What is Ethereum Network & Coin – Crypto Beginner’s Guide
Welcome to the world of cryptocurrency.
Of course, if you’re here, you’re probably generally aware of what cryptocurrencies are, but we’ll be sure to define everything so that we’re all on the same page.
The platform Ethereum is all about quick development and deployment and was created in part out of a need for a platform that deals with app development with improved scripting language compared to Bitcoin, the most well-known cryptocurrency.
At this stage, Ethereum is much more popular among the extremely tech-savvy, as the everyday application is mostly unnecessary for many folks. And to say that programmers are excited about the growth of Ethereum would be a bit of an understatement.
Think about the ability to have any application created without limits. And by application, I mean app, and by app, I mean something that you might have on your very own mobile device that streamlines your day-to-day life.
See, we’re hitting close to home.
Picture the ability to have “smart contracts”, so that when you bet your buddies that the coin flip in the football game lands heads, you get all of their money instantly instead of having to hound them for weeks. (Or using this technology for much more important things … that would work, too.)
Ethereum has endless possibilities, and we’re only scratching the surface. Let’s talk through Ethereum (and its own cryptocurrency, Ether) in terms that a beginner could understand, and really try to unpack why the platform is rapidly becoming so popular.
But before we get in too deep, we should start by making sure we’re all on the same page when it comes to the definition of a cryptocurrency, and then we’ll compare Ethereum to its most popular predecessor and influencer, Bitcoin.
What is a Cryptocurrency, and How Does Ethereum Compare to Bitcoin?
First things first.
A cryptocurrency is a type of digital currency primarily used to perform secure financial transactions through blockchains, which serve as a public financial transaction database. This allows funds to flow freely without being tied up in centralized banking systems.
Bitcoin is thought of as the first decentralized cryptocurrency. This means that the government (in the U.S., the Federal Reserve System) cannot regulate the supply of currency. Instead, blockchains were born.
Blockchains are a digital ledger that tracks and verifies all transactions. The ledger is secured using cryptography and regulated by a community of miners – those who validate and timestamp said transactions.
The entire idea of cryptocurrency is to allow more of a free flow of funds and information without requiring third-party approval for anything. Bitcoin was the first such platform that truly did so successfully, and while it certainly seen its fair share of ups and downs over the past few years, it is the one cryptocurrency that has sustained a certain level of success – although Ether is a solid No. 2.
Now, on to Ethereum.
Ethereum itself isn’t a cryptocurrency; it’s actually a platform on which cryptocurrency can be built. It takes the same blockchain technology popularized by Bitcoin (and, to a lesser extent, other cryptocurrencies) and allows applications to be built on its own decentralized platform. Again, less regulation is the goal, and Ethereum achieves that goal better than any other platform out there.
One more time: the network is called Ethereum. The actual cryptocurrency itself is called Ether. The miners work to earn Ether (aka Ethereum Coin) as compensation, and in turn, the network fuels itself. Ether is a tradeable cryptocurrency that is valuable in a variety of ways throughout the Ethereum network.
A Brief History of Ethereum
Ethereum began as an idea in 2011, as 17-year-old Vitalik Buterin became exceedingly curious about bitcoin. By 2013, Buterin proposes the idea of Ethereum.
In 2014, Buterin dropped out of college and had his research funded in part by a crowdsale as he creates and ramps up Ethereum, all in a shockingly short period of time. Everything went live in 2015, and by 2017, the cap rate on Ethereum was already $36 billion.
Of course, Buterin is still only 24 years old, and recently made headlines by stating that he hopes that “centralized exchanges go burn in hell as much as possible”. (Adding the “as much as possible” surely makes it seem like Buterin knows that they can’t entirely go away, softening what would otherwise be an … aggressive statement.)
So, Why is Ethereum Gaining Steam?
Folks are excited about Ethereum for a number of reasons, but let’s cover a couple of the big ones.
Ethereum is built in a way that allows scripts such as smart contracts to run. Smart contracts allow tasks to be executed as soon as conditions are met, again without the approval of a third party. (And trust me, this is only the beginning of the streamlining.)
The creator of Ethereum, Vitalik Buterin, was motivated to start the platform by – and here it is again – a desire for less regulation for a series of industries and actions that are currently, at least in his opinion, overrated. Smart contracts are one example, but when there is a system of miners who operate within a system based on mutual trust, the execution is not all that difficult.
A few potential future uses of Ethereum include banking, insurance, prediction markets, various data feeds, file storage, sports betting, among others. And with an entire network at the disposal of the creators, each of these decentralized applications can operate on Ethereum’s blockchain instead of needing their own. It’s a relatively way to control everything, which is the clear advantage that Ether and its platform, Ethereum, have such a huge leg up on Bitcoin (more on the similarities and differences later).
Back to smart contracts. How do they work, you ask? It’s simple, really. The contract relies on the strings of computer code created when the predetermined conditions were established. Once the conditions are met, the contracts are executed without needing approval from a third party/central authority. It’s an efficient, black-and-white answer to a number of needlessly complicated problems. And that’s that.
Instances could include something as small as a bet between two friends or as large as a court case in which the lawyers and/or judge were replaced by a smart contract, which is simply obeying the code already set into place. This would, in theory, all but eliminate dispute.
We’re not talking about the year 2020, obviously, but this isn’t exactly a pie-in-the-sky idea. Codes are already created to run countless actions around the world, so the appetite is there. The key here is that these smart contracts could operate within this sphere of cryptocurrency. And that’s the new horizon.
The technology that makes this all possible…
Remember, blockchains are secure by nature. But while security isn’t front of the line in terms of potential issues, it’s important to look at what technology is in place that makes Ethereum hum.
The speed of transaction processing has improved exponentially from Ethereum’s inception and has jumped significantly in about the last 18 months. That will only continue to improve, which is insane to think about.
Now, of course, Ethereum is looking to scale their creation as they continue to optimize their transaction process. The program isn’t yet at capacity, and there’s more growth to be had.
Quickly, let’s get nerdy.
The runtime environment within Ethereum is called the EVM, or Ethereum Virtual Machine. It’s a 256-bit register stack, which means that it will run the same code as intended and is the consensus mechanism for Ethereum. This is where the smart contracts live and are executed.
To draw a quick comparison: early blockchain apps like Bitcoin only allowed users predefined options. And for Bitcoin, that was to behave as a cryptocurrency, and that’s it. Ethereum, on the other hand, allows users to create their own operations entirely, as noted above.
Let’s talk about decentralized applications
In today’s world, the term “applications” is often simply shortened to “apps”. What we’re talking about here isn’t all too different when what any layperson is familiar with using daily on their mobile device or tablet.
Put simply, an app is a program that is created to accomplish a specific task for the user. For instance, on your mobile phone, you likely use a bank app to check your balance or make a mobile deposit rather than opening a web browser, heading to your bank’s website, and navigating from there. Or you go to the ESPN app to check scores instead of typing in “ESPN.com”.
Decentralized applications (or, “dapps”) serve similar functions but are virtually unregulated across an entire network of nodes instead of being completely centralized. Remember, dapps are autonomous in that they operate based on preconditioned rules and cannot be influenced by outside factors. Plus, they’re already encrypted within the blockchain, so they’re entirely secure.
Lastly, let’s go back to ease of implementation. Instead of needing to create a new blockchain and/or platform on which to host their app, developers can simply create a dapp to be utilized on the existing framework.
Think about it this way: Bitcoin is to financial transactions as Ethereum is to dapps. Bitcoin is the conduit that allows transactions to occur, just as Ethereum is the host and conduit for dapps to be created and operated, while Ether is Ethereum’s version of cryptocurrency, similar to Bitcoin.
What dapps are on the horizon?
As of the start of 2018, there were approximately 250 dapps available. That’s changing rapidly, of course, following the scaling year of 2017. Throughout the calendar year, Ethereum was able to find plenty of takers in an initial coin offering. But as investors took on the risk and experienced success, there was suddenly momentum.
Among the existing dapps that have clear goals, Golem is perhaps the most intriguing. It is a project attempting to make a global supercomputer accessible by anyone. It’s not there yet, of course, but … let us know when it is, please. It sounds amazing.
In terms of prediction markets, and specifically sports betting, a dapp called Augur exists as a forecasting tool. It’s tough to know exactly what this would mean for the betting world, but it’s exciting news nonetheless, and even more so now that sports betting is being widely legalized throughout the United States.
Civic is a dapp that would assist in identity protection, and in addition to the security it would provide, it would also be a huge time-saver. Other existing dapps include algorithms, tokens, crowdfunding, gambling, and more.
You can be willing to bet that there are plenty (Hundreds? Thousands?) of dapps that are being independently developed – one of the beauties of a decentralized and essentially unregulated system.
Back to the Bitcoin vs. Ethereum Conversation…
Once again, let’s be clear: Bitcoin and Ethereum are not necessarily competitors in the same field; Ethereum is more about allowing space for some of the other, non-currency functions.
But let’s compare the two, as they’re often lumped together, and Ether is a big part of the Ethereum platform and certainly draws parallels directly with Bitcoin.
- Ethereum mines their blocks far more frequently, which keeps transaction data fresh.
- While Bitcoin transactions are limited block size and competition, Ethereum fees are based off storage needs and network usage. Therefore, these fees are much lower. For instance, the fee for ether was just $0.33, while Bitcoin’s was a full $23.
- Ethereum uses an account system that allows accounts to be debited and credited, which is an advancement over Bitcoin’s similar system.
There are a few obvious advantages for Ether/Ethereum over Bitcoin, even though the purposes aren’t exactly identical. For one, Ethereum’s blocks are mined about every 15 seconds, while Bitcoin’s are only every 10 minutes. That means more transactions faster, with or without more abandoned blocks as a side issue. Secondly, Ether itself is a better currency than Bitcoin, offering transaction data that can be sent faster and more reliably, along with paying lower fees. And that matters.
So, the long story made short is that both are effective, although we aren’t comparing apples-to-apples, Ethereum/Ether is the more modern version of Bitcoin in many ways.
What’s the DAO, and why does it matter?
DAO stands for “decentralized autonomous organization”. DAOs function as their own investor-directed venture capital funds. And, as is the theme here, DAOs do not have a board or management team but ran on the open source code.
Of course, DAO is entirely autonomous and relatively decentralized with no single, individual leader. It’s a bit worrisome, to be sure, but it’s more or less the point of cryptocurrencies, although perhaps a bit tangible than what many are used to dealing with.
The DAO raised a mindboggling $150 million from 11,000-plus investors prior to being hacked to the tune of $50 million back in 2016. The Ethereum community then split into two cryptocurrencies due to a disagreement regarding the idea of splitting Ethereum and what became Ethereum Classic creating a spinoff called Ethereum Classic.
This split is termed a “hard fork”, and it nearly crippled Ethereum. After all, this is supposed to be a Wild West sort of currency with its lack of regulation, and if the powers that step in and protect/correct, then they’ll be doing exactly what DAO is supposed to prevent. Then again, theft is theft, and it would also be a difficult message to condone such behavior within the Ethereum platform.
After all, the developers who design and run Ethereum didn’t have much to do with DAO but had to come up with a solution themselves. And again, it’s an existential question that is crucial to the platform and its future.
What’s the Downside of the Ethereum Network?
As with other cryptocurrencies (and the platforms on which they exist), the idea that criminals could take advantage of the system is certainly alive and well. In fact, there has been one study, based on a paper from the University of Cagliari, which states that the number of existing Ethereum smart contracts that assist in Ponzi schemes being something like 10 percent.
The hard fork that already occurred is a microcosm of what the other main concern would be for detractors or skeptics of Ethereum, as has the DAO hack that led to said fork. Plenty of people would play the middle and argue that banks and other typically-regulated institutions should create their own private blockchains.
Also, bailouts are completely off the table – and we’re not talking about the massive 2008 bank bailout necessarily, but any bailout of any amount. If it is decided that someone lost value and the “error” is fixed via censorship, then it takes on the opposite intention of the entire program. After all, smart contracts are … smart. Humans shouldn’t be trying to outsmart them.
The last thing to look out for is purely operational and will only rear its ugly head if Ethereum suddenly attempts to scale too quickly. Because there is no centralized regulation, there is nothing to keep prices and fees fixed depending on congestion and demand. For instance, if tens of thousands of people wanted to buy the same application and overload the network, there isn’t anything to suppress fees and ensure that everyone gets what they want at the correct price.
If scale happens too fast, you’ll have plenty of people who turn away from using Ether and/or being on the Ethereum network altogether.
Don’t be shocked that there’s some risk involved; every time something is completely deregulated there are going to be some bumps in the road. It will take time to get used to, but the positives far outweigh the negatives, and the upside is enormous.
So, What’s Next for Ethereum?
As it turns out, we have no idea.
Things that the good folks behind the curtain are working on seem to be focused on improving anonymity for users, as well as shoring up streamlined smart contracts and programming.
According to the founders of Ethereum, the main goal of the platform wasn’t specifically created to appease investors but to change the way that the world operates. Because of this, the continued scaling of Ethereum and Ether won’t happen overnight; it will take quite some time for a comfortable future to form out of the infancy of the platform.
That said, Ethereum as a whole is beyond a logical “next step” for blockchains and cryptocurrency but is a creative and effective solution to myriad problems. The capabilities and potential of the platform is seemingly endless, and its versatility compared to the narrow success that Bitcoin aims to have … there’s no contest.
It’s also important to remember that the supply of the currency is theoretically limited. As of the end of 2017, mining generated 9.2 million new ether, which was a 10 percent increase in supply. The inflation rate should continue to drop, and while there isn’t a current hard-cap on the total supply of ether, it will surely be added sometime soon.
Look for there to be additional uses added soon, as well as continued improvements along the lines of what was listed above: faster data mining and transaction processing, continued fee reduction, and improvements to the credit/debit account system.
Also, Ether can only be traded by certain brokers, exchanges, and online wallets. And as of the start of 2018, only 150 stores accepted ether.
Final Thoughts on What is Ethereum
As mentioned, a tangible future is legitimately important to the founders of the Ethereum platform. That means that each decision will be measured carefully, and all of the decisions will be made in the best interest of the greater good, for lack of a better term.
The future of technology as a whole and the ease and convenience of a largely (if not entirely) unregulated online marketplace is the dream of Buterin and his co-founders. Not getting rich quickly.
Ethereum, which grew so rapidly at first, will likely continue a slow climb as it gains users and finds its permanent footing in the cryptocurrency world. Of course, it sits No. 2 now, but its clear advantages over Bitcoin and overall versatility could change that in the years to come.