What Is Ethereum?

What Is Ethereum?

It is a public platform that uses blockchain technology to facilitate smart contracts and cryptocurrency trading securely without a third party. The Ethereum blockchain also supports decentralised digital currency - known as Ether - but with the added innovation of something called Smart Contracts.

Smart Contracts are automated, enforceable agreements that don’t need third-party intermediaries. They are essentially programmable agreements, executed without any human involvement.

Applications built on Ethereum are decentralised and can be created and used without permission or regulation from any centralised third party. They are called DApps - decentralised applications.

Hence, Ethereum as the World Computer. It is the world’s 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.

The Origin Of Ethereum

Ethereum was first proposed in a 2013 white paper by Vitalik Buterin. Vitalik was a programmer who wanted to build on top of Bitcoin’s innovation and bring application development capability to the blockchain world.

Vitalik’s vision for the blockchain space was that instead of having individual blockchains for individual applications, there would be one blockchain platform that anyone could build decentralised applications on top of.

To provide a platform that allows developers to build applications, and users to use applications that are decentralised - there is no central third party control; reliably secure - fraud and third party interference are very difficult if not impossible; universally accessible - anyone can build, deploy and use Ethereum applications without the need for permission.

Ethereum's Unique Characteristics

Ethereum was designed as a blockchain with a built-in Turing complete programming language - called Solidity - that can be used to create smart contracts. 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. Unlike Bitcoin, however, 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 stablecoins: tokens tied to a traditional currency’s value, solving much of the volatility problem with current cryptocurrencies; governance tokens - these can represent voting power for a decentralised app; collectables tokens - these tokens can represent collectable items such as digital art or collectable game items. These are commonly known as NFTs.

Ethereum Ecosystem

More recently, Ethereum has powered the explosion of the decentralised finance industry, otherwise known as DeFi. Innovations include decentralised exchanges and lending platforms amongst many others. The industry is young, moves fast and is continually growing and is an excellent 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.

Ethereum's Limitations

When Ethereum launched, 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 it’s 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 couldn’t 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.

ETH 2.0 And Proof Of Stake

Sharding is a computer science technique used to distribute the load on a particular network. In Ethereum’s case, the idea is to spread the transactional and contractional data processing load across 64 different chains. It is hoped that this technique will improve Ethereum’s capacity to process transactions to up to 100,000 per second.

Proof-of-stake is an alternative way for blockchains to achieve consensus. These are known as consensus mechanisms. Up until now, Bitcoin and Ethereum have used a mechanism known as proof-of-work.

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.

As we saw earlier 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.