Last Updated on: 3rd February 2021, 02:10 pm
Ethereum is a decentralized, open-source, and distributed computing platform that enables the creation of smart contracts and decentralized applications, also known as dapps.
Ethereum, or the Ethereum Virtual Machine (EVM), is an attempt to build a new version of the internet:
- An internet where money and payments are built-in.
- An internet where users can own their data and your apps don’t spy and steal from you.
- An internet where everyone has access to an open financial system.
- An internet built on neutral, open-access infrastructure, controlled by no company or person.
Rather than centralized hubs (or private companies) that control massive troves of personal data, Ethereum is designed to create more decentralized information networks enabled by a series of distributed nodes and Ethereum wallets.
The idea for Ethereum was developed in 2013 by Vitalik Buterin, a computer programmer and contributor to Bitcoin Magazine.
He advocated for more functionality on the Bitcoin blockchain to make it easier for developers to build applications.
When his plan was met with resistance from the Bitcoin community, he developed the framework for Ethereum, created a team, and published the Ethereum whitepaper.
After a pre-sale to raise money to fund the development of the Ethereum Virtual Machine, the network went live on July 30, 2015.
If the internet is like a vast highway, then the current system has few on- and off-ramps. These existing ramps are also controlled by a toll of sorts, which either exists as actual fees or costs that require users to pay in the form of surrendering personal or financial data.
The goal of a decentralized internet is to give people control over their information, enable censorship-resistant technologies (these range from financial applications outside of corporations or governments, to better election technologies, to forms of gaming and data storage that aren’t stored on centralized servers), and remove the need/cost of third parties.
A decentralized internet replaces large, centralized gatekeepers that control the flow of information, with internet operating infrastructure that is spread all over the world.
In other words, a decentralized internet provides many more on-ramps and off-ramps, which makes the internet more secure and more democratic.
Ethereum helps accomplish the vision of decentralized computing in two ways.
The first way is to create a distributed system of nodes, which happens anytime a computer or miner joins the Ethereum blockchain — and anyone, with sufficient computing power, can become a node, which makes Ethereum a permissionless blockchain.
A node is any machine that contains a copy of the blockchain. The more nodes that exist, the more resilient Ethereum becomes to security breaches and outages.
A wide distribution of the network makes it possible for developers to build decentralized applications using open-source smart contracts, which is the second way that Ethereum is enabling digital decentralization.
A smart contract is basically a computer program that executes a transaction after a series of requirements are met.
Most Ethereum apps are written using the Solidity language (there are also other Ethereum-specific languages).
Three Popular Uses Cases for Etheruem
there are three major uses emerging for Ethereum: As a platform for initial coin offerings (ICOs), as a means to create ERC20 tokens, and as a way to create ERC271.
An initial coin offering is very similar to when a traditional company launches an initial public offering (IPO) to raise capital in order to grow.
In the case of an ICO, a person or group of people get together, create a website or whitepaper explaining a project, and then launch a coin or token sale.
While the ICO boom of 2017 helped fuel the meteoric rise of the cryptocurrency market and helped launch a lot of new and interesting projects, the ICO fundraising mechanism was also used to raise money for projects that were not developed enough to ever be successful, and/or were outright frauds.
In a lot of cases, some of the hundreds of ICOs that have been launched in the past two years were launched on Ethereum.
It’s like the paradox of success, Ethereum developers did such a good job of building a means for people to launch decentralized projects without any kind of oversight or gatekeeper, that the many projects took advantage of the system and general euphoria about raising money in the crypto space.
However, despite the overdone ICO boom, the ability to quickly create and launch a project without having to raise capital through traditional channels has helped many really innovative and interesting projects get off the ground.
An ERC20 token is a digital unit of account that is completely exchangeable with another unit of the same system.
In other words, ERC20 tokens are designed to be fungible. This aspect of fungibility allows the tokens to be traded back and forth, much the way dollars can be traded for dollars, or euros can be traded for other euros.
The creation of the ERC20 standard was really an important piece of infrastructure because it allows cryptocurrency projects to interoperate in a sense.
For example, the 0x Protocol, which was built according to the ERC20 standards, is building decentralized exchanges, which will allow other ERC20 token projects to exchange tokens and other forms of value.
Besides the infrastructure layer, the ERC20 standard also means that individual token projects can build independent token economies.
In the long-run, well-conceived and well-executed token economies will allow projects to support themselves and drive growth and adoption.
Right now, token economies are sprouting up around new ways of sharing digital data, new ways of controlling personal identity, futures markets, and all kinds of interesting ideas that are made possible by ERC20.
On the opposite end of the spectrum of the ERC20 tokens are tokens that fall under the ERC271 standard.
Instead of being fungible, or one easily converted for another, ERC271 tokens are non-fungible.
Having the ability to create and distribute non-fungible tokens opens the potential to use ERC271 tokens to create collectibles or tokenize (or make a digital representation) of anything that is unique and valuable.
This could range from artwork to baseball card collections.
A non-fungible token model is still an emerging field, but interesting projects are developing to explore the possibility of using ERC271 as a means to secure digital property and rights, which could lead to applications that extend way beyond any current cryptocurrency use cases.
Potential applications range from creating digital scarcity to enabling things like genetic algorithms, where one unique digital good could potentially be paired with other unique digital goods, leading to offspring of sorts, with the lineage verifiable and traceable via the Ethereum blockchain.
Like other blockchains, Ethereum has a native cryptocurrency called ether (ETH). ETH is digital money.
If you’ve heard of Bitcoin, 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 is decentralized, and it is scarce. People all over the world use ETH to make payments, as a store of value, or as collateral.
As Ethereum grows to become a massive network, more and more Ethereum wallets are being created to hold ether, which is the Ethereum blockchain’s currency. You use Coinbase it’s one of the largest wallets.
Ether’s main value is that it is the native token to the Ethereum blockchain. Just like on the Bitcoin blockchain, transactions on the Ethereum blockchain come at a cost.
The transaction cost on Ethereum, which is known as gas, is paid in ether.
Ethereum currently uses the proof-of-work, which like Bitcoin, relies on a system of validating the blockchain’s transactions and creating new coins through difficult computation.
As the proof-of-work process becomes more difficult, it will require more resources to contribute to the network.
For Bitcoin, this system works because there is a fixed supply of 21 million coins. With Ethereum, there is no fixed supply, so the proof-of-work and intense computation might make less sense.
Instead, the Ethereum community will attempt to move to a proof-of-stake system, which is a means of using distributed consensus (rather than mining) to confirm transactions and keep the blockchain moving forward.
Ethereum blockchain’s currency ether is currently ranked number two by cryptocurrency market capitalization, and there is almost 111 million ether in the circulating supply.
Vincent Nyagaka is a Professional Trader, Analyst & Author. He has been actively engaged in market analysis for the past 7 years. He has a monthly readership of 100,000+ traders and has taught over 1,000 students since 2014. Vincent is also an experienced instructor and public speaker. Check out Vincent’s Professional Trading Course here.