entirely. However, the founder of Ethereum has pretty modest views and predictions about the platform. He recently stated that he and his team are trying to keep Ethereum as the leading platform based on blockchain technology. He also said that the company is focusing on security improvements and technical issues.

The founder of Blockchain, Peter Smith, said that the infrastructure of Ethereum is undoubtedly fascinating. He also said that the platform has great potential and can go a long way. The CEO of 21.co, Balaji Srinivasan predicts that the Ethereum platform is not going anywhere at least for five to ten years.

Overall, it’s safe to say that Ethereum is one of the greatest decentralized platforms to date and the opinions and predictions regarding its future are very positive among cryptocurrency experts. However, some old-school financial critics still believe that the downfall of Ethereum is near. But the stats, stability, and the success of both Ethereum and Bitcoin are not on the side of those financial experts.

 

Final Word

We hope this article clears up pretty much everything you need to know about Ethereum as a beginner. If you want to explore the concept more deeply, then we recommend you read the following books:

 

References:

https://blockgeeks.com/guides/ethereum/

https://www.guru99.com/ethereum-tutorial.html

https://www.bitdegree.org/crypto/what-is-ethereum

https://blog.coinbase.com/a-beginners-guide-to-ethereum-46dd486ceecf

https://ethereum.org/en/developers/tutorials/

https://www.etoro.com/crypto/what-is-ethereum/

https://dl.acm.org/doi/book/10.5555/3164698

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