If you are new to the cryptocurrencies world and want to know what Ethereum is and the benefits it can bring, without going too deep into the technical side of things, you will find this guide well suited to your needs.
Though many associate the emergent blockchain technology with Bitcoin and simply as a means to have fast, transparent and secure transactions, in reality its usefulness goes well beyond that.
One person that was able to see this potential is Vitalik Buterin, the creator of Ethereum. He considered that Bitcoin could be enhanced by adding a scripting language, so that applications could be developed on top of it. The community at that time did not fully agree with Vitalik, so he decided to develop a new platform that was capable of doing what he envisioned.
Ethereum , similar to Bitcoin, is a decentralized public blockchain network. The main difference between the two is that Ethereum allows other cryptocurrencies and projects to be built and deployed without the need of creating a separate blockchain for them. This is done through the means of smart contracts , a type of computer code that is set to execute once certain parameters are met. As smart contracts run on the blockchain, there is no possibility of third party interference, censorship, fraud or downtime.
One of main innovations Ethereum brings is the Ethereum Virtual Machine (EVM), a software that allows any program to run on its network, regardless of the programming language used, if enough time and resources are allocated. While before you needed to create separate platforms for different functionalities, and find a way to make them work together, Ethereum makes this problem a thing of the past in a smooth, effortless transition.
Ethereum also has its own token, called Ether. In order to send or receive Ether, you will need an account. This is done similarly to Bitcoin, where you have a public address from where you send and receive Ether or other tokens on the Ethereum network, and the private address or private key, which gives you the “authority” to send Ether and tokens from your public address. As a general rule, the private key is never to be disclosed. Think of it as the key to your house, safe or lockbox. If someone were to find it, it would most likely result in the loss of all your funds.
The verification and security of the network is handled through a Proof-of-Work (PoW) consensus algorithm that can be seen in various cryptocurrencies. All transactions and data sent across the network are gathered into blocks. Once a block is full, it is sent to be validated by “miners” using specialized equipment to crack the cryptographic code of each block, verifying that everything is in order. For doing this, they receive incentives through transaction fees.
This method is considered archaic and inefficient, as mining consumes a considerable amount of electricity. However, there are plans for Ethereum to switch to a Proof-of-Stake algorithm, where network validators simply stake a part of their Ether, locking it up in order to fulfill the same role as today’s miners.
If all of the above didn’t pique your interest, Ethereum is also capable of building Decentralized Autonomous Organizations (DAO). A DAO fulfills the role of a traditional organization, however, it is entirely built on programming code and smart contracts, and has no leadership structure. There is no need for employees, managers, VPs and CEOs, instead ownership is divided between token holders similar to shares and equities, with each token giving a certain amount of voting power.
There are however some issues raised with the type of decentralized governance Ethereum runs on. As smart contracts are coded by people, human error still applies. Oversight or mistakes can be very costly to the network, should someone decide to exploit them.
A simple change in the code should fix these problems outright, no? Well yes, but since one of the fundamental concepts of blockchain is immutability, a network consensus is needed for even the smallest change in the source code to occur. This can be time consuming and difficult to achieve, leaving vulnerabilities open for longer than what would normally happen in a centralized system.
Perhaps the most exciting characteristic of Ethereum is the ability of building DApps (decentralized applications) based on the Ethereum Virtual Machine and smart contracts. These can range from finance, retail, sports betting, supply chain and cute virtual cat breeding and trading. There are a few limits to what kind of application can be built on the Ethereum platform, however its scalability has been taken into question lately, with many of the running DApps leaving the network congested, leading to increased fees and slower validation times.
Despite scalability issues and network congestion, Ethereum is the leading platform for ICO development, having more than 50% of the ICO market share, which only gives praise to how easy it is to create your own cryptocurrency or application through Ethereum.
Ethereum has become as important a part of the crypto community as Bitcoin. While the latter focuses on bringing a new meaning to how we view and use money, the other focuses on a future of almost infinite possibilities. The concept of smart contracts can be instrumental in eliminating the need for third parties or central authorities, cutting down costs, fees and manual labor to a minimum. If the future is to be decentralized, then Ethereum will surely be a part of it.