What Is Ethereum? – A Simple Guide

Ethereum (ETH), one of the earliest and most ambitious blockchain projects, aims to use cryptocurrency to decentralize products and services in a wide range of use cases other than money.

Bitcoin and Ethereum: The Differences

If Bitcoin aims to be a digital gold standard, Ethereum has taken a different approach, diversifying so that its users can create an unlimited number of custom assets and programs that govern their operation.

This has resulted in (perhaps mistaken) comparisons of Bitcoin to email (a very powerful, specialized tool), whereas Ethereum has more in common with a web browser (its goal being to enable programs users can interact with and create).

This analogy effectively communicates Ethereum’s scope, as its team would develop its own virtual machine and scripting language (required to execute its programs), raise funds through the sale of its own new money (ether), and introduce the concept of “state” to cryptocurrency.

Simply put, Ethereum tracks both changes and potential changes yet to occur, a distinction that is central to its vision.

These multi-step computing functions are referred to as “smart contracts” on Ethereum. Decentralized applications are larger structures made up of many smart contracts.

While such programs seem to be primitive today, some genuinely think they could one day be used to create software that mimics the behavior of some of the world’s largest internet companies.

Amazon, for example, can be viewed as a type of state service that connects buyers to a massive, constantly updating inventory stashed on databases via a simple web interface. In this case, a for-profit corporation serves as a middleman and technology steward.

Ethereum can be viewed as an early attempt to use cryptocurrencies to create competitive markets governing various parts of these now-monopolistic services.

As of 2020, Ethereum’s developers are in the early stages of implementing this concept, preparing an overhaul of its core code known as “Ethereum 2.0” that will usher in new changes.

How Ethereum works

There are always two Ethereums: the Ethereum that exists today and the Ethereum that developers hope to complete when they finish their roadmap.

While Ethereum has made significant progress since its initial public offering in 2015, it’s important to remember that not all of its proposed features have been implemented.

Blockchain Ethereum

Today, Ethereum’s blockchain is powered by proof-of-work mining (in which computers burn energy to solve puzzles required to create blocks). (Miners batch transactions into new blocks every 12 seconds or so.)

Developers create programs (smart contracts) in the project’s programming languages, Solidity or Vyper, and then deploy this code to the Ethereum blockchain.

All nodes (computers running the software) keep a copy of the Ethereum Virtual Machine (EVM), a compiler that translates smart contracts written in Solidity and Vyper and executes their changes in blockchain transactions.

In 2016, a group of Ethereum users voted down a proposed code update, opting instead to run older code. As a result, Ethereum Classic, a new cryptocurrency, was created.

Proof-of-Stake

With the transition to Ethereum 2.0, Ethereum intends to change its core operating system, moving to a proof-of-stake system (PoS).

A proof-of-stake model would allow any user with a minimum of 32 ETH to lock those funds in a contract, which would then earn rewards for solving computations required to add new blocks to the blockchain.

At a time when many cryptocurrencies have struggled to find a single use case, Ethereum may be unique in that it has gone through several distinct periods of high demand.

Blockchains for private use

Major banks and institutions were among the first to embrace Ethereum, using its open-source code to develop proof-of-concepts and R&D initiatives in 2015 and 2016.

Those who did not copy the Ethereum code were frequently inspired by its approach, such as the Linux Foundation’s Hyperledger and R3’s Corda, projects that copied parts of its architecture but rejected the notion of creating a new cryptocurrency.

Major banks and corporations would eventually back Ethereum more directly by forming the Enterprise Ethereum Alliance. This is a non-profit founded in 2017 with the goal of connecting the many private bank blockchains with the main Ethereum blockchain.

ICOs 

Later, in 2017, entrepreneurs flocked to Ethereum with the belief that its platform could be used for fundraising by creating new cryptocurrencies and selling them to global consumers in what became known as “initial coin offerings” (ICOs).

ICOs took advantage of Ethereum’s ability to allow developers to build new crypto assets on top of its blockchain, using token standards, without having to create a new codebase from scratch.

Enterprising projects with their own live blockchains and cryptocurrencies (such as Tron and OmiseGo) would launch as ethereum tokens, later delivering new technology.

DeFi

Decentralized finance (DeFi), the network’s most recent wave of innovation, has seen entrepreneurs use Ethereum to create protocols that replicate traditional financial services.

Projects such as MakerDAO, which designed a protocol to decentralize the management of a cryptocurrency pegged to the US dollar, have been among these. Other DeFi initiatives have attempted to automate and decentralize financial services such as lending and borrowing.

Final thoughts

Ethereum may do for applications of all shapes and sizes what Bitcoin did for money and payments by leveraging blockchain technology. Smart contracts can be created with a built-in scripting language and distributed virtual machine to perform a wide range of functions without the need for a trusted third party or central authority. 

Nodes can be paid for their processing power in running these decentralized apps using its internal cryptocurrency, ether, and eventually, entire decentralized autonomous organizations may exist in an ether economy.

Ethereum is the second most valuable crypto currency with a market cap of $411.6 billion. ETH currently trades at $3,488.89 per coin and production of ETH is capped at 117M, making it very scarce. 

This article was provided for educational purposes only. If you are considering investing, do your own research and talk with your financial advisor. Never invest more than you are comfortable losing.