Ethereum is an open-source platform that aims to decentralize the internet and to revolutionize many different industries with its novel concept of smart contracts.
The beauty of Ethereum is that it allows users to build what are called “smart contracts”, which are automatically executed with no downtime or external interference. Ethereum runs on a blockchain technology just like all the other cryptocurrencies (with a few exceptions such as IOTA and Ripple, which technically do not rely on blockchain technology) and the applications of these smart contracts are endless in every sense of the word.
The Ethereum Network was developed by the Ethereum Foundation, a non-profit Swiss organization. The man behind the Ethereum project is called Vitalik Buterin, who proposed the project in late 2013 and has stuck with it since.
Buterin has been involved in other projects such as founding the website known as Bitcoin Magazine and creating the Egora marketplace as well as Dark Wallet. Buterin was assisted in the creation of Ethereum by Dr. Gavin Wood and Joseph Lubin.
Ethereum went live in July 2015 with 12 million coins available at the sale. This number represents 13% of the circulating supply. The coin sale took place before Ethereum went online, in July 2014.
At the time it was the most successful crowd sale ever, raising over $18 million. The platform has since taken off and attracted interest from all over the world. The funds from the crowd sale were managed by the foundation.
The Ethereum token is the Ether and it is not meant to be a currency in the traditional sense of the word. It is meant to be a token to build decentralized applications and invest in certain projects.
How Ethereum Works
The Ethereum blockchain is similar to the Bitcoin blockchain in many ways. Both blockchains are secured ledgers of transactions and every node has a copy of the blockchain. A transaction is a transfer of currency from A to B.
Both blockchains use a Proof of Work (POW) methodology in order to validate transactions and ensure network security. To sum up this POW protocol is that miners solve computational puzzles using the hashing power of their individual machines.
If they crack the correct answer they broadcast the solution to other miners on the network who verify it and work on the next “block” of transactions, which is essentially the puzzle that is being solved. Verifying the solution can be done instantly.
Like Bitcoin, when Ethereum miners solve a block they are rewarded with Ether tokens. It is impossible for miners to cheat at this game. There is a possibility that a mining network could get together and run a denial of service attack on the Ethereum blockchain, but the possibility is near zero at present.
While the Bitcoin blockchain processes a block every 10 minutes, and the Litecoin blockchain processes a block every 2.5 minutes, the Ethereum blockchain processes a block every 12-15 seconds. In other words, it puts many other blockchains to shame and is much faster.
These timeframes are by design in order to release a steady supply of tokens onto the network. The difficulty to mine tokens adjusts so these times are maintained.
The proof of work algorithm that Ethereum uses to mine Ether is called ethash. This makes it harder to mine Ether using ASICs, which are machines designed specifically for mining.
The cost of mining Bitcoin is tremendous in terms of electricity consumed, but Ethereum does not have this drawback and is more efficient to mine. Additionally, Ethereum intends to move from a Proof of Work to a Proof of Stake (POS) methodology to secure its blockchain. This means that blocks will no longer be mined.
They will be validated by people who have a larger stake and are thus less liable to damage the system. It will use fewer resources than the current model and be a better option for the world at large.
The Bitcoin mining industry is becoming increasingly centralized at present with governments and corporations entering an industry that is now highly specialized.
All in all, the two blockchains are very similar, and in terms of security are equally safe. There is no realistic way to cheat a blockchain.
But the Ethereum blockchain stores the code for smart contracts as well as the transactions. This makes the Ethereum network more complex in a number of ways.
Contracts written in Ethereum are compiled into bytecode so it can be read and executed by the Ethereum Virtual Machine. All nodes execute the contract using the Ethereum Virtual Machine (EVM).
Ethereum nodes are additionally required to hold the “state” of each program, and the network of miners take ownership of transferring the shift from state to state. There are thousands of Ethereum nodes and each node executes the same code.
The Potential of Ethereum
Ethereum is a platform for the creation of decentralized applications. Currencies such as Bitcoin are focused on replacing the financial industry by making it decentralized.
Ethereum is not focused on this, though Ether can be used to do the same things for all intents and purpose. Ethereum simply provides a platform for developers to do cool things using smart contracts.
The potential for Ethereum is endless in terms of what can be done. An appropriate analogy would be that Bitcoin is an application created with a specific purpose in mind: to replace a financial system. And it does a good job.
But Ethereum is not an application. It is more like an operating system which can be used to build applications on. Its ambit is far wider and what can be done with it is limited only by human ingenuity.
A smart contract is a contract hosted on the Ethereum blockchain that executes once certain conditions are met. It eliminates middlemen and intermediaries using the blockchain to do the job.
Meaning it does not rely on third parties which can be unreliable and expensive. Bitcoin and other digital currencies do this, but only in the world of finance. With Ethereum, a smart contract can be invented to suit the needs of whatever you can possibly think of.
No more lawyers, accountants or underwriters are needed. Smart contracts will replace them all, and will be far safer, and free. The question is not if, but when.
The core aim of Ethereum is to eliminate the client-server model. Essentially, when you look for applications in a store such as the Apple store or Google store, all of these applications are actually hosted by a third party, such as Apple or Google.
All of your data and browsing history is kept on Google, Facebook, Amazon and Apple servers. Which is then sold to governments and other institutions. This is not an ideal situation and Ethereum seeks to establish a completely decentralized internet.
An example would be if you wanted to edit an online document, typically stored in Evernote or some other program. The edit would be saved by the network without the need for any third party to host the document.
The model of online services is that the users give value to the site via their participation, be it Uber, AirBnB, Twitter, LinkedIn or Etsy. Ethereum aims to give power back to individual contributors. It is doing to the client-server model what Bitcoin is doing to the financial model – Creating a completely new paradigm.
Ethereum is definitely the furthest along in terms of a decentralized internet, as well as being one of the bigger and more well-known coins. But it does have competition from coins such as NEO and IOTA.
You can get a glimpse of the decentralized internet of the future with the Ethereum Metamask browser. This browser connects to the Ethereum blockchain and enables users to run decentralized applications (Dapps) in the Metamask browser.
Metamask is available as an add-on for Firefox, Chrome and Safari browsers right now. You can also store your Ether coins on the Metamask browser and spend them directly, though it is not the most secure form of storage.
Of course, programmers can still make contracts that have loop holes or that can be exploited This happened with the collapse of the DAO, which was a group of smart contracts among people residing on the Ethereum blockchain. 2016 saw the collapse of the DAO (decentralized autonomous organization) project and a split in the Ethereum blockchain.
The DAO was an ambitious project and was an investor fund that aimed to be free of state boundaries. It was a new type of business model that was not tied to any state, and an experiment in how it would be viewed by government regulators who would not have had any authority to govern it.
It was constructed on the Ethereum blockchain and had no board of directors or management structure. The shareholders had complete control over the organization and anybody could pull their funds until the first time they voted.
All profits from the investments would flow back to investors. The DAO did not actually hold any investor funds. Instead the investors owned DAO tokens which gave them the rights to vote on potential projects.
Unfortunately, the ambitious project suffered from a number of security flaws which were exploited in June 2016. In late 2016 two of the worlds major exchanges, Kraken and Poloniex, delisted the DAO token.
The US Securities and Exchange Commission ultimately ruled that DAO tokens were securities and could possibly be in violation of US securities law. It was a strange conclusion for a decentralized project built on a platform that was created by a Canadian and managed by a Swiss non-profit organization.
Hard Forks v Soft Forks
The end result of the DAO collapse was that Ethereum was split into two separate blockchains. The new version became Ethereum, and the old version became Ethereum classic. This is known as a hard fork in the digital currency community.
Ethereum Classic advocates believe that because they have the original code that they are the real Ethereum. But in reality, the Ethereum project has moved on and the Ethereum Classic token is far behind Ethereum.
A similar split happened in the Bitcoin ecosystem. Bitcoin implemented a soft forkby adopting a feature known as Segregated Witness (SegWit), which some users were unhappy with. Because of this soft fork a new currency was created by “rogue” developers, which constituted a hard fork.
A hard fork is a permanent split in the blockchain which is not backwards compatible. A soft fork is a temporary split in the blockchain which is backwards compatible.
Users essentially vote on which fork is better and the forks/blockchains are then merged back together. The vote is done by network hashing power, and if it is sufficient, the fork is implemented, if not, the chain stays the same.
A hard fork is a sign of community division. In the case of Bitcoin, the blockchain was forked to create a new currency called Bitcoin Cash in August 2017. Bitcoin Cash is faring far better than Ethereum Classic.
But here is where things can get very interesting, and very confusing. Bitcoin Cash and Ethereum Classic are both technically the real deal.
And Bitcoin and Ethereum are actually hard forks of them. Bitcoin and Ethereum adopted a new code which differed from the original, but still managed to retain their name because they had a community consensus!
Technically, it would be more appropriate to call Bitcoin and Ethereum as they are now known Bitcoin “new” and Ethereum “new”, and call Bitcoin Cash and Ethereum Classic simply Bitcoin and Ethereum respectively.
But this is not what is done and these “real” cryptocurrencies are still described as hard forks, which is the opposite of the truth. At the end of the day it could be an argument of semantics. Most users followed the forks and for this reason there might be an argument that they should keep the name/branding.
Buying and Storing Ethereum
Ethereum is the second biggest coin by market capitalization, currently being a little under half of Bitcoin’s market capitalization. As a large cryptocurrency, it is available on all major exchanges and can be bought directly on many platforms.
Currently, Litecoin, Bitcoin and Ethereum can all be bought directly with credit card on multiple online platforms. For all of the other cryptocurrencies, it is first necessary to purchase one of these major cryptocurrencies and then exchange them on a platform such as Changelly or ShapeShift.
One of the easiest places to buy Ethereum directly is Coinbase. Coinbase is one of the largest Ethereum exchanges and is tightly regulated. You simply sign in, register, submit identity verification and then proceed to purchase Ethereum with your bank account, credit card or debit card.
The transaction fees for credit and debit card purchases are 3.99%, which is very reasonable. You can keep your Ether on Coinbase as it is well recognized, but coins kept online are liable to being hacked, no matter how safe they are reported to be, so it is always better to acquire a good desktop or hardware wallet.
Further, Coinbase recently suffered a credit card glitch for the purchase of cryptocurrencies, so it is best to avoid this exchange for now (it is refunding customers, but this takes time). The verification process is similar to many of the other popular online exchanges, such as Coinmama, Coinhouse, Kraken, Bitfinex, CEX IO, Local Bitcoins, Shapeshift, Changelly, Litebit.eu and so on.
You will be required to register and submit identity verification for all of them. Be sure to check the prices and commission for each. You can typically expect to pay 4-8% total, factoring in withdrawal fees and conversion fees.
Credit card is the most expensive way to purchase cryptocurrencies with bank transfers being the cheapest. Many exchanges do not accept credit or debit cards and fewer still, if any, accept PayPal.
More important than where you buy your Ether is where you store it. The cryptocurrency industry is rife with stories of lost or stolen funds.
But this is actually avoided quite easily if you take two simple steps. The first is to get an official desktop wallet stored on your computer. The second is to make two copies of your unique recovery passcode.
This will ensure that if anything happens you can recover your funds. For the best in Ethereum wallets consider investing in Ledger Nano or a Trezor. These are hardware wallets that contain your passcode and currently retail at around $99.
If you do not want to invest the time or money into a hardware wallet then consider downloading Exodus, a free multi-currency desktop client that supports over 29 cryptocurrencies. It was the world’s first multi-currency desktop wallet and your funds are not stored online.
ShapeShift is integrated onto the platform making the transfer of cryptocurrency assets smooth, quick and easy. Other secure options include Mist, the official Ethereum wallet, and MyEtherWallet (MEW).
Both of these wallets are desktop wallets, and nothing is stored online. Consider online exchanges as a last resort in terms of cryptocurrency storage. And remember to only download wallets from official websites due to numerous scams. There is a large number of phishing scams for the best wallets, especially MEW and Mist.
Immutability – once a record has been written, there is no re-writing or any form of alteration that’s going to happen. This prevents hackers and fraudsters from tampering with records.
Corruption and meddle-proof – every action on this blockchain is reached upon through the principle of consensus. This makes censorship nothing but a pipe dream.
Zero downtime – apps never go down on this network and neither can they be switched off
Secure – Ethereum blockchain is guarded by cryptography and its lack of a central point. This means any third-party meddling cannot be witnessed. The network is foolproof against fraud and hacking as well.
Cons of Ethereum
Not void of faults – contrary to what many people believe, decentralized apps have their weaknesses too. Smart contracts are created by humans and thus prone to issues like bugs, unintended adverse actions. Also, any action taken by one of the nodes (or 51% attack) makes the whole concept of decentralization quite questionable.
The Future of Ethereum
The Ethereum platform is poised to revolutionize the internet and is far ahead of any other project in terms of what it can do. It is superior to Bitcoin in many technical ways though they both have different aims.
It has a solid backing and is very much decentralized in terms of its tokens, as opposed to Ripple and some other questionable projects. Ethereum is going to result in a decentralized internet and its smart contract capacity is going to change the world. The applications are endless.