Bitcoin is undeniably the most popular cryptocurrency in the world. For many, it is the name most closely associated with the digital assets. Nevertheless, it is also undeniable that the first major cryptocurrency is also not the most technologically advanced one. For many, that title belongs to the second biggest cryptocurrency by market capitalization as of November 2018, Ethereum. Ethereum is an open source, distributed platform that features smart contract functionality. It allows Ethereum to offer capabilities far superior to the standard blockchain networks. Although Ethereum doesn’t trace its history as far back as its more popular alternative, the network has become a part of many processes and a platform that brought into existence many other digital tokens. As such, Ethereum is one of the most interesting cryptocurrencies out there. To truly understand what Ethereum is and how it works it is important to have a general understanding of some concepts like smart contracts. This article is a guide to the second biggest cryptocurrency in the world and it tries to explain simply what Ethereum is and how it differs from other cryptocurrencies on the market.
Vitalik Buterin, a programmer and a cryptocurrency researcher who is credited with founding Ethereum first proposed the idea in 2013. Any definition of Ethereum would be incomplete without the inclusion of the creator’s vision. His main issue with the existing cryptocurrency networks was the absence of a scripting language, which hindered the use of the blockchain networks for a wider range of purposes. His first proposal included a scripting language for application development, but it failed to attract support. As a result, Vitalik Buterin submitted a revised proposal that included a more general scripting language. The proposal would later manifest itself in what Ethereum is today. The development of the network didn’t begin until 2014. The funds for the project were obtained through a crowdsale which took place during the summer of 2014. Those who wanted to take part in the crowdsale were offered to buy Ethers, the Ethereum value token, and pay for them in bitcoins. At that time, not many people understood the meaning of Ethereum.
The history of Ethereum is full of changes and modifications as it is an ever-evolving platform that is trying to adapt to the present demands of the market. As the cryptocurrencies are a new concept, the business applications of these assets are still unclear. Ethereum is one of the leading networks in pushing forward the application of the new technology. Therefore, the first step to understanding how Ethereum works is to understand how it got to the current condition. For this reason, we consider the soft forks and hard forks of the network throughout its existence.
Soft forks and hard forks of Ethereum explained
Before launching the network we know of today, the founders had to go through a few versions. One of the prototypes was codenamed “Olympic”. The network offered a bounty of 25,000 ether to those who found bugs in the codes. This was a way for the developers to incentivize network participants and independent individuals to dig into the code and test it. It was also in line with the ideology of openness and cooperation of the blockchain networks. The first official release of the Ethereum platform occurred with “Frontier” in July 2015. After “Frontier”, the network went through a few soft forks for protocol upgrades. These are important in order to create a version of the network that is up to date and meets the requirements of the users.
“Homestead” was another version which launched in March 2016. Some of the biggest changes in the soft fork concerned gas pricing, security issues and transaction processing. “Metropolis Part 1: Byzantium” soft fork happened in October 2017, and it is the current version of the network. It added flexibility for the smart contract developers that is necessary for the advancement of the technology. As we will explain, smart contracts allow Ethereum to differentiate itself from other networks, which is why it was important for the people behind the platform to keep developing this functionality. The network plans to go through two more protocol upgrades which will be titled “Metropolis Part 1: Constantinople” and “Serenity”. This ever-changing nature of the network that adds complexity and usefulness to the system differentiates Ethereum and makes it appealing for the investors.
In addition to the soft forks, the Ethereum blockchain has undergone a few hard forks as well. These didn’t serve as an upgrade to the system as they were caused by security issues of the network. Hard forks simply allowed the network to make big changes to the ledger for various reasons. One of the major issues faced by the network occurred in June 2016. Months prior to the incident a set of smart contracts had been developed on the platform creating a decentralized autonomous organization called The DAO. It was a form of an investor-directed venture capital fund, which raised an astounding $150 million during the crowdsale. An unknown hacker stole $50 million of these funds in Ether and triggered an outrage in the community. Some demanded that Ethereum perform a hard fork in order to get back the funds. The network did split in two. The new fork continued as Ethereum while the original blockchain assumed the name Ethereum Classic. By the end of 2016, Ethereum had to go through two more hard forks that were caused by similar incidents. Fortunately, the network was able to establish adequate security measures that reduced the risks of similar hacks happening in the future.
Ether – native cryptocurrency of Ethereum defined
While it is a common mistake to refer to the cryptocurrency by the name Ethereum, the digital coins are in fact called Ethers. As famous as the network is, many people still don’t know what Ether is. Ether could be thought of as a gas that allows the blockchain to operate. It is needed to pay for transactions, which is why, as long as there is a demand for the Ethereum blockchain, there will also be a demand for Ether. Although using the smart contracts, there have been many other cryptocurrencies and tokens created on the platform, the running of these smart contracts still requires the usage of Ethers. If you have ever wondered what ETH stands for, it is the ticker symbol for the cryptocurrency. The coin also has its own currency symbol, which is denoted by a Greek letter Xi (Ξ).
Differentiating Features of Ether explained in detail
Mining rewards are an important part of the blockchains. It incentivizes miners around the world to keep supporting the network and allows the blockchain to exist. More miners there are involved with the network, more secure the network is. On Ethereum, the rate of Ethers generated does not change. For comparison, the rate of Bitcoins generated halves every 4 years. Many see this as a problem as the incentive for the miners will decline with time. Bitcoin enthusiasts believe that the network fees should compensate for the mining rewards. Ethereum isn’t likely to face a similar problem as the supply of Ether will remain constant over time. Currently, the supply of Ether stands at 100 million. Last year there were nearly 10 million new coins generated. As the number of coins generated does not decline, there is no cap on the supply of Ether. This has troubled many investors, who think that a constant supply of the currency will have a deflationary effect on the price.
The time it takes for a blockchain to generate another block is extremely important for these networks. It, along with the size of the blocks, determines how long it’s going to take to add transactions to the chain i.e. how many transactions can be processed in a given time. It also determines how fast the merchants can verify transactions. For a merchant to accept a transaction, they might consider the number of blocks added after the transaction. More blocks there are, the smaller the likelihood that the transaction will be reversed. This has created serious problems for the Bitcoin network. Ethereum generates blocks every 14 to 15 seconds, which is considerably less than the 10 minutes needed to create a new block on the Bitcoin network. Transaction fees are another crucial aspect of the blockchains. Fees determine how expensive it is to transact using the network. High fees have hindered Bitcoin from being adopted by merchants and many individuals. Ethereum fees are much lower than those for Bitcoin. Last year, an average fee on the Bitcoin network was $23, while a fee on the Ethereum network was only $0.33.
Ether price and market capitalization
As of November 2018, Ether is the second largest cryptocurrency in the world behind Bitcoin and above XRP. The market capitalization of the digital asset stands at over $22 billion and the price of a single coin is valued at $220. Initially, after the launch of the network, Ethers were valued at around $1. The price of the coin fluctuated around that value until 2016, when there was a slight nudge in the positive direction and the price started to fluctuate around $10. In 2017, the cryptocurrency market as a whole experienced a stupendous growth and Ether was swept up by the momentum as well. The price of the digital coin saw extremely large gains and reached over $1,400 during the peak. The market capitalization of the coin at that time was almost $140 billion. Then, a negative sentiment took over the market and the price of Ether declined along with all the other cryptocurrencies. The value of the coin changes about $200 as of November 2018.
Features of the Ethereum platform
Ethereum – explanation of smart contracts and its applications
Smart contracts are a defining feature of the Ethereum network. They are at the core of what Ethereum stands for. These are high-level programming abstractions deployed to the network for execution. Smart contracts are based on various programming languages and can be written in Solidity, Serpent, LLL and Mutan. They can be public as well, but in such case, the errors and bugs in the code are visible to the whole network, which opens up the possibility of hack attacks and allows individuals to exploit the weaknesses of the code.
The existence of smart contracts allows users of the network to write applications which will run inside the Ethereum network. Such applications are referred to as decentralized applications or DApps. There have been many projects that aim to substitute existing centralized business processes with decentralized applications. It should be noted that Ethereum is not the only network which offers this functionality, consequently, not all DApps are necessarily running on the Ethereum network. Many believe DApps to be the future of many businesses as they have considerable advantages compared to the traditional models. First of all, in some cases, such applications are faster and more effective. Secondly, they don’t require a centralized authority, which reduces fees considerably and makes the services offered by the application cheaper.
Smart contracts also allow project authors to issue digital tokens to finance their businesses. This process is known as an initial coin offering or an ICO. ICOs are another extremely popular product of the blockchain. There are hundreds of ICOs launched every week. Ethereum has a 50% market share in ICOs, meaning half of such projects are launched using the Ethereum platform. While the speculative behavior in the ICO market has hindered markets and tarnished the reputation of such projects in the first few years, ICOs have a potential to become a dominant way in which businesses raise funds. They allow companies to reach investors directly without the need for intermediaries and thus are faster, more effective and less expensive for fundraising.
Permission blockchain based on Ethereum explained simply
While the Ethereum blockchain is public, meaning all users can access all information on it, some institutional clients are working on a permissioned version of the Ethereum blockchain. JP Morgan Chase, one of the largest banks in the world, is working on such project titled “Quorum”. The aim of the project is to use the flexibility of the blockchain technology to allow certain parties quick and easy access to financial information while protecting the data from others with privacy measures. Royal Bank of Scotland is working on a similar permissioned blockchain for its Clearing and Settlement Mechanism.
In conclusion, the answer to the question ‘what is Ethereum?’ is simple. Ethereum is an evolving platform which focuses on the business applications of the blockchain technology and offers functionality far beyond what some of the simpler networks offer. The platform has gone through multiple changes during its years of existence, some of which were intentional and served to advance the network, while others were forced by hack attacks. There is still room to grow, but one thing is clear. Ethereum network has the ability to adapt and could be one of the leaders in advancing the adoption of the blockchain technology.