Chapter 1.5 Ethereum
Ethereum is the world’s second largest cryptocurrency by market cap, behind only bitcoin. Launched in 2015, Ethereum has grown to become one of the best-known names in the crypto space.
The primary goal of bitcoin is to function as an international payment platform. Bitcoin was launched as a currency built on blockchain technology. Ethereum, meanwhile, is an open source platform for developers. Developers can build currencies on the platform. Or, they can build games like “Crypto Kitties”. It’s an open source platform where anyone can build, launch, and securely run decentralized apps on a blockchain.
The Story Behind Ethereum
The Basics: What Makes Ethereum Different?
Ethereum is an open source, public, blockchain-based distributed computing platform and operating system. Today, Ethereum clients are available for all major operating systems. Developers can freely build decentralized apps – also known as dApps – on the platform.
Why would developers build on Ethereum? Well, Ethereum has unique features like the Ethereum Virtual Machine (EVM) that can execute scripts using an international network of public nodes. This Turing-complete virtual machine allows users to harness the power of blockchain to perform complex, decentralized functions. It’s like having a software-running server distributed around the world. These scripts are known as smart contracts.
The Ethereum network runs on a currency called Ether (ETH). Gas, meanwhile, is used as an internal transaction and pricing mechanism, helping to mitigate spam and allocate resources on the network.
Ultimately, all of these innovations have led many people to call Ethereum “blockchain 2.0”. It’s the second major leap in blockchain technology in history – at least, according to Ethereum supporters. Other people call Litecoin “blockchain 2.0” – so the title is still up for debate.
Ethereum: A Brief History
Ethereum was proposed in 2013 by Vitalik Buterin, who was just 19 years old at the time. Described as a wunderkind, the Russian-born computer programmer grew up in Canada and published a whitepaper for Ethereum late in 2013. He received the Thiel Fellowship in 2014, getting $100,000 from Peter Thiel in exchange for a promise to avoid university and focus on Ethereum full-time.
The Ethereum network launched in July 2015, although an initial crowdsale took place between July and August 2014. Money raised from the crowdsale was used to fund development of the project.
The DAO and The Creation of Two Versions of Ethereum
In 2016, Ethereum faced a major event: the infamous collapse of The DAO project. “DAO” was an acronym for “Decentralized Autonomous Organization.” The goal was to create a decentralized app on Ethereum called The DAO. That application would organize a community of investors together to make various democratic investment decisions. The community would vote on various proposals, allocating an enormous pool of money to promising projects and then sharing in the profits when the projects came to fruition.
That all sounds good – and The DAO crowdsale proceeded smoothly. The sale attracted huge amounts of attention and money. By May 2016, the project had set a record for the largest crowdfunding campaign in history, raising over $100 million by May 15, 2016. By the end of the crowdsale, the fund held a total of $150 million in ETH from 11,000 investors worldwide. In fact, at one point, the fund held nearly 14% of all ETH tokens in circulation.
That’s when things suddenly changed. Near the end of the crowdsale, a paper was published online showcasing an umber of vulnerabilities in The DAO. The security vulnerabilities were particularly prominent in the smart contracts used to hold raised funds.
In June 2016, The DAO was subject to an attack that exploited a number of vulnerabilities. A single hacker gained control of $50 million worth of ETH – approximately one third of the money raised by the project. The user wasn’t able to sell the tokens: they were just about to capture the tokens and lock them way from the fund.
At this point, the Ethereum community had a choice to make. They could move forward, accept the loss, and sacrifice the lost tokens. Or, they could “roll back” the blockchain and move to a point before the hack took place.
One side of the community – the majority – chose to roll back the blockchain to a point before The DAO was hacked; this led to the creation of Ethereum, or ETH
The other side of the community – the minority – chose to accept the loss and sacrifice the lost tokens, leading to the creation of Ethereum Classic (ETC)
Today, Ethereum (ETH) remains the core arm of the project, while Ethereum Classic – although still in active development – is in the minority. They’re two separate blockchains. However, when people talk about Ethereum, they’re generally talking about Ethereum (ETH) and not Ethereum Classic (ETC).
The Benefits of Developing Apps on Ethereum
Ethereum is an open-source development platform where anyone can create and launch their own blockchain-based, decentralized apps.
Why would a developer build an app on Ethereum?
The main advantage is the way in which the app stores data. With traditional apps, app data is stored on a centralized server. That means your data, your personal details, and anything you make with the app is sent to a third party server. If you create, say, a photo or piece of artwork using the app, then that data is stored on a server owned by the app developer.
With Ethereum, data is stored differently. User data remains with the user. Even if the app crashes, you remain in control of your data as long as you hold your private key. Only you can make changes to your data, and nobody – not even the person who created the app – can change ownership of your digital asset.
Ethereum apps also store app data on the blockchain. That means the data is publicly-viewable. Anyone can check the Ethereum blockchain to verify the app data – including the rules and programming for the app. You don’t need to trust the app’s creator.
What is Ether (ETH)?
Ether, or ETH, is the main unit for the Ethereum blockchain. Listed under the symbol ETH, Ether is mined in a similar way to bitcoins. Both blockchains use the proof of work (PoW) algorithm, which means miners devote processing power to the network to secure transactions, then receive a reward in the form of ETH.
Just like other cryptocurrencies, you can store Ether in a wallet. There are popular Ether wallets like MyEtherWallet available as a browser extension.
Unlike bitcoin, Ether does more than just work as a cryptocurrency: it also helps to power the system. Ether is the “fuel” of the Ethereum network because it helps run all decentralized apps on the network.
Of course, Ether can also be traded, bought, and sold like any currency. The price of Ethereum, like the price of bitcoin, rose dramatically in 2017, climbing from $13 to over $1400 at one point in January 2018.
You need Ether to do anything on the Ethereum platform. Ether also relies on Gas, including Gas Limits and Gas Price. To calculate the final price of everything you do on the Ethereum platform, you need to take into account Gas Limits and Gas Price based on the following formula:
Final Price (in ETH) = Gas Limit x Gas Price
The best way to think of Gas is as the cost of performing an action on the Ethereum network. Gas Limit, meanwhile, is the maximum amount of “fuel” required to run an operation or execute a smart contract. Gas Price is the cost per unit quantity for gas. The price of gas can be controlled by the user. The higher you set your Gas Price, the sooner your transaction will take place.
When you complete an Ethereum transaction, you’ll be asked to input the Gas Price. You can customize your Gas Price or accept the average price.
Another unique thing about Ether is that, unlike bitcoin, there’s no fixed quantity of Ethereum. There’s a total supply of just 21 million bitcoins, but there’s no fixed supply of Ethereum. On average, 18 million ETH are mined every year.
How Do Smart Contracts Work?
Ethereum is well-known for its smart contracts. Smart contracts are now available across a number of blockchain-based platforms, although Ethereum was the first to introduce smart contracts.
The easiest way to understand smart contracts is this: they’re computer programs running on the blockchain.
These computer programs can be coded with different rules. Anyone can verify and view these rules by checking the blockchain.
The smart contract can be outfitted with rules stating that the contract will automatically execute a certain action when certain conditions are met. A smart contract for car insurance, for example, might pay drivers $20,000 when their car is totaled.
Smart contracts can be seen like standard contracts. In the legal world, a contract is a secured agreement between two parties. There are employment contracts that force employers to pay employees for certain work, for example. These contracts are based on a set of rules enforced by law.
Like an ordinary contract, a smart contract has ruled enforced not by law, but by cryptography.
Anyone can build their own smart contract on the Ethereum network. Today, people use Ethereum smart contracts to launch ICOs, secure real estate transactions, or make business deals.
Smart contracts can use things like “oracles” to verify a certain event has taken place. A sports betting website might use an “NFL scores oracle”, for example, to verify the score of a certain game. Two parties who bet on the score of that game will rely on that oracle to verify the score; then, the smart contract will automatically dispense payment based on the score of that game.
The Future of Ethereum
Ethereum has one of the most active development communities in the cryptocurrency ecosystem. Ethereum’s core developers actively contribute to the ecosystem. However, the ecosystem has also attracted thousands of independent developers creating decentralized apps (dApps) on the platform. This creates a vibrant marketplace and an active ecosystem of users seeking to push the platform forward.
The future of Ethereum looks bright. Today, it sits as the #2 largest cryptocurrency by market cap – a position that has remained mostly steady since 2016 (aside from brief challenges from Bitcoin Cash and other top cryptocurrencies). It’s not unreasonable to think Ethereum could reach #1 status at some point in the future.