What is Ethereum: The World’s First Programmable Blockchain

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Launched in July 2015, Ethereum (ETH) is a decentralized, open-source blockchain that first introduced smart contract functionality. Ethereum trades at $3,000 and has a circulating supply of 119.7 million, for a total market cap of $359 billion.

what is ethereum

What Is Ethereum?

Ethereum is a decentralized, blockchain-based, cryptocurrency platform created by Vitalik Buterin. Currently, it is only second to Bitcoin in terms of market capitalization. It has redefined much of the crypto industry with the introduction of smart contracts. The best way to understand Ethereum is by first comparing it to Bitcoin.

Ethereum v.s. Bitcoin

Although Ethereum and Bitcoin share many similarities, ultimately these are two separate projects with distinct goals. While Bitcoin (BTC) was introduced by Satoshi Nakamoto primarily as a store of value to serve as an alternative to centralized financial systems, Ethereum does the same with applications and services. The project aims to provide users with more control and freedom by eliminating intermediaries such as Twitter and YouTube by replacing them with code that can be executed automatically according to programmable conditions.

Ethereum and Bitcoin Similarities

Let’s first examine the characteristics they do have in common. Both are decentralized systems, meaning that there is no single entity that controls them. Instead, their systems run on a global network of computers volunteered by willing participants called nodes. In other words, both rely on blockchain technology to record data or transactions in a safe and public manner. However, their differences become apparent in terms of the long-term objectives they each have for this technology.

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Ethereum and Bitcoin Differences

  • Purpose: Bitcoin stands as the first cryptocurrency or money transfer system recorded on a distributed public ledger, whereas Ethereum is a multipurpose platform. Although it does have its own digital currency, ether (ETH), this is only one component of its overall system.
  • Applications: Ethereum significantly expanded on Bitcoin’s core technology to offer a network that allows for the creation and deployment of other decentralized applications (DApps). These applications can be entirely new concepts or new versions of existing ones. For example, decentralized finance or DeFi is one of the most popular fields currently being developed on the Ethereum network. These are traditional financial services reimagined and reconstructed without the need of third-party intermediaries. Picture the ability to lend or borrow money on a global scale but without a bank or company collecting a large percentage in fees. Instead, all generated interest and transaction fees go straight to the lenders. It is a true peer-to-peer system in which every interaction happens directly between users.
  • Tokenomics: Even if we compare just Ethereum’s cryptocurrency component to Bitcoin, there are still some significant differences. The total maximum supply of bitcoins is capped at 21 million. Ether, on the other hand, has no limit. Ethereum also aims to have its blocks mined at an average of 12 seconds per block, much faster than the 10 minutes Bitcoin takes.
  • Mining: Finally, bitcoin mining is much more resource-intensive, requiring custom dedicated machines that few can afford. In contrast, it is much easier for the general public to participate in the mining of ETH, thereby encouraging more decentralization.

To learn more about Ethereum compared to other cryptocurrencies, read:

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Smart Contracts On Ethereum

Smart contracts are perhaps the most transformative innovation in the crypto space since the birth of Bitcoin itself. Just like physical contracts, smart contracts can be thought of as an agreement between multiple parties. The difference is that while a physical contract does not actually guarantee the execution of any particular action, smart contracts are filled with code that ensure they execute exactly as advertised.

What are Smart Contracts?

Smart contracts are the singular new feature introduced by Ethereum that has become a catalyst for the development of countless new decentralized applications. Like their physical counterparts, these can be understood as binding agreements between two parties. However, in the physical world, signing a contract does not guarantee an expected result. In fact, contracts are broken or ignored all the time. These paper documents are often merely deterrents whose strength is dependent on the enforcement capabilities of the legal and governmental institutions that back them. A smart contract does not have such weaknesses. It is represented by computer code that runs exactly as intended on the Ethereum blockchain. Once deployed, it is automatic and cannot be censored or tampered with. It facilitates transactions or exchanges of money, data, content, or anything of value. Smart contracts are self-operating, meaning that their code is designed to execute specific actions once certain conditions are met.

Example of a Smart Contract

Let’s illustrate the power of smart contracts with a simple example. Imagine you want to buy a digital book from someone on the other side of the world. Your main issue will be trust. If you first wire the money to this person, what guarantee do you have that the seller will actually send you the product? Conversely, the seller also risks not receiving any payment if they send you the book first. One solution is an intermediary or trusted escrow service that holds the payment and only releases it upon proof that the product has been delivered. Of course, the escrow company will likely charge fees in exchange for their service. Yet, even in this situation you must still trust and hope that the intermediary will act in good faith as they too could choose to keep your money and run. Employing a smart contract on the Ethereum network eliminates all of these concerns. A code that automatically sends you a copy of the book once a specified amount of funds has been transferred to a target account is a much more effective solution. Besides the buyer and the seller, no additional parties are required, no extra fees are collected, and everything happens automatically with public transaction records verifiable on the blockchain.

Applications for Smart Contracts on Ethereum

Smart contracts can be used to automate and govern the transaction of money, data, content, or anything else of value in a censor-resistant manner. While this means no centralized entity can prevent a transaction or interfere with its terms, it also means that losses caused by bugs in the code or malicious behavior are much harder to reverse.

Developers can leverage these smart contracts to create much more complex applications limited only by their imaginations. These new services would all share the traits of decentralization, automation, and transparency and this is exactly what is happening with the current DeFi boom. All different types of traditional financial and banking services are being recreated on the Ethereum network with the use of smart contracts. However, finance is not the only industry that can be decentralized. Voting systems, social networks, and even gaming all have the potential to be revolutionized.

Smart Contract Execution

Smart contracts are executed through the Ethereum Virtual Machine (EVM), a Turing-complete network that allows contracts to execute any task a regular computer could. The EVM is maintained by thousands of decentralized contributors known as nodes, which continue to compute contracts so long as the network receives the required fee (known as gas) or the contract is otherwise terminated. Known by some as a “world computer,” the EVM can be viewed as a decentralized and global computer that allows the execution of code in a trustless environment.

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What Does Ethereum Do?

Ethereum DApps

The programmable nature of Ethereum has led to the creation of decentralized applications (DApps), which provide services without the need of a third-party intermediary. DApps can be viewed as a collection of interoperable smart contracts that work together to provide a certain service in an open and censorship-resistant manner.

One of the most popular forms of DApps is decentralized finance (DeFi), which allow for a broad range of financial services that cut out middlemen such as brokerages, exchanges, and banks. For example, popular decentralized exchanges (DEXs) such as Uniswap (UNI) and SushiSwap (SUSHI) allow users to directly trade, lend, borrow, and pool a wide range of currency pairs, thereby providing on-chain liquidity to the market.

As decentralized exchanges directly connect users, they provide far more options than centralized exchanges (CEXs), which are ultimately limited in the amount of currency pairs they can support. The downside to this is that DEXs do not vet or in any way audit the tokens that are traded on their platforms, meaning that it’s up to the user to exercise proper due diligence.

Other DeFi applications include yield farmers such as Compound Finance (COMP) and Yearn.Finance (YFI), which provide users with returns for staking or contributing their assets to liquidity pools. The high returns offered by these DApps have seen an explosion of interest over the past few years, resulting in huge increases to ETH gas fees (because of increased volume).

Ethereum’s ERC-20 protocol

Besides smart contracts, perhaps the most influential innovation of Ethereum has been the ERC-20 protocol, the most widely used standard for smart contracts in the world. Much of what makes the crypto world tick runs on the ERC-20 protocol, including stablecoins such as Tether (USDT) and USD Coin (USDC) and utility tokens such as MATIC and Basic Attention Token (BAT).

A large number of the most popular crypto projects today got their start as ERC-20 tokens before moving on to their own independent networks. For instance, EOS initially issued tokens on the Ethereum network before eventually migrating to its own mainnet. Currently, there are almost 500,000 ERC-20 token contracts currently in circulation.

Ethereum NFT Marketplace

Another application of Ethereum is the popular NFT marketplace OpenSea, which allows users to bid on and mint NFTs on everything from Bored Apes (BAYC) to Meebits. The platform was valued at $13.3 billion as of January 2022.

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What Are Disadvantages of ETH?

Although it shows a lot of promise, Ethereum’s smart contract feature does have one potential critical flaw, human error. The uneditable code of a smart contract is only as good as the person who wrote it. If a mistake was made or an oversight left an exploitable bug, it’s only a matter of time before a malicious actor takes advantage of it. Once they do, there is virtually nothing that can be done to reverse the damage. Of course, a new and improved version of the contract can be written, but whatever transaction happened using the previous contract has already been recorded and made permanent on the blockchain. The only way to change this would be through general consensus to reverse the transaction and rewrite the underlying code, a move that goes against the core philosophy of an immutable ledger.  Whenever such mistakes happen, and they certainly have, trust in the Ethereum network gets eroded and the value of ETH drops significantly. Despite this, this exciting field is still young, and so far, it has managed to pick itself up and regain the confidence of investors multiple times.

Who Is Behind Ethereum?

Ethereum has a total of eight co-founders, namely Vitalik Buterin, Gavin Wood, Anthony Di Iorio, Charles Hoskinson, Mihai Alisie, Amir Chetrit, Joseph Lubin, and Jeffrey Wilcke.

Vitalik Buterin was the first to propose Ethereum in his white paper published in 2013, which outlined the goal to build decentralized applications. Vitalik dropped out of his computer science program at the University of Toronto after receiving a $100,000 grant from the Thiel Foundation to work on Ethereum full-time. Prior to his work on Ethereum, Vitalik was a writer for Bitcoin Magazine, which he cofounded with Alisie.

Gavin Wood served as the first chief technology officer at the Ethereum Foundation. Wood’s contributions include the authoring of the yellow paper that first defined the EVM, along with the proposal and development of Solidity, the programming language in which most Ethereum smart contracts are written. Since leaving the Ethereum project in 2016, Wood has gone on to co-found the Polkadot (DOT) and Kusama (KSM) projects.

Anthony Dio Iorio helped finance the project during its early stages of development. Mihai Alisie and Charles Hoskinson helped establish the Ethereum Foundation in Switzerland, though Hoskinson left the project shortly after to found Cardano (ADA). Another early financer, Joseph Lubin has since gone on to found ConsenSys, a blockchain software company that primarily works with Ethereum projects.

Ethereum (ETH) Price History

While the price of Ethereum has performed well in the long-term, prices have fallen significantly in the short-term. The token rose from $1,563 on February 28, 2021 to $2,633 on February 28, 2022, representing a rise of roughly 68% over a year. The price of ETH peaked at $4,805 in November 9, 2021, but has since sharply fallen by roughly 45% over the past three months.

Ethereum price from Feb 2021 to Feb 2022

Ethereum price from February 28, 2021 to February 28, 2022 (Source:TradingView)

The projects is currently ranked #2 by market cap, attracting more and more people willing to buy and trade Ethereum. There is no maximum supply to the amount of ETH in circulation, though the amount of ETH that can be mined is currently limited to 18 million a year. At the time of writing, roughly 119.7 million ETH are in circulation. As with all proof of work (PoW) networks, ETH is warded to miners that forge the next block in the node. This will eventually change as the Ethereum Project moves to a proof of stake (PoS) system with Ethereum 2.0.

Conclusion

Although it ranks below Bitcoin in terms of market cap, Ethereum is still undoubtedly one of the most influential crypto projects. Programmable smart contracts have revolutionized the way blockchain technology is used and serves as the cornerstone for most crypto applications and innovations.

Despite Ethereum facing more competition from other strong Layer 1s, the project shows no signs of giving up its dominance. Ethereum is still by far the most popular network for DApps and has continued to see increasing adoption from NFTs.

To address environmental concerns and high gas fees brought about by its popularity, the project is moving from a proof of work system to a proof of stake system with Ethereum 2.0. The project introduced a burning mechanism with the most recent London Hard Fork in an effort to introduce a deflationary mechanism and slowly shift rewards away from mining.


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