Launched in July 2015, Ethereum (ETH) is a decentralized, open-source blockchain that introduced smart contract functionality for the first time.
What is Ethereum?
Ethereum is a decentralized, blockchain-based cryptocurrency platform created by Vitalik Buterin . Currently, in terms of market capitalization, it is only behind Bitcoin. It has redefined much of the cryptocurrency industry with the introduction of smart contracts. The best way to understand Ethereum is to first compare it to Bitcoin.
Ethereum vs. Ethereum Bitcoin
Although Ethereum and Bitcoin share many similarities, ultimately these are two separate projects with different goals. While Bitcoin (BTC) was introduced by Satoshi Nakamoto primarily as a store of value to serve as an alternative to centralized financial systems, Ethereum (erc20 token development)does the same for applications and services. The project aims to give users more control and freedom by eliminating intermediaries like Twitter and YouTube, replacing them with code that can automatically execute according to programmable conditions.
Similarities between Ethereum and Bitcoin
Let’s first look at the characteristics they have in common. Both are decentralized systems, meaning there is no single entity that controls them. Instead, its systems run on a global network of computers offered by willing participants, called nodes. In other words, both rely on blockchain technology to record data or transactions in a secure and public manner. However, their differences become apparent in terms of the long-term goals they each have for this technology.
Differences between Ethereum and Bitcoin
Purpose: Bitcoin is the first cryptocurrency or money transfer system recorded on a public distributed ledger, while Ethereum is a multi-purpose platform. Although it has its own digital currency, ether (ETH), this is just one component of its system.
Applications: Ethereum has significantly expanded Bitcoin’s core technology to provide a network that allows the creation and deployment of other decentralized applications (DApps). These applications can be entirely new concepts or new versions of existing ones. For example, decentralized finance or DeFi is one of the most popular fields currently developing on the Ethereum network. These are traditional financial services reimagined and rebuilt without the need for third-party intermediaries. Imagine the ability to lend or borrow money on a global scale, but without a bank or company charging a large percentage in fees. Instead, all interest rates and transactions generated go directly to lenders. It is a true peer-to-peer system in which all interaction takes place directly between users.
Tokenomics : Even if we compare just the cryptocurrency component of Ethereum with that of Bitcoin, there are still some significant differences. The total maximum supply of bitcoins is limited to 21 million. Ether, on the other hand, has no limit. Ethereum also aims to have its blocks mined at an average of 12 seconds per block, much faster than the 10 minutes that Bitcoin takes.
Mining: Finally, bitcoin mining is much more resource intensive, requiring custom dedicated machines that few can afford. In contrast, it is much easier for the general public to participate in ETH mining, thus encouraging greater decentralization.
Smart Contracts on Ethereum
Smart contracts are perhaps the most transformative innovation in the cryptocurrency space since the birth of Bitcoin itself. Just like physical contracts, smart contracts can be considered as an agreement between multiple parties. The difference is that while a physical contract doesn’t actually guarantee the execution of any specific action, smart contracts are filled with code that guarantees they will execute exactly as advertised.
What are Smart Contracts?
Smart contracts are the unique new feature introduced by Ethereum that has become a catalyst for the development of countless new decentralized applications. Like their physical counterparts, these can be understood as binding agreements between two parties. However, in the physical world, signing a contract does not guarantee an expected result. In fact, contracts are broken or ignored all the time. These paper documents are often mere impediments whose strength depends on the law enforcement capabilities of the legal and governmental institutions that support them.
A smart contract does not have these weaknesses. It is represented by computer code that runs exactly as intended on the Ethereum blockchain. Once deployed, it is automatic and cannot be censored or tampered with. It facilitates transactions or exchanges of money, data, content or anything of value. Smart contracts are self-operational, meaning their code is designed to perform specific actions once certain conditions are met.
Smart Contract Requests on Ethereum
Smart contracts can be used to automate and govern the transaction of money, data, content, or anything else of value in a censorship-resistant manner. While this means that no centralized entity can stop a transaction or interfere with its terms, it also means that losses caused by bugs in the code or malicious behavior are much harder to reverse.
Developers can leverage these smart contracts to create much more complex applications, limited only by their imagination. All of these new services would share the traits of decentralization, automation, and transparency, and that is exactly what is happening with the current DeFi boom . All different types of traditional financial and banking services are being recreated on the Ethereum network with the use of smart contracts. However, finance is not the only industry that can be decentralized. Voting systems , social networks and even games have the potential to be revolutionized.
Execution of Smart Contracts
Smart contracts are run through the Ethereum Virtual Machine ( EVM ), a Turing complete network that allows contracts to perform any task that a normal computer can perform. The EVM is maintained by thousands of decentralized contributors known as nodes, who continue calculating contracts as long as the network receives the required fee (known as gas) or the contract is terminated. Known by some as a “world computer”, the EVM can be seen as a decentralized, global computer that allows code to be run in a trustless environment.
What does Ethereum do?
Ethereum DApps
The programmable nature of Ethereum has led to the creation of decentralized applications ( DApps ), which provide services without the need for a third-party intermediary. DApps can be viewed as a collection of interoperable smart contracts that work together to provide a given service in an open and censorship-resistant manner.
One of the most popular forms of DApps is decentralized finance ( DeFi ), which enables a wide range of financial services that eliminate intermediaries such as brokers, exchanges and banks. For example, popular decentralized exchanges ( DEXs ) such as Uniswap ( UNI ) and SushiSwap ( SUSHI ) allow users to directly trade , borrow, lend , and pool a wide range of currency pairs, thereby providing on-chain liquidity to the Marketplace.
As decentralized exchanges directly connect users, they offer many more options than centralized exchanges (CEXs), which are ultimately limited in the amount of currency pairs they can support. The downside to this is that DEXs do not verify or audit the tokens that are traded on their platforms, meaning it is up to the user to exercise due diligence .
Other DeFi applications include yield farmers such as Compound Finance ( COMP ) and Yearn.Finance ( YFI ), which provide users with returns for staking or contributing their assets to liquidity pools . The high returns offered by these DApps have seen an explosion of interest in recent years, resulting in huge increases in ETH gas fees (due to increased volume).
Ethereum ERC-20 Protocol
Aside from smart contracts, perhaps Ethereum’s most influential innovation has been the ERC-20 protocol , the most widely used standard for smart contracts in the world. Much of what makes the cryptocurrency world run on the create ERC20 token protocol, including stablecoins like Tether ( USDT ) and USD Coin ( USDC ) and utility tokens like MATIC and Basic Attention Token ( BAT ).
A large number of the most popular crypto projects today started out as ERC-20 tokens before moving onto their own independent networks. For example, EOS initially issued tokens on the Ethereum network before eventually migrating to its own mainnet . There are currently nearly 500,000 ERC-20 token contracts in circulation.
Ethereum NFT Marketplace
Another application of Ethereum is the popular NFT marketplace OpenSea , which allows users to bid and mint NFTs on everything from Bored Apes ( BAYC ) to Meebits . The platform was valued at $13.3 billion as of January 2021.
What are the disadvantages of ETH?
While it shows a lot of promise, Ethereum’s smart contract feature has a potential critical flaw, human error. The non-editable code of a smart contract is only as good as the person who wrote it.
If a mistake was made or an oversight left a bug easy to exploit, it’s only a matter of time before a malicious actor takes advantage of it. And once that happens, there is virtually nothing that can be done to reverse the damage.
Of course, a new and improved version of the contract can be written, but any transaction that took place using the previous contract has already been recorded and made permanent on the blockchain.
The only way to change this would be through a general consensus to roll back the transaction and rewrite the underlying code, a move that goes against the core philosophy of an immutable ledger. Whenever these errors happen, and they certainly do, trust in the Ethereum network is compromised and the value of ETH drops significantly.
Despite this, this exciting field is still young and has so far managed to find its feet and regain investors’ trust several times.
Who is behind Ethereum?
Ethereum has a total of eight co-founders, namely Vitalik Buterin, Gavin Wood, Anthony Di Iorio, Charles Hoskinson, Mihai Alisie, Amir Chetrit, Joseph Lubin and Jeffrey Wilcke.
Vitalik Buterin was the first to propose Ethereum in his white paper published in 2013, which outlined the goal of building decentralized applications. Vitalik dropped out of his computer science program at the University of Toronto after receiving a $100,000 grant from the Thiel Foundation to work full-time on Ethereum. Prior to his work at Ethereum, Vitalik was a writer at Bitcoin Magazine, which he founded with Alisie.
Gavin Wood served as the Ethereum Foundation’s first chief technology officer. Wood’s contributions include the creation of the yellow paper that first defined EVM, along with the proposal and development of Solidity, the programming language in which most Ethereum smart contracts are written. Since leaving the Ethereum project in 2016, Wood has gone on to co-found the Polkadot ( DOT ) and Kusama ( KSM ) projects.
Anthony Dio Iorio helped finance the project during its early stages of development. Mihai Alisie and Charles Hoskinson helped establish the Ethereum Foundation in Switzerland, although Hoskinson left the project shortly after to found Cardano ( ADA ). Another early backer, Joseph Lubin, has since founded ConsenSys, a blockchain development company that works primarily with Ethereum projects.
Conclusion
Although it ranks below Bitcoin in terms of market value, Ethereum is still undoubtedly one of the most influential crypto projects. Programmable smart contracts have revolutionized the way blockchain technology is used and serve as the foundation for most crypto applications and innovations.
Despite Ethereum facing more competition from other Layer 1 stalwarts, the project shows no signs of giving up its dominance. Ethereum is still by far the most popular network for DApps and continues to see growing adoption of NFTs.
To address environmental concerns and high gas fees brought on by its popularity, the project is moving from a proof-of-work system to a proof-of-stake system with Ethereum 2.0. The project introduced a burn mechanism with the latest London Hard Fork in an effort to introduce a deflationary mechanism and slowly shift mining rewards away.