What is Ethereum? [A Comprehensive Guide to Understanding Ethereum]

By Mr.CryptoWiki | cryptocurrency | 16 Sep 2019

Before you can fundamentally understand Ethereum, it helps to first understand the internet of today and where it’s heading – “Web 3.0”.

Today, the internet is run by centralized servers and clouds owned by companies like Amazon, Facebook, Google, and Microsoft. On these clouds and servers, digital information such as our personal data, passwords, and financial information is stored. These companies store this information so that it can easily be called upon via the internet and utilized by users in a quick and secure fashion. 

These centralized servers enable convenient use of the internet while removing the costs that come with hosting and uptime. But with this convenience, there is also vulnerability. The digital information (data and files) are centrally stored, meaning hackers or governments can gain unwelcome access to your files without your knowledge. As we’ve learned from data breaches in the past, important files and data can be stolen, leaked, or changed.

If the internet’s servers were decentralized, there would be no central point of attack. This centralized way of hosting data and running applications is essentially what Ethereum aims to disrupt.

Ethereum is setting out to revolutionize the internet with the creation of its vision of the Decentralized Web or Web3 – the next generation of internet facilitating true peer-to-peer (P2P) transactions without a middleman. Ethereum is doing this by using blockchain technology to replace internet third parties – those that store and manage financial information, personal and sensitive data, etc.

Now that we have a fundamental understanding of the premise of Ethereum, let’s delve into what Ethereum actually is.

What is Ethereum?

Ethereum is a globally decentralized, open-source public blockchain computing platform that enables anyone to build and use decentralized applications, also known as dapps. The creation of these dapps is made possible because Ethereum is a programmable blockchain with smart contract functionality that is powered by what’s called the Ethereum Virtual Machine (EVM).

I know this explanation is complex and a lot to take in. So, breaking it down in layman’s terms; Ethereum is a distributed world computer based on blockchain technology. It has programmable capabilities that enable developers to create smart contracts and build and deploy decentralized applications.

On Ethereum, anyone can write code and create complex applications that are decentralized and accessible from anywhere in the world. It allows developers to more easily build complex blockchain applications that previously required a deep understanding of cryptography, mathematics, as well as significant resources. With Ethereum, never before seen applications are possible such as electronic voting, prediction markets, digitally recorded property assets, secure identity and data management, collateralized loans, peer-to-peer lending, and hundreds if not thousands more applications. 

This is what Ethereum brings to the table, the tools to build unstoppable, decentralized, and censorship resistant applications that operate without the need of third party intermediaries. In doing this, Ethereum’s blockchain technology has the potential to fundamentally change the internet’s P2P economy through a means of control over the technologies and applications that we use each and every day. 

Essentially, Ethereum enables users to gain control over their data and digital identities while making money (cryptocurrency) a native feature of the internet. This is why Ethereum is said to be contributing to the new Web 3.0 movement in a big way. 

What is Ether (ETH)

Ether is the cryptocurrency used within the Ethereum network. In the Ethereum blockchain, miners work to earn Ether and it’s used to fuel the network by paying for computation within the EVM. Application developers building on top of Ethereum use Ether to pay for transaction fees and services on the network. Also, Ether is the tradeable cryptocurrency in which people invest in and refer to as Ethereum (ETH). 

Ether can be denominated to 18 decimal places and the smallest denomination of Ether is called Wei. 1 Ether is equal to 1e18 wei or 1,000,000,000,000,000,000 wei. The ticker symbol used to represent Ethereum or Ether is ETH. 

How Ethereum is different than Bitcoin?

Blockchain technology is the technological basis of both Bitcoin and Ethereum. Both of them operate on their own distributed public blockchain network in a decentralized manner. Therefore, no one owns or controls Bitcoin or Ethereum, they are both free and open-source projects built and run by many people from around the world.

But unlike the Bitcoin protocol – which is resistant to change and is essentially the same as it was when first released – Ethereum’s protocol was designed to be adaptable and flexible. It can more easily integrate improvements and changes to its code. For instance, Ethereum’s development is divided into four milestone phases being Phase 1: Frontier, Phase 2: Homestead, Phase 3: Metropolis, and Phase 4: Serenity or Ethereum 2.0. Currently, Ethereum is entering phase 4, which will be carried out over various steps through the next few years.


Image Source: https://media.consensys.net/the-roadmap-to-serenity-bc25d5807268


Another major difference between Bitcoin and Ethereum is that Bitcoin is nothing more than a currency, whereas Ethereum is a distributed computing platform that enables the creation of smart contracts and building of decentralized applications. Ethereum has a nearly endless number of use cases and is far more complex than Bitcoin’s blockchain protocol. 

All in all, the fundamental difference between Bitcoin and Ethereum is that Ethereum is not a currency – it’s a platform. And the Ethereum platform has its own digital currency called Ether (ETH).

Is Ethereum Better than Bitcoin? 

As described in the section above, Ethereum and Bitcoin are completely different from one another. However, because they are the top 2 cryptocurrencies by market capitalization, people compare them all the time. They ask which one is better? Which one should I invest in? Which one is a safer investment? Which one is more secure? Which one is faster? Which one can scale better? Etc.

In the following section, I’ll provide subjective answers to the above questions so that you can make a decision of whether Ethereum is better than Bitcoin for yourself. 

Which one should I invest in?

Most cryptocurrency investors invest in both BTC and ETH as they are both promising cryptocurrencies. As well, they both have divisible units of measurement, meaning you don’t need to buy 1 full Ether or 1 full Bitcoin. Ether is divisible to 18 decimal places and Bitcoin is divisible to 8. Therefore, you can easily invest any amount you want in each and don’t necessarily have to choose one or the other.

Some factors that might influence your investment decisions include the coin supply and utility. 

Bitcoin is limited to 21 million coins and is thus considered to one day be a healthy store of value. Ethereum however, is not limited in supply. The production of Ether will continue forever but the supply of Ether will slow down a lot over time to appease investors and increase the value.

As for the coins utility and value proposition, Bitcoin is and will be primarily used as a store of value and currency. This provides value in some way and the market will continuously decide how much that value is worth. Ether on the other hand has much more utility in the Ethereum ecosystem and can be used as a currency. Also, in the near future ETH will be used to secure the Ethereum network through staking (locking up tokens). ETH holders who participate in staking will be rewarded with new ETH, like receiving dividends. 

Therefore, both Bitcoin and Ethereum have excellent value propositions and are worth investing in if you think they will succeed. 

Which one is more secure and a safer investment?

Both Ethereum and Bitcoin are speculative cryptocurrency investments that could either fail and go to zero or provide extremely high returns on investment. 

Bitcoin has been around for over 10 years and has thus far proven to be extremely resilient to attacks and is very secure. Bitcoin is considered to be the most secure blockchain in the world because it is the most tried and tested, and has the greatest hashing power (processing power securing the network). 

As for Ethereum, it has only been around for less than 5 years and is still under heavy development. Therefore, Ethereum is more susceptible to vulnerabilities and unforeseen circumstances. For instance, Ethereum is switching from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus algorithm to secure the network. This transition is necessary for Ethereum to scale but poses some risks to the network. However, according to Ethereum co-founder Joseph Lubin, he is confident the transition will be smooth and PoS will be secure. 

All in all, Bitcoin may be more secure than Ethereum as well as a safer investment. However, there are various other factors not discussed here that could sway this conclusion.

Which one is faster and can scale better?

Ethereum’s blockchain technology is more advanced and adaptable than Bitcoin’s. Therefore, Ethereum is better able to scale in the future and already offers a greater throughput of transactions at faster speeds. 

For instance, Ethereum’s block time (transaction speed) is just seconds and can process roughly 15 transactions per second, while Bitcoin’s block time (transaction speed) is minutes and can process on average 4.6 transactions per second.

As for scalability, Bitcoin’s primary concern is about preserving security rather than scaling. This is because Bitcoin’s strongest features are censorship resistance and being a secure store of value. Therefore, implementing and adopting scaling solutions onto Bitcoin is a very slow and tedious process as it’s not a top priority. 

Ethereum on the other hand must scale if it’s to succeed and it’s better able to do that because it was built to adapt from the very beginning. Ethereum has multiple scaling solutions that are being developed, tested, and will be implemented soon with Ethereum 2.0. In fact, Lubin predicts that Ethereum will become about 1000 times more scalable by 2021. 

Is Ethereum a Security? 

Before we delve into whether or not Ethereum is considered to be a security, what exactly is a “security” in terms of financial assets. Well, according to the United States Securities and Exchange Commission (SEC), “security” is the term used to describe certain financial assets that can be traded. In the US, securities are broadly categorized into debt securities (banknotes, bonds and debentures), equity securities (common stocks), and derivatives (forwards, futures, options, and swaps). A financial asset that’s declared a security is subject to strict regulation and must be registered by the SEC.

So, is Ethereum a security?

Under existing United States laws, Ethereum is most likely not a security and regulators tend to agree. For instance, in June 2018 the SEC Division of Corporate Finance head William Hinman stated:

"Based on my understanding of the present state of Ether, the Ethereum network and its decentralized structure, current offers and sales of Ether are not securities transactions.”

Additionally, SEC Chairman Jay Clayton agrees with Hinman that Ethereum is not a Security and explained why he believes certain crypto assets like ETH could transition away from being a security. In a letter to the US House of Representatives, Clayton said:

“I agree with Director Hinman's explanation of how a digital asset transaction may no longer represent an investment contract [a security] if, for example, purchasers would no longer reasonably expect a person or group to carry out the essential managerial or entrepreneurial efforts.”

Furthermore, the SEC uses what’s called a Howey Test to determine whether something is a security or not. The test consists of 3 questions:

  • Is an investment of money with the expectation of future profits?
  • Is the investment of money in a common enterprise?
  • Do any profits come from the efforts of a promoter or third party?

In regards to Ethereum, it appears the digital asset passes the test. Ethereum is decentralized and therefore the investment of money is not in a common enterprise. Also, future profits are not necessarily expected as Ethereum is used in the blockchain network’s ecosystem. As for investor profits, they do not necessarily come from third party promoters. 

All in all, Ethereum is more than likely not considered to be a security. 

What is a Smart Contract 

A smart contract is pretty self explanatory, it’s an automatically executing, programmable agreement that’s recorded on the Ethereum blockchain. It’s programmable code that executes when specific conditions are met and operates on basic if / then logic.

As defined from the Ethereum Foundation:

“Smart contracts are applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.”

The last 4 points made in this definition are very important as to why smart contracts are revolutionary and such a key component of Ethereum. Therefore, let’s break down what these smart contract attributes mean:

Downtime: Smart contracts and the applications they enable never shut down unexpectedly and can never be switched off.

Censorship: The Ethereum network is decentralized with nodes (computers running the protocol) distributed around the world eliminating censorship from a central authority.

Fraud: A smart contract’s code is immutable. It can never be changed, hacked, or manipulated. 

Third Parties: Smart contracts are “smart”, meaning their code self executes based on specific outcomes and therefore does not require a trusted third party or intermediary.

With the above mentioned features, Ethereum smart contracts enable developers to build thousands of different applications that open up never before seen capabilities. As explained by renowned Canadian author and blockchain enthusiast, Dan Tapscott: 

“[Ethereum] blockchain has some extraordinary capabilities. One of them is that you can build smart contracts. It’s kind of what it sounds like. It’s a contract that self-executes, and the contract handles the enforcement, the management, performance, and payment.”

Who Created Ethereum 

Before I delve into who created Ethereum, you must first understand its predecessor – Bitcoin’s history. 

Bitcoin was the first cryptocurrency that emerged in 2008 when it’s pseudomonas creator, Satoshi Nakamoto published the Bitcoin whitepaper, “Bitcoin: A Peer-to-Peer Electronic Cash System”. It was then launched in early 2009 and forever set the stage for blockchain technology and new cryptocurrencies to come. 

As Bitcoin began gaining the attention of developers and technologists, innovators began to experiment with Bitcoin’s blockchain technology by altering the use of the Bitcoin network. This led to the creation of “alt coins” – alternative cryptocurrencies to Bitcoin with their own separate blockchains and often featuring new features or capabilities. 

Then, in late 2013, Ethereum’s inventor Vitalik Buterin proposed a whitepaper titled, “Ethereum: A Next Generation Smart Contract & Decentralized Application Platform”. In this whitepaper,  Buterin introduced an entirely new concept for blockchain technology. He described Ethereum as a distributed world computer for executing and storing computing programs.

As stated by Buterin in the Ethereum whitepaper:

“What Ethereum intends to provide is a blockchain with a built-in fully fledged Turing-complete programming language that can be used to create "contracts" that can be used to encode arbitrary state transition functions, allowing users to create any of the systems described above [decentralized exchange, financial derivatives, peer-to-peer gambling, on-blockchain identity, reputation systems], as well as many others that we have not yet imagined, simply by writing up the logic in a few lines of code.”

Following the release of the Ethereum whitepaper, other developers joined Buterin in bringing Ethereum to reality. In early 2014, Ethereum co-founders Dr. Gavin Wood, Joseph Lubin, and Jeffrey Wilke began working on the next generation blockchain, Ethereum.

Dr. Wood became Ethereum’s chief technological officer and wrote the Ethereum yellow paper –  a sort of technical bible that outlays the specification for the ethereum virtual machine (EVM). 

Lubin went on to form Consensys, which was a startup for decentralized apps and is now a global blockchain technology company that solves real-world problems with Ethereum blockchain solutions.

Before Ethereum was fully launched, Buterin and the other founders held a public token sale (crowdfunding campaign) of the project’s native cryptocurrency, “Ether” (ETH). The sale took place in 2014 and raised more than $18 million, making it the largest token sale ever commenced at the time. Till this day, funds raised in the crowdsale are now managed by the Ethereum foundation, a non-profit entity based in Switzerland.

After the token sale, it took another year for Ethereum to launch its first live release (the mainnet) on July 30, 2015. The distributed smart contract platform started off as very basic with few capabilities but has since improved and swelled into an ecosystem with thousands of developers and decentralized applications. Today, Ethereum is the leading blockchain platform in terms of number of developers, rate of adoption, and decentralized applications. However, there is still much work and improvements to be done. The final iteration of Ethereum – “Ethereum 2.0” isn’t expected to be completed until 2021 at the very earliest.

5 Interesting Facts About Ethereum

1.Enterprise Businesses Love Ethereum

There are more than 2000 cryptocurrency projects out there and the majority of them have achieved little to no real-world adoption. Ethereum on the other hand is achieving real-world adoption and it’s from enterprise businesses. More than 50% of the of the billion-dollar firms included in Forbes, “Blockchain 50: Billion Dollar Babies” list are building applications on top of Ethereum or on private blockchain platforms derived from it. Such enterprises include Microsoft, Amazon, Ernst & Young, JP Morgan, HSBC, Barclays, ING, and many more.2

2. Ethereum is Changing

Ethereum is changing from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus algorithm to secure the network in a protocol upgrade called Casper. This is just one major change happening with Ethereum. When the final iteration of Ethereum – “Serenity” or “Ethereum 2.0” – is complete, the Ethereum blockchain will be very different from it is today. The Ethereum 2.0 roadmap with all of its phases can be viewed here.

3. Ethereum has the Largest Ecosystem and Biggest Network Effects351665157-9229dd0e9a52f4a52e995e552bd7d848464fbf3138b1f0e2709020e786ab8bda.png

Image Source: https://www.theblockcrypto.com/2019/01/04/mapping-out-ethereums-developer-ecosystem/

Ethereum is the leading smart contract platform for developers and is estimated to have between 250,000 to 350,000 developers building on their blockchain. These developers have built an enormous ecosystem of decentralized applications, protocols, and platforms. Getting to this point has taken an enormous amount of work and Ethereum’s network effects are unparalleled as a result.

4. Ethereum is Interoperable

Image Source: https://hackernoon.com/five-challenges-of-permissioned-blockchain-solutions-and-the-tools-and-protocols-that-can-help-you-d3e9cf49818a

An interesting fact in which many people fail to realize is that the public Ethereum blockchain is interoperable with private/permissioned Ethereum variants such as JP Morgan’s Quorum blockchain, Pantheon from PegaSys, and Parity. These permissioned blockchain alternatives to Ethereum will be able to plug into the public Ethereum mainnet and access all parts of its high-value public ecosystem. This interoperability essentially future proof’s enterprise blockchains because they can benefit from a global network of decentralized applications and continuous developments and upgrades.

5. Ethereum is Still Risky and Could Fail

Even though Ethereum is the second largest cryptocurrency by market cap, has achieved a decent level of adoption, and has a long-term development plan, the project is still risky and could fail. Ethereum will undergo multiple upgrades and if they doesn’t go smoothly, the whole system can crash. Also, there are many competing blockchain projects that could prove to be better than Ethereum in terms of scalability, security, and decentralization. Such projects include EOS, Stellar, Cardano, NEO, and projects that have yet to even launch such as Hedera Hashgraph, Polkadot, and Telegram Open Network. All in all, it’s still too early to say with 100% confidence which blockchain protocol will come out on top. 

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