If you have even a slight interest in the Bitcoin Value, Bitcoin in general or blockchain technology, then you’ve likely heard of Ethereum, the world’s second most valuable digital asset.
Ethereum is both a blockchain platform and cryptocurrency designed by Vitalik Buterin that was launched in July 2015. It has had its fair share of headlines in the last four years with proponents hailing as the new internet and blockchain 2.0.
This guide gives a non-technical overview of Ethereum, smart contracts, and decentralized applications, as well as ether and gas. By the end, you’ll know what Ethereum can do today, why it was built, and the technology behind the project.
How Ethereum Works in a Nutshell
Like Bitcoin, Ethereum is built on a “blockchain,” which is a distributed digital ledger analogous to the physical book ledgers accountants used to keep track of transactions before desktop computers became mainstream. The ledger is “distributed” because:
- It is not maintained or owned by a central authority.
- It is hosted on a network of millions of computers called “nodes” that are run by people who use special software to verify transactions.
Think of the blockchain ledger as a “magic book” with millions of copies around the world, and when someone writes a new entry in one book, it magically appears in all the other copies. No one can delete what is already written in this magic book.
Bitcoin, Ethereum, and all other cryptocurrencies use their version of the magic book to log transactions. If you write, “Send 5 bitcoins to Jane,” the book goes through all your previous entries to make sure you have the correct amount of bitcoins before sending it to Jane, who will see a new entry appear in her copy of the book confirming she received 5 bitcoins. All of this should theoretically happen in a matter of seconds.
There are thousands of nodes (people with copies of the magic book) around the world storing the entire Ethereum blockchain. The information that you enter isn’t just stored on your computer or in one central service; it’s stored across the entire network of nodes. The more nodes there are, the safer the network and its data become.
Blockchain technology has many other applications that go beyond simple transactions, but until fairly recently, building blockchain applications required developers to have a complex background in coding, cryptography, mathematics, as well as significant computing resources.
The Ethereum blockchain provides developers with the tools to quickly build and launch decentralized applications. Instead of enabling users to perform a few pre-defined operations (e.g., bitcoin transactions), Ethereum allows users to run pretty much any code they want.
The Ethereum Virtual Machine
Before Ethereum, apps built using blockchain technology had very limited uses. Bitcoin and several of the older cryptocurrencies, for example, were designed to exclusively function as digital currencies.
Developers faced a problem: they could either expand the set of functions offered by Bitcoin and similar applications, which is a very complicated and time-consuming process, or they could develop a new blockchain and an entirely new platform. Ethereum’s creator, Vitalik Buterin, saw the latter as the better option.
Buterin designed the Ethereum Virtual Machine (EVM), a runtime environment that runs on the Ethereum network and can be used by developers to build and deploy applications using any programming language.
The EVM makes the process of building blockchain applications simpler and more efficient. Rather than build a new blockchain from scratch for every new app, developers can use Ethereum to develop thousands of apps that run on one platform.
Smart Contracts
In Ethereum, the term “smart contracts” is used to describe self-executing programming code that can facilitate a wide variety of transactions. Applications that run on Ethereum are written using smart contracts that are compiled by the EVM and deployed to the blockchain for execution.
Smart contracts perform a specific action only when certain conditions are met. For example, imagine a company automatically sending dividends to shareholders at a predetermined date, or a self-driving car automatically turning on its heater when the temperature drops below a predetermined level.
Since smart contracts are deployed on the Ethereum blockchain, altering them is almost impossible. The blockchain’s immutability ensures that smart contracts will always run as written without the possibility of downtime or censorship.
Write enough smart contracts, and you can build an application that executes pretty complex tasks. Smart contracts aren’t intended to be used in isolation–they are the tools that make up the building blocks for decentralized apps.
Decentralized Applications (DApps)
Decentralized applications or dApps are apps that run on the blockchain. They are “decentralized” by virtue of being deployed on a distributed blockchain ledger.
Facebook, for example, is a centralized application because all its data is stored in a central server that is owned by Facebook, Inc. Developers at Facebook can at any time choose to ban a user, or delete content they don’t like, or simply shut down the service in an entire country.
Decentralized applications don’t have a central authority, which makes them immune from third-party interference. They run exactly as programmed, and their functionality can’t be changed. Examples of dApps that are currently running on Ethereum include:
- Golem – an app that enables users to rent the idle power of their computers in exchange for Golem Network Tokens (GNT). The first release of Golem can be used for CGI rendering, which is an activity that requires considerable computing power.
- EtherTweet – a decentralized version of Twitter that runs on the Ethereum blockchain and provides basic Twitter-like functionality.
- IDEX – a decentralized cryptocurrency exchange for trading tokens that are deployed on the Ethereum blockchain.
- CryptoKitties – a Pokemon-like game built on the Ethereum blockchain that allows players to purchase, collect, breed, and sell virtual kitties.
Ether and Gas
To execute smart contracts and run dApps, the EVM charges a very small transaction fee in exchange for the computational power required to execute a program. This fee is called “gas” and is paid for in Ether, which is Ethereum’s native cryptocurrency and the ‘fuel’ of the network.
Ether can be “mined” by network nodes which use their computer resources to verify transactions and add new blocks of data to the blockchain. Nodes receive a small amount of Ether in exchange for their resources.
This reward system is the network’s incentive for encouraging people to maintain the Ethereum ledger, and it’s also how new Ether tokens are added to the pool. Nodes are usually called “miners” because they’re essentially minting new money out of thin air.
Ether is a tradable asset that can be used by application developers to pay for transaction and service fees on the network. Unlike Bitcoin, which is capped at 21 million coins, Ether doesn’t have a hard cap, and as of January 2019, over 104 million tokens were in circulation.
Conclusion
Ethereum is one of the most promising projects in the crypto space, and it has a bright future. It is helping to decentralize the internet by providing a user-friendly platform that enables developers to harness the power of blockchain technology.
Everything from refrigerators, door locks, TVs, light bulbs, and toasters are now connected to the internet as part of the “Internet of Things.” These devices are vulnerable to hacking and other malicious activity. Smart contracts and dApps can help them run safely and with clear instructions, whilst keeping an unbreakable record of every action these machines perform.
Ethereum has the potential of disrupting hundreds of industries in finance, insurance, academia, healthcare, and more. Skeptics may call it another passing tech fad, but the technology has proven to have valuable real-world applications, and it’s unlikely to stop making headlines any time soon.
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