What is Ethereum (ETH)?
Think of Ethereum as Android OS or Linux, open-source platforms where you can write code, create, and build, without a set of rules, so to speak.
Think of Ethereum as Android OS or Linux, open-source platforms where you can write code, create, and build, without a set of rules, so to speak.
Ethereum at its most fundamental level is an open-source software platform that utilizes blockchain technology so that software and app developers can build and deploy decentralized applications.
First use
It was first introduced in a whitepaper by Vitalik Buterin, a programmer and co-founder of Bitcoin Magazine in late 2013. Buterin’s reasoning was that Bitcoin needed a scripting language for application development, and thus created Ethereum.
Ethereum is also be written and referenced as “ETH”.
Relationship to Bitcoin
When describing Bitcoin and blockchain technology, Ethereum’s co-founder Gavin Wood, analogized blockchain technology to the internet. Email is one particular use of the internet, just as Bitcoin, while first and foremost a currency, is also a particular use of a blockchain.
Ethereum just happens to be another use of the Blockchain. However, as to why an individual would choose to use Ethereum over Bitcoin, it all comes down to the purpose and capability each offer.
Bitcoin, in applying blockchain technology, offers a peer-to-peer (P2P) electronic cash system that enables online Bitcoin payments. Nothing different than using a PayPal or Venmo, except for the blockchain and encryption aspects.
While Bitcoin is used to track ownership of its native digital currency (bitcoins), ethereum focuses instead on running the programming code of any decentralized application (dApp).
Native Token: “Ether”
Unlike Bitcoin, where miners “mine” for bitcoin, in the Ethereum, miners work to earn the network’s native currency, Ether. Ether, like bitcoin, can also be purchased, traded, and used to pay for transaction fees and other services on the ethereum network. It is available on Cryptoexchange.ae.
Alternate Token: Gas
In addition to Ether, another native token that is used to pay miners fees for including transactions in their block is called “gas”. Imagine if every ATM (including your own bank) assessed a fee for putting your card in...so it can do what you ask it to. In the world of blockchain, that’s gas fees.
Every Ethereum smart contract execution requires a certain amount of gas to be sent along with the contract, so that miners are encouraged to put that transaction into the Blockchain.
Ethereum Smart Contracts
In non-cryptocurrency transaction, we are accustomed to traditional contracts (paper or electronic) that set out the terms and conditions for any particular transaction. Similarly, cryptocurrency exchanges also utilize a contract, but instead, use a computer code, called a “smart contract”, that helps facilitate the exchange of value (money, content, property, shares, etc) that is the essence of the transaction.
Once a smart contract is executed on the blockchain, it is self-governing, and does not require or need human interference, so as to completely eliminate the potential for censorship, downtime, fraud, or third-party interference--something that our traditional legal landscape unfortunately still faces. The smart contract, through the computer code, automatically executes different aspects of the contract when specific conditions are met.
For developer purposes, Ethereum is like the Matrix when it comes to innovation, allowing for app developers to create whatever operations they want, beyond anything we have seen before.
Using Ethereum for Decentralization
What Apps Are Being Developed On Ethereum
The Ethereum platform can run applications with use case across a broad range of services and industries.
- Finance
- Real Estate
- Insurance
As mentioned earlier, Ethereum enables developers to build and deploy DApps, or decentralized applications that serve some particular purpose to its users. These DApps are made up of code that run on the ethereum network, and are not controlled by any individual or central entity, also known as “decentralization”.
Decentralization
serves to remove all the third-party intermediaries that are essentially the “pain-in-the-ass” to the transaction. Think about all those intermediary services you come across on a daily basis across hundreds of different industries (banks, brokers, etc.) Decentralization removes those “middle men” so that the parties can deal directly with one another, without delay.
But why is decentralization necessary? Or rather, attractive?
Immutability
You don’t want third-parties or other random clowns coming in and altering or manipulating data. Having an immutable ledger allows for complete control.
Removes Fraud
You don’t want corruption and fraud in the equation. These DApps survive on a consensus network, making censorship and these rules, impossible.ver crash, slow down, or are turned off. So there’s that.
Secure
The golden word of 2020 when it comes to data privacy. With no central point of failure, utilizing cryptography guards against cybersecurity attacks like hacking and other fraudulent behavior. Now, keep in mind, that the smart contract code is written by humans, so these smart contracts are only as good as the people who write them. There is always the possibility for bugs or oversights that could yield unintended actions, which would open the network up to an attack.
No Off-Switch
Yeah, there’s no off-switch.
Dao
In addition to DApps, Ethereum can also be used to build Decentralized Autonomous Organizations, or DAO. A DAO is a fully autonomous, decentralized entity with no single leader, run solely by a programming code, contained within a collection of smart contracts, written on top of ethereum.
So, by taking a traditional organization which is governed by agents, intermediaries, and rules (centralized), and removing all of that shit, you now have a decentralized organization which is now owned by everyone who purchases tokens. Each token equates to an equity share and ownership stake.
These tokens can then be used to exercise voting rights on the network. You have to have a stake in the game, right?
The $55 Million DAO Hack That About Destroyed Ethereum
Everything is hackable, including a DAO. And that’s exactly what happened in 2016 to Slock.it, the team who developed and programmed a project called “The Dao”. In short. The project was supposed to be a venture capital firm (without humans) that would allow investors to make financial decisions through smart contracts.
The DAO was funded through a token sale and raised around $150 million, from thousands of different people. Point being, there was quite a stake in the game here, with much to lose. And literally, that’s what happened, all due to a technical flaw in The DAO software, not the ethereum platform itself.
Soon after the funds were raised, The Dao was hacked by an unknown attacker, who made off with around $55 million dollars (at the time) of Ether. Now, while ethereum wasn’t to blame here, its founders certainly had their hands full dealing with the mess.
An Existential Crisis for Ethereum: Hard Fork
The question was what to do from there, which because of the decentralized nature of the blockchain, was a question to be answered by the consensus and users to the network. Consequently, the Ethereum community voted and decided to retrieve the stolen funds by executing a hard fork, or a change in code. The hard fork would allow for the stolen funds to be moved to a new smart contract designed to let the original owners/victims withdraw their tokens.
However, this decision to execute a hard fork was highly controversial and became the subject of intense debate throughout the blockchain and cryptocurrency communities for one reason alone: it would essentially violate the very precedent that ethereum via the Blockchain established--that in the event a large sum of money is involved or “special circumstances” which would probably be undefined, transactions would actually be anything but anonymous, tamper proof, immutable, and secure--a digital existential crisis.
For this reason, a less aggressive “soft fork” solution was put forth, which placed both the ethereum community and its founders in a very dangerous position. On one hand, if the stolen money wasn’t retrieved, what purpose would ethereum serve in the future, other than a huge liability to the space?
But on the other hand, recovering investor money would destroy and render completely useless, decentralization as a whole. A double-edged sword.
So, what did the community decide to do?
Unfortunately, as the majority of the ethereum community voted to perform a hard fork to retrieve The DAO investor’s money, it created a separate faction within the ethereum community, where two parallel blockchains were created, Ethereum Classic and Ethereum (the new strain).
Using Ethereum to Launch Other Cryptocurrencies
Everything is hackable, including a DAO. And that’s exactly what happened in 2016 to Slock.it, the team who developed and programmed a project called “The Dao”. In short. The project was supposed to be a venture capital firm (without humans) that would allow investors to make financial decisions through smart contracts.
The DAO was funded through a token sale and raised around $150 million, from thousands of different people. Point being, there was quite a stake in the game here, with much to lose. And literally, that’s what happened, all due to a technical flaw in The DAO software, not the ethereum platform itself.
Soon after the funds were raised, The Dao was hacked by an unknown attacker, who made off with around $55 million dollars (at the time) of Ether. Now, while ethereum wasn’t to blame here, its founders certainly had their hands full dealing with the mess.
An Existential Crisis for Ethereum: Hard Fork
The question was what to do from there, which because of the decentralized nature of the blockchain, was a question to be answered by the consensus and users to the network. Consequently, the Ethereum community voted and decided to retrieve the stolen funds by executing a hard fork, or a change in code. The hard fork would allow for the stolen funds to be moved to a new smart contract designed to let the original owners/victims withdraw their tokens.
However, this decision to execute a hard fork was highly controversial and became the subject of intense debate throughout the blockchain and cryptocurrency communities for one reason alone: it would essentially violate the very precedent that ethereum via the Blockchain established--that in the event a large sum of money is involved or “special circumstances” which would probably be undefined, transactions would actually be anything but anonymous, tamper proof, immutable, and secure--a digital existential crisis.
For this reason, a less aggressive “soft fork” solution was put forth, which placed both the ethereum community and its founders in a very dangerous position. On one hand, if the stolen money wasn’t retrieved, what purpose would ethereum serve in the future, other than a huge liability to the space?
But on the other hand, recovering investor money would destroy and render completely useless, decentralization as a whole. A double-edged sword.
So, what did the community decide to do?
Unfortunately, as the majority of the ethereum community voted to perform a hard fork to retrieve The DAO investor’s money, it created a separate faction within the ethereum community, where two parallel blockchains were created, Ethereum Classic and Ethereum (the new strain).
Tracking Unique Digital Assets with ERC721
Now, when it comes to transactions involving unique digital assets, such as digital collectibles, ERC20’s token standard won’t work because it requires individuals to prove ownership of these scarce digital goods.
Thus, Ethereum created the ERC721 token for tracking these assets. In the recent year, many video games are currently being built using ERC721, such as the viral overnight game CryptoKitties--similar to the millennial’s understanding of a tomagatchi.
Ethereum 2.0
Over the past five years, there have been several smaller upgrades improving ethereum’s usability and scalability. When the gaming Dapp, CryptoKitties grew so popular, it ended up clogging the ethereum network. As a result, over 30,000 transactions were prevented from being completed. Enter the new wave of Ethereum: Ethereum 2.0 (Eth2).
Eth2 is predicated upon shifting Ethereum away from its underlying consensus PoW mechanism towards a Proof-of-Stake (PoS) consensus mechanism. PoS replaces the two primary components of a PoW algorithm--miners and electricity, with validators and stake. Validators are charged with maintaining the agreed-upon state of the network and receive rewards for randomly selecting the next block of data.
To encourage validators to work, they deposit 32 ETH of their own funds into the official deposit contract tthhat has been developed by the Ethereum Foundation. Validators then will download and run E2 client software. While running the software, they will be randomly selected to propose and attest to blocks of data on the Eth2 blockchain.
But what if…
A validator doesn’t want to do their part? You know the lazy sons of bitches. In the event a validator fails to stay online and see to their share of computational duties, their block reward will moderately decrease in order to incentivize them to continue running the software. In the event
A validator intentionally tries to attack the network? Yeah, they lose all or some of their 32 staked ETH. No questions asked. Bottom line, don’t fucking do it.
The Phases
Eth2 is expected to roll out in phases, beginning with Phase 0 in 2020. While it has not launched yet, experts believe it is very close to Phase 0.
Phase 0
Phase0 will launch the beacon chain of the Ethereum 2.0 network. The beacon chain will implement PoS and will manage the registry of validators, who will begin attesting blocks into existence on Ethereum 2.0.
As of the end of September, Spadina, the latest in a series of Ethereum 2.0 testnets, launched with mixed success, according to CoinTelegraph. Intending to only last for 72 hours, Spadina was short-lived.
Phase 0 won’t immediately impact Ethereum’s wider ecosystem, as the current PoW blockchain will continue operating as is, minus the addition of the Eth2 deposit smart contract.
With three months left in 2020, current results appear to bode well for a scheduled 2020 Phase 0 launch.
Phase 1
Once the Phase 0’s beacon chain launches, the Ethereum community expects an annnouncement as to Phase 1’s launch date.
As it currently exists, Ethereum and other PoW blockchains can only process one consecutive block at a time, meaning if there is a backup queue of transactions, those transactions must wait until one block is processed before they can be confirmed. In layman’s terms, think about Limewire and having to wait for 1 pirated song to finish downloading, before the next one in your neverending lineup can start.
Phase 1 will implement shard chains as Eth2’s scalability solution, resulting in a 64 separate chain partition (shard chains) that will run parallel to one another and interoperate seamlessly. The purpose of which is to allow Ethereum to process multiple transactions simultaneously--in this case, 64 blocks at a time. Dope!
Phase 1.5
At some point during Phase 1, Ethereum’s existing PoW blockchain will be replaced with the new PoS blockchain, providing for an ongoing data history (with no break in continuity). This is referred to as Phase 1.5 in the Ethereum community.
To ETH holders’ advantage, they will not have to undergo any token transfer or swap between Ethereum and Eth2. Instead, they will be seamlessly able to use their existing Eth without the fear or “use it or lose it”.
Phase 2-4
As for Phases 2 through 4 of Eth2, it’s hard to tell what progress would look like, but Buterin outlines in his whitepaper the roadmap he envisions for Ethereum moving forward.
On Ethereum 2.0, validators will stake at least 32 ETH by depositing the funds into the official deposit contract that has been developed by the Ethereum Foundation. Validators will download and run Ethereum 2.0 client software. While running client software, they will be randomly selected to propose and attest to blocks on the Ethereum 2.0 blockchain. Validators who correctly propose and attest to blocks will receive a reward of ETH as a percentage of their stake.
A shift in Ethereum’s underlying consensus mechanism to address the restrictions of a Proof of Work blockchain has existed since the blockchain’s genesis.