What is Ethereum

Let's briefly Explain what Ethereum is: Ethereum is a decentralized blockchain network powered by the Ether token that allows users to make transactions, earn interest on their holdings through staking, use and store nonfungible tokens (NFTs), trade cryptocurrencies, play games, use social media and so much more.

Ethereum

Ether and bitcoin are similar in many ways: Each is a digital currency traded through online exchanges and stored in several types of cryptocurrency wallets. As Bitcoin uses blockchain technology to manage and create a digital currency safely without a centralised third party. The Ethereum blockchain supports decentralised digital currency - known as Ether - but with the revolution that was added of something called Smart Contracts.

Smart Contracts are automated, enforceable agreements that dont need third-party intermediaries. They are crucially programmable agreements, executed without any human involvement. So if you think of Bitcoin using blockchain technology to store currency transaction data, Ethereum uses blockchain technology to store contractual data (along with transaction data).

Ethereum uses this revolution provide an open-source platform that software developers can build applications on top of (a concept introduced in a previous lesson discussing Bitcoin's limitations). Applications built on Ethereum are decentralised meaning that they are not issued or regulated by a central bank or other authority and can be created and used without permission or regulation expected from any centralised third party. They are called DApps - decentralised applications.

Thus, Ethereum as the ‘World Computer’. It is the worlds first programmable blockchain. In this sense, Ethereum provides a platform that allows applications to run without any possibility of downtime, fraud or third-party interference, powered by network of computers participating based on economic incentive. Just as personal computers run local applications like Microsoft Word, Ethereum runs global applications that are decentralised and distributed.

The Origin of Ethereum & Its Objective

Ethereum is a platform powered by blockchain technology that is best known for its native cryptocurrency, called ether, or ETH, or simply ethereum.

To better understand why Ethereum is important and where the platform is heading, its useful to realize its origin and get a sense of its original aims. Ethereum was first proposed in a 2013 white paper by Vitalik Buterin.

Ethereum grew out of Vitalik Buterin‘s discontent with the limitations of Bitcoin and has become the second most valuable cryptocurrency in existence at the time of writing. Vitalik was a programmer who wanted to build on top of Bitcoin’s creation and bring application development capability to the blockchain world. Vitaliks vision for the blockchain space was that instead of having separate blockchains for individual applications, there would be one blockchain platform that anyone could build decentralised applications on top of.

Therefore, instead of having bitcoin for currency and another blockchain for another application, Ethereum could provide the blockchain foundation for anything that can be reduced to programmatic logic. Here we can begin to understand Ethereums divergence from Bitcoin. Bitcoin uses blockchain to provide a reliably safe and decentralised medium of exchange.

Although Ethereum also has that capability, it is intended as a blockchain to provide a reliably secure and decentralised platform to build applications on top of. Hence the idea of a ‘world computer’.

The aim of Ethereum can are summarised as follows:

To provide a platform that allows developers to build applications, and users to use applications that are

1. Decentralised - there is no central third party control.

2. Reliably secure - fraud and third party interference are very difficult if not impossible

3. Universally accessible - anyone can build, deploy and use Ethereum applications without the need for permission.

Ethereum's Unique Characteristics & Ecosystem

As ETH becomes the second most valuable cryptocurrency in existence at the current time, then how does Ethereum achieve these aims？. Ethereum was created as a blockchain with a built-in ‘Turing complete’ programming language - called Solidity - that can be used to create smart contracts.

Turing Complete

All that ‘Turing complete’ means is that Solidity is a programming language capable of programming for any hypothetical computation. Thus, in theory, any computer application can be programmed in Solidity and run on the Ethereum platform. This language, therefore, is what Ethereum‘s ’smart contracts are written in. Similar to how Bitcoin uses blockchain technology to store its transactional data in a secure and decentralised way, Ethereum uses blockchain technology to store transactional data and contractual data.

By supplying a blockchain complete with a programming language, Ethereum can achieve its objective of being a platform for decentralised, reliably safe and worldly accessible apps to be built on. From this, we can start to understand the ecosystem that Ethereum allows and why there is so much interest in the platform.

Prio to Ethereum, the blockchain world was limited to one main application (cryptocurrency through Bitcoin) and other speculative projects such as Namecoin that used blockchain to sell decentralised domain names. Ethereum provides the platform for any decentralised application to be built on top of. But how will these DApps work？ Well, a key component of their functionality is Ethereum‘s native currency Ether used as sound money for transactions on the Ethereum platform. As with Bitcoin, the Ethereum platform rewards users that verify transactions by charging fees. Ethereum’s transaction fees are known as Gas (more on this later).

In contrast to Bitcoin, though, Ethereum also allows for other currencies to be used on the platform. Anyone can create assets and use Ethereum to trade them. These are known as tokens.

Some famous applications of tokens include:

1. Stablecoins: tokens tied to a traditional currencys value, solving much of the volatility problem with current cryptocurrencies.

2. Governance tokens - these can represent voting power for a decentralised app.

3. Collectables tokens - these tokens can represent collectable items such as digital art or collectable game items. These are commonly known as NFTs (non-fungible tokens).

Ethereum Ecosystem & Innovations

Since 2013, many decentralised applications have been built on Ethereum. The surrounding Ethereum ecosystem has grown to a market cap of over $140 billion. Famous decentralised applications include digital art marketplace Foundation and browsers such as Brave that let you earn cryptocurrency from browsing the internet. More recently, Ethereum has powered the explosion of the decentralised finance industry, otherwise known as DeFi.

DEFI

Revolution include decentralised exchanges and lending platforms out of many others. The industry is young, moves fast and is continually growing and is a gerat example of the power of Ethereum. Another interesting example of the power and perhaps the dangers of the Ethereum platform is the DAO. The DAO was a digital Decentralised Autonomous Organisation and a form of investor-directed venture capital fund.

A decentralized autonomous agency, sometimes called a decentralized autonomous corporation, aimed to be a new venture capital fund that allowed investors to vote via tokens granted based on the amount invested. It is estimated that the fund reached an Ether value of over $150 million. Where It lasted around 6 months in 2016 before an attack that saw nearly $50 million worth of Ether stolen. This Ether was eventually returned to its original owners via a ‘hard-fork’. This fork means the original Ethereum blockchain is no longer the main Ethereum chain (known as mainchain) and is now called Ethereum classic.

A decentralized autonomous organization, has highlighted specific vulnerabilities with creating DApps at scale. Namely that the complex codebases expected to develop large DApps such as the DAO can be exploited. To get the complete story of Ethereum and understand where the platform is heading next, we need to look at these vulnerabilities in more detail and evaluate the platform in light of its limitations.

Ethereum's Limitations

It suffers from a variety of real-world limitations, not least of which is its inability to scale. Seeking to replace it in the race for dominance. But The most significant limitation of Ethereum - like with Bitcoin - is its scalability, which, as with Bitcoin, is hard to achieve without sacrificing decentralisation or security, Fiat currency achieves security and scalability but sacrifices decentralisation to do so. In contrast, Bitcoin achieves decentralisation and security but sacrifices scalability to do so. At the moment its a similar story with Ethereum, while its critics also highlight to its founder as a point of failure, along with a lack of clarity over its total supply.

After the launch of Ethereum, it was seen as an upgraded version of Bitcoin not just because it made DApps possible, but also because it upgraded the number of transactions that could be processed per second. This lent more scalability to the platform, but its still constrained. Bitcoin can handle around 5 transactions per second, whereas Ethereum can handle about 30. Compare this with a platform like VISA that can run 50,000 per second, and we can see the current limitations of cryptocurrencies.

This limitation of Ethereum, coupled with its ability to empower developers to produce DApps, led to the rise of the ICO ecosystem. An ICO - initial coin offering - initially funded Ethereum; inspiring many developers to raise funds similarly. Many promised things that they couldnt deliver on the current Ethereum platform. Thus, the resulting ICO frenzy where teams raised lots of money but often failed to deliver on their promises.

Then how, can Ethereum be claiming to be a ‘world computer’？ If it can‘t scale, surely it can’t compete？

ETH 2.0 - Proof of Stake

Due to the inability of Ethereum to compete with Fiat systems such as VISA, in its current form, then there is need to upgrade, then Here we come to the advent of ETH 2.0 or Ethereum 2.0.

Ethereum 2 (ETH2) is an upgrade to the Ethereum network that aims to improve the network's security and scalability. This upgrade involves a shift in Ethereum's mining model (“Proof-of-Work”) to a staking model (“Proof-of-Stake”). Sharding is a computer science idea used to distribute the load on a particular network. In Ethereums case, the idea is to spread the transactional and contractional data processing load across 64 different chains. It is hoped that this idea will improve volume of Ethereum to process transactions to up to 100,000 per second.

Proof-of-stake is a type of consensus mechanism used by blockchain networks to achieve distributed consensus. It requires users to stake their ETH to become a validator in the network. Validators are responsible for the same thing as miners in proof-of-work: ordering transactions and creating new blocks so that all nodes can agree on the state of the network.

Proof-of-work is very costly in terms of computer processing power which translates to high energy costs. It also risks the network being corrupted if mining centres grouped together and took control of more than 50% of the network. Proof-of-stake aims to address these two problems by randomising the consensus burden rather than having it as a competition. Switching to proof of stake will see a transition from miners to validators. There will still be a reward for confirming transactions; however, it will be more of a random selection than proof-of-work.

Considering what we saw earlier that Ethereum‘s transaction fees are known as Gas and naturally, these fees fluctuate with demand and are limited by Ethereum’s transaction processing limitations. Increased demand and a limited supply are a recipe for high fees. It is hoped that the Eth 2.0 upgrades will dramatically increase volume of Ethereum to process transactions and hence Gas fees (transaction fees) will become much lower.

With the use of these two main upgrades we have explained and a promise of a more easily upgradeable infrastructure, Ethereum 2.0 aims to be the platform that Vitalik initially envisioned for Ethereum. The community launched the first phase of Eth2 in December 2020, and the full rollout is planned to take place over the next two years. It continues to be seen if Ethereum can fulfil its promise of being the ‘world’s computer‘, but you certainly can’t fault them for their ambition.