If you’re at all interested in cryptocurrency, you’ll need to learn about Vitalik Buterin’s Ethereum platform.

Described in the white paper as “A Next-Generation Smart Contract and Decentralized Application Platform”, this is a huge project that has totally changed the crypto/blockchain landscape.

The Ethereum token ETH is currently second in value only to Bitcoin, with a market cap of over $58 billion, more than twice that of XRP at number three. While ETH is almost the most valuable coin in the crypto ecosystem, Ethereum is about so much more than currency. The project has ramifications that affect blockchain adoption in a number of areas, and one could argue that it even has more real use cases than Bitcoin!

Ethereum is a blockchain-based software platform designed specifically to allow developers to build decentralised applications. Now, I did say beginners guide, didn’t I?

 

Blockchain


I’ll start with blockchain, which can be imagined as a spreadsheet or a ledger that records information. It’s “decentralized”, meaning it’s not stored in just one location. The ledger is stored on many different computers, and when new information enters the ledger, the system is updated on all the computers.

Why?

The main reason is security. Traditionally, if a company stores sensitive information like credit card details, that information is encrypted to increase security. The information is then stored on a computer server network and guarderd. If someone accesses that information, they can leak it or change it. Because there’s only one point of “attack”, the information is vulnerable.

However, with a decentralized ledger distributed across multiple computer networks, security is greatly increased. If you want to change the information, you need to break into every node at the same time and force them all to agree. With a system like Ethereum, which has 25,000 nodes distributed across the world, that’s no easy feat! Some would argue that it’s quite impossible.

 

Decentralized Applications

I’m going to say straight off the bat that these are applications that nobody owns, never need to stop working maintenance, and can never be shut down. Ever.

Interested?

OK. Now, you may think you’re not sure what an app is, but you probably use them all the time. Email software, text messaging…. let’s look at examples.

Think of an app, any app. Need inspiration? Check your phone! The typical smartphone has a number of apps (applications) that serve different functions. Does your phone have a calculator? That’s an app. Does it have social media software like Twitter and Facebook? Apps.

Really? OK. Well, if you get this then congratulations! You are the first neolithic cave person in history to learn about Ethereum’s decentralized applications, and we are all very proud of you. Well done.

The thing about the above applications is that they’re actually not decentralized, meaning that they have a central point of authority, and a central point of failure. One company or entity owns and controls those apps, right? The software developer for the calculator app could choose to remove his or her app from the app store.

Twitter and Facebook are companies that store sensitive personal info on their company servers, and an uncrupulous employee could potentially access that information. A natural disaster or tyrannical government could potentially destroy or shut down the servers and prevent the application from working. Under the command of one authority, and with one central point of data storage, which is a weakness no matter how well-guarded.

Decentralized applications are different.

Here are the criteria for what qualifies: An app has to be

  • open source
  • decentralized
  • Self-incentivized
  • Algorithmic

Those last two basically mean that the app has to have it’s own token which funds the running of the app. A digital asset that keeps the lights on basically, meaning that the app is powered by people using it and doesn’t need external support. dApps must run on an algorithm/software protocol that generates tokens and allows the user community to make consensus-based decisions.

So… cryptocurrencies? Sort of! Bitcoin is technically a dApp which allows peer to peer payments on an open source decentralized platform that produces it’s own tokens through miners solving proof of work algorithms. Not all cryptocurrencies are decentralized, but many could be considered dApps while others aren’t. However, while cryptocurrencies exchange value, dApps are more data-orientated, the bigger picture to the specific use case of blockchain as an currency platform.

These apps are developed using the Ethereum network, launched on the Ethereum platform, and then stored on all 25,000 nodes. let’s say you’re a software developer in a country with heavy censorship of media, and you create a social media app that people start using to combat government propaganda. If it’s centralized, the government can ban the application. They can raid any nationally-based offices, seize servers, and shut the whole thing down. If it’s decentralized, well… their job just got a lot more complicated.

According to the Ethereum white paper, there are three types of dApps. 

The first type is an app that manages money: finance management will be a huge use case for dApps, and Ethereum designed their system with an aim to facilitate financial agreements and contracts being fulfilled through their applications.

The second type of dApp concerns applications that need off-chain information to operate. They’re decentralized, but external info is required to keep things running. For example, fishermen could buy a derivative that pays out if their work is affected by storms. The weather update isn’t external, but the payout is autonomous – a contract that executes itself automatically is called a “smart contract”, and we’ll get to those a little later on.

The third type of app doesn’t concern finance at all, and the examples given in the white paper are voting software and decentralized governance. Now we’re starting to see the full scope of the project.

 

Smart Contracts

Smart contracts are a major aspect of the project. They’re designed to eliminate trust (which sounds kind of bad), or rather the need for trust (much better). Two parties enter an agreement, the agreement is cryptographically signed and entered into the Ethereum platform. The contract is then triggered by an event – such as the passing of a certain date. Once that happens, the contract is executed. Automatic monthly payments, for example. Weekly business reports. Warnings about dangerous driving conditions – it could be anything.

Now, these are all things that exist already, right?

The difference is, smart contracts are coded directly into the blockchain, and as we’ve already learned, once information is entered there it can never be removed or altered. Smart contracts are immune from censorship, fraud, and system downtime, which is… amazing, to be quite honest.

 

The Virtual Machine and the World Computer

Ethereum seeks to decentralize and even democratize the existing model of client-server data storage. Nodes replace clouds and traditional servers and nobody owns or sells your personal data. That’s the idea. One argument is that if anyone should be selling your data to advertisers, it should be you, not Facebook or Google.

A major breakthrough in crypto/blockchain technology was Ethereum inventor Vitalik Buterin’s concept of the EVM – Ethereum Virtual Machine. At a time when most other cryptocurrencies were (and still are) modeled from Bitcoin’s peer to peer payment blockchain design, Buterin could see platforms struggling to be anything more than a payment structure. He envisioned more applications, and instead of trying to bend Bitcoin codes and protocols to suit his needs he tore up the rulebook and made an entirely new blockchain system.

The EVM does use certain aspects of Bitcoin – there’s no doubt that the system design has influenced all that came after it. However, the EVM went far beyond the payment structure. The system is Turing Complete, meaning it’s capable of performing any logical step of the computational function. This allows it to be a computing platform, not just a payment system, and the while Ether (ETH) is the second most valuable cryptocurrency, its immediate use is actually to fuel the Ethereum plaftorm.

 

Ether and Gas

Ether is the currency, and it’s needed to power the whole platform. Just like we talked about earlier with dApps, the system powers itself – it “costs” a certain amount of Ether to carry out functions on the platform, and the cost of the fee is referred to as “gas”. Gas prices are decided via consensus, and the people who decide are called miners, or sometimes forgers.

Ethereum was originally a Proof of Work system, meaning that miners had to solve complex computer algorithms in exchange for ETH. The ETH was given as a reward for the work (hence, proof of work). This is the system that many other currencies also use to distribute their currencies, and doing it like this helps prevent inflation of prices.

How?

Well, as more miners compete for ETH, the algorithms become more difficult to solve, meaning they require more time and computational power.

So, people download the entire blockchain to their computers and run algorithms – when their computer guesses the correct number, they get paid. By doing this they’re actually running a node, and their node helps verify transactions – once a certain amount of transactions are mutually verified, they form a “block” of newly-verified data which is then entered into the chain.

Ethereum actually changed fro Proof of Work to a newer system, Proof of Stake. There were a number of reasons, among them being the high cost of electricity and energy required to decrypt new blocks as time went on. Proof of Stake is cheaper – thousands of times cheaper, in fact! Instead of requiring miners to crack codes, rewards are given in a deterministic way based on how much currency the community miners already own (or what their “stake” is).

Instead of block rewards, they’re given transaction fees, and the whole process tends to run a lot smoother. Ethereum actually forked a number of times, meaning the community couldn’t agree on certain issues and split into two different currencies. Ethereum Classic still uses the original Ethereum coding and the Proof of Work system to mine coins.

Decentralized Network of the Future

Ethereum is a fascinating project, and while there’s more to explore, hopefully this has given you a good working knowledge not just of how it operates, but why it could be useful. The Ethereum platform’s aims to be a World Computer are ambitious, and met with skepticism by many who feel that such worldwide decentralization will never be allowed to happen. That may be so, but the effort to get there is sure to see more and more innovations and breakthroughs in the world of blockchain development.