What is Ethereum Exactly?
There are many resources out there to help you understand Ethereum. The point of this article is to try to explain Ethereum in layman’s terms and simplify abstract concepts.
It is important to realize that Ethereum is complicated to define simply. This article is an attempt to summarize much of what Ethereum is. Many people describe Ethereum as Bitcoin 2.0. It is partly a cryptocurrency called Ether, and more accurately a large network capable of running decentralized applications and smart contracts. In order to understand Ethereum, it is helpful to understand Bitcoin first. Here is a video that explains Bitcoin brilliantly in a little over a minute: here.
If that was still all greek to you, all you really need to understand is these three things:
- Cryptocurrencies are based on everyone distrusting each other and checking each other which makes them secure
- Cryptocurrencies are not owned by any government or one centralized entity
- Cryptocurrencies are run by a large network of computers called the “Blockchain” who receive a small fee for verifying the transactions on a transparent, public ledger
Now that you understand the fundamentals of Bitcoin we can delve into what makes Ethereum so great.
Just like Bitcoin, computers on the Ethereum blockchain solve complex algorithms in a process called ‘mining’ which has two primary functions explained in the video. First, by solving these algorithms they are actually verifying the transactions of the cryptocurrency on a huge, transparent, public ledger. Second, for verifying these transactions, miners have the chance of receiving a small reward in return in the form of the cryptocurrency. This gives miners an incentive to keep the blockchain running and helps release more coins into the economy. However, Ethereum takes mining one step further. Instead of simply verifying transactions and solving algorithms, Ethereum makes miners on the blockchain process lines of code. Not only can it process lines of code, but it is what they call ‘turing complete.’ This means that Ethereum is capable of preforming any function of a normal computer. In effect, the blockchain becomes a huge, decentralized virtual server.
Initially, it may seem like a cryptocurrency and the ability to process code are completely unrelated. However, the two concepts work together symbiotically in that each one is necessary for the other to thrive. Because users place value on Ether it gives the Ethereum network the relevancy required to have a large network that can provide the necessary mining and decentralization. This gives the Ethereum network efficiency that would not be possible in a peer-to-peer network like Bittorrent where seeders and peers have low incentives to participate in the network.
The potential of this technology is only starting to be realized. Already, developers have started a plethora of projects using Ethereum. The advantages of running applications on Ethereum are many. Applications run on the blockchain are called “Decentralized Applications” or “Dapps” for short. Because many people are familiar with Facebook, I will use it to describe a hypothetical Dapp. Facebook is a centralized company that has full control of its application and data. This means that it is potentially vulnerable to denial of service attacks as it has single points of failure. Also, as a Facebook user, you are forced to trust Facebook with your data that you ultimately may not be in control of. A decentralized Facebook would solve both of these problems. In a Dapp, developers are forced to make the code public and create applications in such a way that they are autonomous. Because the applications are decentralized across hundreds of thousands of computers, the data is theoretically incorruptible and not controlled by any one person or entity. In effect, your data is yours and it is far more secure than it could ever be on a centralized network where you are forced to trust a single entity.
“Smart contracts” are the foundation of Dapps. Smart contracts are simply coded contracts coded into the blockchain that execute based on an event. The contracts are written such that the parameters can be verified by the hundreds of thousands of computers on the blockchain. Effectively, this means a need for a middleman is removed and work can be paid out immediately when it is completed. These contracts give Dapps added autonomy which, until Ethereum, has never been truly possible.
There is an extremely small fee associated with transactions that has been put in place to incentivize miners and make transactions go through quickly. Its major purpose is stop code that would run forever in a so-called “infinite loop”. Without gas, looping code would go on forever and could have a negative impact on the blockchain by requiring an inordinate amount of processing power. Gas enures that looping code will be expensive and prevents developers or malicious attackers who put out bad code from being able to disrupt the network.
Who Created Ethereum?
Ethereum is the brainchild of the prophetic Vitalik Buterin. At first glance, Mr. Buterin is an unassuming man of 22 years. However, listen to him speak and you will see why he might be smarter than everyone in any given room. He is a cryptocurrency fanatic and has credibility in the crypto world as one of the most innovative guys around. For more on Vitalik and to hear him speak, check out his videos on youtube.