What is Ethereum?

What is the cryptocurrency Ethereum ETH

The History of Ethereum

The idea of Ethereum was first introduced through a white paper written by a programmer named Vitalik Buterin back in 2013. Buterin was skeptical of bitcoin’s limitations and insisted that there was a need for a new scripting language for application development. Thus, his goal was to build a decentralized application that would offer just that. However, his first proposal was rejected, so he moved on and crafted a new proposal. This new proposal would later become Ethereum.

The First Public Announcement of Ethereum

That’s how Ethereum was born and a year later, it was publicly announced at the North American Bitcoin Conference in Miami (January 2014). Among its initial founders were Gavin Wood, Charles Hoskinson, and Anthony Di Iorio. However, only six months later, Hoskinson decided to leave the project after Buterin announced that Ethereum would proceed as a non-profit. Several other people joined the team of founders afterwards, which left Ethereum with a long list of people responsible for its existence. The list includes Anthony Di Iorio, Vitalik Buterin, Mihai Alisie, Amir Chetrit, Joseph Lubin, Gavin Wood, and Jeffrey Wilke.

Initiating the Development Process and Funding

The formal development process of Ethereum began in 2014 through a company known as the Ethereum Switzerland GmbH. The most challenging work fell in the hands of Gavin Wood, the chief technology officer at the time, who had to specify their idea of placing executable smart contracts in their blockchain. At about the same time the development began and The Ethereum Foundation was created.

Interestingly, the foundation was not funded by venture capitalist but by an online public crowd-sale where the members of the cryptocurrency community could buy ether coins using bitcoin. The public crowd-sale generated about 18.4 million US dollars as around 11.9 million Ethereum tokens were sold. Before the public release of the platform, the team launched a test-net called Olympic in May 2015, which they used to work out features and issues related to the Ethereum protocol.

The Stages of Ethereum Development

The Ethereum development process took part in four stages: The Frontier, the Homestead, the Metropolis and the Serenity stage. The Frontier was the initial stage of development where users could buy and sell Ethereum and perform basic cryptocurrency functions. Homestead was the second stage of development and it represented the first stable Ethereum release that took place in March, 14th, 2016. We are currently in the third stage of development, Metropolis, which aims to introduce zk-Snarks and a decrease in the miner reward. The fourth and final stage is titled Serenity and marks the transition of the platform from a Proof of Work to a Proof of Stake system. We have yet to see where the developers are going to take it next!

Ethereum Hard Fork

In June of 2016, a very popular smart contract on Ethereum got exploited in a hack and with that, over $ 50 million in Ether was stolen. This led to a split in the community and eventually a Hard Fork of the blockchain and the inception of Ethereum Classic.

Ethereum is a platform designed to facilitate the development of applications and systems on top of it. In May 2016, a few members of the Ethereum community announced the foundation of a smart contract called the DAO or Decentralized Autonomous Organization. The purpose of the DAO was to operate as a venture capital fund for the cryptocurrency space without a centralized authority. An innovative and forward-thinking concept which raised a record amount of $150 million in Ether during its crowdfunding period.

Unfortunately, the DAO smart contract had a major security flaw which led to the exploitation by an unknown attacker and the drainage of 3.6 million Ether. The attack was possible due to what’s known as a ‘recursive call exploit’. A solution to return all stolen Ether was proposed by the community and the Ethereum team. The solution basically concluded that the blockchain would be Hard Forked and the DAO smart contract would be practically invalid like it never existed. This modus operandi generated a lot of controversy inside the Ethereum community and eventually led to a split of the community. The counter hard fork group kept supporting the un-forked chain which led to the existence of the Ethereum Classic blockchain.

Specifications of Ethereum

Ticker Symbol ETH
Founder(s) Vitalik Buterin, Gavin Wood & Joseph Lubin
Date of Release 30 July 2015
Consensus mechanism Proof of Work
Hashing Algorithm Ethash
Maximum supply n/a
Average Block Time 10 – 20 seconds
Mining reward 2 ETH
Average blocksize 20 kb
Next Block Halving n/a
Smart Contracts Yes, in Solidity

The Price of Ethereum

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Unique Aspects of Ethereum

The reason why Ethereum was so successful since its initial release is because it introduced innovative features to the game. Its most unique feature is the smart contracts, which we will get to in a second. In order to properly understand how Ethereum works, we must start from the very beginning, that is, the Ethereum Virtual Machine or the EVM for short.

EVM

EVM is a term used to refer to the part of the Ethereum network that uses decentralized computing power. This network can be most simply described as an enormous web of nodes or computers connected to one and another. Everything that happens within the network must be done through smart contracts. Whatever type of transaction you want to start in Ethereum, the first step would be to initiate a smart contract.

What Are Ethereum’s Smart Contracts?

A smart contract is basically a set of instructions written in a programming language called Solidity. The contracts are structured in a hierarchical order, which means each set of instructions needs to be implemented before you can move on to the next set of instructions and eventually complete the contract. Every step of a smart contract, as well as every transaction on the platform, are recorded and updated in the Ethereum ledger.

This means that every participant of the contract is held accountable for their actions. Thanks to this feature, Ethereum takes away the possibility of business fraud and bad intentions. You simply cannot make a move in the network without your ID being tied to it. Another great benefit of using Ethereum is that it allows you to make transactions without third parties and middlemen.

The Concept of Gas

Another term that you must understand before you start using Ethereum is “gas.” Just like a vehicle uses gas to move and accelerate, Ethereum also implements a similar concept where the users need gas to start a transaction or complete a step in a smart contract. In other words, every action on the Ethereum network has a cost because of the computational power that is required. These costs are measured in gas. The party that requests a smart contract must pay for gas in Ether, which is the native currency of Ethereum.

Ethereum as an Open Environment

What is truly unique about Ethereum is the fact that it is not only a cryptocurrency but also an open interactive platform that allows anyone to make use of blockchain technology. People can build their own projects or decentralized applications using smart contracts and gas within Ethereum. Decentralized apps in Ethereum are owned by people who purchase the specific tokens of the app they are interested in.

ICOs and Tokens on the Ethereum blockchain

In other words, participating in crowd-sales allows you to get a share of the decentralized app by paying for it in usage or work tokens. These crowd-sales and fundraisers in the cryptocurrency world are known as the Initial Coin Offerings or ICOs for short. During the crowd-sales, people can purchase tokens of specific decentralized apps. You might be confused as to why you need to use ether to purchase tokens instead of directly using ether to purchase apps. Here’s a real-life example that will make things easier to understand when you go to an arcade center, you usually pay for a certain amount of coins at the entry. Then you use the coins you’ve been given to activate the arcade machines. You don’t use the original money you paid with, but you use the coins that the arcade gave you at the entry.

In this analogy, the arcade center is the decentralized application, the coins you’ve been given are tokens, and the money you used at the entrance is ether. This process makes things faster and more effortless within the Ethereum network. Most decentralized app developers get their funding through ICO crowd-sales, where people can invest in projects by purchasing the tokens of certain apps.

Why Use Ethereum?

The most attractive trait of the Ethereum platform is the possibility to design projects, combined with the implementation and usability of tokens. With the ERC-20 token standard, users are able to implement smart contracts for token creation. This revolutionary technological feature makes the Ethereum network stand out.

Ethereum’s ERC20 token standard

The Ethereum ERC20 token template has become the technical standard within the Ethereum network. As a result, most tokens that are released on the Ethereum network use this ERC20 token standard. One of the reasons for ERC20’s popularity is the simplicity of deployment. This aspect, along with the interoperability that can be utilized with other Ethereum token standards, makes it the default and most favorable standard for companies working on an ICO. An ICO, short for Initial Coin Offering, is comparable to a crowdfunding phase of a project.

The token standard also comes with certain basic functionalities. For example the way ERC20 handles the access of specific information and the transferring of tokens. These functions enable developers to roll out contracts for token creation without the need to adjust them every time a new token is developed. Since August 2019, the number of different kinds of ERC-20 tokens has risen to roughly 200.000 and this number is still increasing every day.

ERC-721

Another open token standard that offers possibilities in the realm of token creation is the ERC-721 standard. This standard makes it possible to define a contract in which non-fungible/unique tokens can be created. One example of implementation is a digital game in which a virtual item or an object, has a unique token corresponding with the in-game item. For example, Cryptokitties is a game in which it is possible is to collect unique items of which the individual value are variable. While this removes the familiar ERC20 interchangeability, this configuration would give way for the free market to dictate the price of such individual in-game objects.

Ethereum as World Computer

Ethereum is also known as the “World Computer”, and for a good reason. This intricate network is based on thousands of nodes and operates 24/7, making it a reliable choice. Besides the lack of a middleman, the usability of Ethereum is seen as a big plus. Most importantly, Ethereum is an open network which allows anyone to participate through decentralized projects if they have enough ether to pay for gas. Summed up, Ethereum offers plenty of reliable benefits. For example the fact that services can run without an intermediate, or the security aspect, avoiding business fraud through the blockchain technology.

Resources of Ethereum