What is Ethereum?

February 25, 2020

Ethereum is a distinct type of cryptocurrency network that was conceived in 2013 and officially launched in 2015. Created by Vitalik Buterin, it was designed to extend the capabilities of Bitcoin by utilizing the concept of a blockchain as a “world computer.” It's based on the notion of instilling a public, permissionless cryptocurrency network with Turing-complete programming.

Turing-completeness means that programs can be developed and executed with arbitrary logical complexity. The programs that run on Ethereum are known as “smart contracts” and they are coded in a JavaScript-like programming language called Solidity -- explicitly designed for the network.

At a high level, Ethereum has a native cryptocurrency called Ether (ETH). If you’ve heard of Bitcoin (BTC), ETH has many of the same features. It is purely digital, and can be sent to anyone anywhere in the world instantly. The supply of ETH isn’t controlled by any government or company - it's decentralized, and it's scarce. People all over the world use ETH to make payments, as a store of value, or as collateral.

Ethereum has no central server. Instead, the applications run on the Ethereum Virtual Machine (EVM) -- a decentralized computer executing transactions, contract calls, and all other necessary application operations.

Ethereum has surged, alongside Bitcoin, to mainstream awareness since its inception. Its network has become a hub of recent developments in the broader cryptocurrency ecosystem including: tokens, ICOs, and decentralized finance (DeFi). The Ethereum community is enormous and was rated by Github’s “State of The Octoverse” report as one of the fastest-growing open-source projects in the world.

The Advantages of Ethereum

The Ethereum network is built on a decentralized blockchain. But unlike other blockchains, the network is programmable, allowing developers to build new types of applications called dapps. The dapps operate on the network with smart contracts that perform complex functions and features similar to what you find in Google Play or the App Store.

Users can exchange the native ETH cryptocurrency or any of the network’s thousands of tokens. Such tokens are standardized smart contracts (e.g., ERC-20) that interoperate with each other and comprise the native tokens of dapps.

Dapps on Ethereum have proliferated over the last several years and range from markets in gaming to finance. You may also be wondering:

“Why use an application on Ethereum instead of a conventional app?”

Because dapps are basically a series of interdependent smart contracts, they are decentralized and run on Ethereum’s public ledger. Dapps run autonomously when launched and cannot be interfered with by a third-party. As a result, dapps on public blockchains are conduits for accessibility and open finance.

And open finance is the surging application of Ethereum -- its breakthrough app.

Known as DeFi, finance on Ethereum is increasingly mirroring conventional financial instruments like ending, insurance, derivatives, and more. However, these DeFi platforms are accessible to anyone with an internet connection, many do not require KYC, and they are ideal for seamless transfers of assets.

Users can tap into open lending protocols like MakerDAO, stablecoins like USDC, staking yield interest, and even microinsurance products for DeFi deposits with a phone and no bank.

There is no downtime with dapps that run on Ethereum, meaning that marketplaces and lending products run 24/7. Interactions between dapps can also be entirely automated, meaning that clever innovations, such as flash loans can execute multiple trades within a single transaction.

Additionally, applications such as games can operate with provable scarcity. For example, token standards on Ethereum allow users to cryptographically verify that only a certain number of tokens exist, meaning that games similar to Fortnite could offer skins and upgrades that are verifiably rare and unable to be counterfeited.

Payments on Ethereum are cheap compared to high card fees of centralized payment processors and settle on the back-end much quicker. Swaps between different assets can be executed virtually instantly and with minimal overhead costs.

Smart Contracts

A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. However, these computer programs exist on a public blockchain -- a network that anyone can access and interact with. The code for the contract is entirely open-source and they operate autonomously as the Ethereum network churns out blocks in its blockchain roughly every 20 seconds.

The idea for smart contracts was pioneered by cryptographer Nick Szabo, who envisioned their ability to improve basic contract and application designs. Critically, since smart contracts (e.g., programs) operate on Ethereum’s public ledger, they convey no downtime, no censorship, and restrict third-party interference. Contracts only operate when called upon by a specific trigger, such as a payment being sent between two users.

Ethereum’s blockchain is essentially an amalgamation of all the interactions between autonomous smart contracts and actual human users. If Ethereum’s blockchain is the trunk of a tree, then all of its connected dapps and tokens are the branches and leaves, respectively.

Future Plans

Ethereum isn’t perfect. Notably, it experienced scaling woes in the Fall of 2017 as the network’s consensus could not keep pace with the surging demand and use of the network. As a result, the Ethereum community decided to move away from the proof-of-work (PoW) consensus model that Bitcoin uses and adopt a proof-of-stake (PoS) method with better scalability.

Known as Ethereum 2.0, the major network upgrade with the smart contracts network is expected to finalize in mid to late 2020. The move will bring significant changes for the network, especially as DeFi grows past $1 billion in locked value and institutions continue probing the advantages of public blockchains like Ethereum.

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