About Ethereum (ETH)
Bitcoin enabled secure peer-to-peer exchange of value on the internet through its use of blockchain and revolutionary consensus protocol. It essentially executes codes to make transactions between two parties under certain conditions. In that sense, it's a contract.
These contracts can be used to do a whole lot more than just exchange value between two individuals. Self-executing smart contracts can be coded to perform various functions when a given set of conditions are met.
Vitalik Buterin, a programmer who was involved with Bitcoin saw this opportunity and lobbied to integrate a scripting language into Bitcoin for developing self-executing applications on the bitcoin blockchain. However, his entreaties were rebuffed.
Undeterred, in 2013 he went out on a limb to outline a proposal for the development of a new blockchain based on bitcoin with built-in Turing-complete programming language which would support decentralized applications (Dapps).
Ethereum Virtual Machine
Ethereum consists of a decentralized cloud computer, Ethereum Virtual Machine (EVM), which allows anyone to write self-executing smart contract and Dapps where they can create their own set of rules and functions.
EVM is the runtime environment for Ethereum smart contracts and Dapps. Every node on the Ethereum network runs an implementation of EVM, executing the same set of contracts.
Ethereum's native cryptocurrency token is called Ether. Ether is the ‘fuel' for executing contracts and operating Dapps. On Ethereum, these transaction costs paid by clients to the machines on the platform to execute requested operations are calculated based on an internal unit called ‘gas' required by each action. The amount of gas is calculated and paid in Ether.
60 million Ether was purchased in a crowdfunding campaign in 2014. 12 million of which allotted to the development fund and the non-profit Ethereum Foundation in Switzerland. Issuance of Ether is capped at 18 million per year which may change in future.
Ethereum's consensus protocol works in the same way as Bitcoin. Instead of SHA-256, Ethereum uses a PoW algorithm called Ethash. Ethash is ASIC-resistant to eliminate centralization risks.
While Bitcoin blocks are generated every 10 minutes, Ethereum blocks are generated roughly every 15 seconds. Difficulty is adjusted to retain a block generation period of 10 to 19 seconds. The miner of a block is rewarded 3 Ethers.
Ethereum has been exploring a transition from PoW to a PoS (proof-of-stake) consensus protocol known as Casper which we shall explore in due course when the transition happens.
Conceived in 1994 by Nick Szabo, smart contract is a set of codes programmed to be self-executing under a given set of stipulations. In Ethereum, these smart contracts are currently written in Solidity, compiled down to EVM bytecode and deployed on the Ethereum blockchain for execution.
Although blockchain's immutability ensures autonomous self-execution of contracts, their transparency and public accessibility means that any bugs or security vulnerabilities are also visible to everyone and failure to address them at once can prove disastrous.
This was illustrated in 2016 when security vulnerabilities were spotted in a set of smart contracts, The DAO (Decentralized Autonomous Organization), which were developed on the platform and raised 11.5 million Ether via crowdsale. Before the fixes could be applied, The DAO fell victim to an attack which exploited many of the vulnerabilities and appropriated 3.6 million Ether.
Smart contracts can be programmed to perform an action based on feedback from an ‘oracle'. An oracle is a trusted third-party capable of providing information required for fulfilment of a contractual condition.
Decentralized applications (Dapps) are applications which are a lot like the ones we use on our mobiles, tablets, laptops and personal computers except that they are stored and executed on the blockchain and are not controlled by any single entity.
Think of Facebook, Twitter, Uber etc. So many different apps on the web and all centralized. Ethereum provides app developers a single platform for building such apps and issuing their own tokens without having to go through the hassle of building an all new blockchain.
Dapp developers on Ethereum hold an Initial Coin Offering (ICO) to distribute their tokens. ICO is a crowdfunding event to raise funds for their project where investors can purchase a value token using cryptocurrencies such as Bitcoin and Ethereum. Ethereum is the leading platform for ICO projects which have raised more than 2.5 billion in 2017.
Decentralized Autonomous Organization (DAO) is a self-governing democratic organization on the blockchain without a C-suite. Apart from democratizing governance of an organization, DAOs can also address the challenges of coordinating and motivating large groups of people to carry out tasks in conventional, hierarchical organizations.
Various rules of governance for an organization are encoded in smart contracts allowing all operations to be performed autonomously. A DAO abides by a specific programmatic set of rules. Token holders will have the right to vote on proposals for changes to these rules through a democratic voting process.
The value proposition of a DAO is to emulate many of the functions of corporate business entities without the bureaucracies and red-tape of traditional organizations. It's an entirely new paradigm in corporate management. Aragon, Colony and District0x are some current DAO projects.