Many crypto beginners who happen to stumble upon the said terms may be scratching their heads in confusion. That is understandable, since Bitcoin and Ethereum, the two leading cryptocurrencies by market capitalization, are initially referred to in the same context.
But the two cryptocurrencies are worlds apart in terms of purpose, design, and vision.
For example, Bitcoin was created to redefine money. On the other hand, Ethereum was conceived to become a “world computer,” as many Ethereum enthusiasts often say.
This article will explain all the Ethereum basics. From Ethereum Virtual Machine to ERC20 tokens, readers will be able to have a fundamental understanding of how Ethereum works.
Definition of Ethereum and Its Language
Computer programmer Vitalik Buterin envisioned and created Ethereum. He previously worked for Bitcoin.
Fintech services benefit from Ethereum’s DApps and smart contracts. As a result, they save time and money by eliminating intermediaries, third parties, and inefficient monopolies, such as large companies or even government agencies.
According to 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, as well as many others that we have not yet imagined, simply by writing up the logic in a few lines of code.
Inheriting the philosophy of decentralization from Bitcoin, Ethereum has grown to become a revolutionizing force that can perform a large class of tasks.
Ethereum Virtual Machine (EVM)
Ethereum Virtual Machine (EVM) focuses on preventing denial-of-service (DoS) attacks. It also ensures that programs cannot meddle with each other so that communication can be established without any interference.
EVM makes use of several programming languages, including C ++, Python, Ruby, Go, and Java. It also uses a special language called Solidity for writing smart contracts.
Contracts decrypt and execute bytecode, compiled instructions from different programming languages. This means that if there are enough time and memory, anyone can run any program, no matter what language it is written in.
All Ethereum nodes execute contracts using EVM. Thanks to this invention, users are able to build interaction in a more efficient way than ever. Thus, there is no need for each new project to have its own blockchain.
Whenever someone wants to send ETH or create a smart contract, the system will record and confirm the accuracy of the event. This task is not performed by people or companies, but by thousands of computers around the world that are connected to the Ethereum network.
To make sure that transactions are recorded safely and correctly, computers solve complex algorithmic problems and do it as quickly as possible in order to receive a mining reward. That is why Ethereum used Proof-of-Work (PoW) in its early days.
Early cryptocurrencies like Bitcoin and Litecoin use PoW. It has proven to be secure against various cyber-attacks and double-spending.
On the other hand, PoW consumes a huge amount of electricity and requires productive equipment. For most ordinary people, it is too expensive. This led to the concentration of miners in mining pools. In other words, the method has led to centralization.
Acknowledging all of these limitations and disadvantages, Ethereum had to look for better options.
Enter August 2017, when Buterin announced his plans to leave PoW. In his proposal known as Casper, he stated that Ethereum would move from pure PoW to the hybrid PoW and Proof-of-Stake (PoS) algorithms. He also said on Twitter:
Hybrid as stepping stone, to reduce transition risks. Full PoS is still the goal.
The PoS protocol verifies transactions through the efforts of validators, wherein they put their coins into specialized wallets.
Unlike PoW, where the algorithm pays miners for solving complex math problems to verify transactions and create new blocks, PoS allows validators to bet on which block they think will be added to the blockchain. They receive rewards in proportion to their stakes.
How Ethereum Works
As in every cryptocurrency, the blockchain acts as a public register where everything that happens on the network is recorded in real-time. Some of the fundamentals of blockchain that enable Bitcoin also underpins Ethereum.
A large-scale decentralized network easily synchronizes this distributed digital register. This is what makes Ethereum available to anyone who can access the Internet regardless of their location.
The Ethereum network has data blocks consisting of transactions and smart contracts. These blocks are connected and represent a complete record of the Ethereum history starting from the first block.
Meanwhile, blocks are created by some users and distributed among other users that check them and confirm they are “correct.”
Each blockchain has a specific type of consensus algorithm. The network uses these algorithms to match only valid data values.
ERC-20 is the name of a set of standard requirements for those who want to issue a new token on the Ethereum blockchain. ERC stands for “Ethereum Request for Comments.”
The requirements of ERC-20 introduced at the end of 2015 were unofficial guidelines until they obtained official clearance on the Ethereum page on GitHub.
The main purpose of ERC-20 is to ensure that Ethereum-based tokens behave in a predictable way throughout the ecosystem, and decentralized applications and smart contracts interact equally across the platform. It also ensures all tokens will comply with a fixed security standard.
Due to the vast number of ICOs held on Ethereum, the standard was required. There are thousands of smart contracts for ERC-20 tokens, and it is the standardization that ensures their stable operation on the Ethereum network.
For anyone to access Ethereum for their application, they need to use Ether (ETH) to serve as gas. This is where the users of the platform pay for their requested operations.
The cost of the fuel is determined by the complexity of the calculations for the action that the network performs. Hence, any developer who wants to create an application on Ethereum, or any person who wants to access a smart contract, must have ETH.
Moreover, ETH is a currency. As the Bitcoin network slowed down in its development, and the transaction fees became higher, some users switched to ETH as a medium of exchange.
The total supply of ETH is not limited. The volume of supply and the pace of release was largely determined by the initial fundraising in 2014.
How Ethereum Can Be Used
What makes Ethereum different from other projects is the wide range of features it offers to users.
ETH is not just a digital asset. Apart from using it as a crypto to trade on exchanges, it also can be used as a fuel for the ecosystem. Speculators and investors buy and sell ETH as they believe that the cost of the Ethereum project and the network of DApps will increase over time.
ETH also has other uses:
- ICO. Over the years, the Ethereum blockchain operated most ICOs. It is the preferred option when it comes to financing open-source projects.
- DApps. Decentralized applications are significantly growing. There is Augur, a market for decentralized forecasts; ether Tweet, an uncensored blockchain-based platform; and TenX, an application that allows people to use the broadcast almost everywhere.
- DAO. In addition to the infamous DAO, there are other examples of decentralized autonomous organizations (DAO). Technically, the popular Dash cryptocurrency is a DAO.
Ethereum is a decentralized platform for DApps, and it has all the advantages of blockchain technology:
- Immutability. No third party can change or delete data recorded in the blockchain.
- Uncensored. Ethereum applications are based on a network with a consensus principle. This makes censorship impossible.
- Security. Blockchain, protected by cryptography, has proven that it is immune to fraud or hacking. Ethereum has no central point of failure.
- Transparency. All entries are available to everyone.
- Universality. Ethereum supports multiple programming languages and algorithms of different complexity. Accordingly, different fields utilize smart contracts.
- Availability. Ethereum is an open-source platform for everyone who wants to develop decentralized applications.
Unlike many other platforms, Ethereum has some disadvantages:
- The smart contract code is not perfect. The infamous The DAO fiasco has become a clear example of how human error can lead to severe problems. If the error in the code becomes apparent, there is no real way to stop the attack, except for quick network consensus and base code processing.
- Low transaction speed. The network can process about 20 transactions per second, while other platforms can process over 3,000 TPS.
- Scaling. This is a problem for almost any blockchain, including Ethereum.
Ethereum has tremendous achievements, sufficient funding, a pioneering advantage, and a growing team of first-class developers. But it still has problems.
Ethereum’s biggest problem is scaling, as it is still far from being able to run applications with 10 million users.
Released in November 2017, Ethereum-based game CryptoKitties demonstrated this problem. The idea of the game is that people can buy and sell digital cats for real money using smart contracts.
Users can also breed unique animals in their “farm.” Kitties are a limited resource with many attributes, some of which are extremely rare.
The game caused a stir. At some point, the project, with over a $6.5 million investment, took over a significant traffic share of the entire system.
CryptoKitties significantly slowed down Ethereum. Thus, many other blockchain-based projects with similar goals and characteristics started to catch up with Ethereum.
Examples of popular blockchain ecosystems are the following:
- QTUM, which is a platform that combines the functionality of Bitcoin and Ethereum in a blockchain format convenient for business. Like Ethereum, QTUM enables the creation and use of smart contracts.
- Cardano, which is a project that focuses on smart contracts, founded by former members of the Ethereum team. Its developers put special effort into the scalability and democratization of the voting process.
- NEO, which is a project that aims to digitize many types of traditional assets for use in smart contracts.
- Ethereum Classic, which is the Ethereum hard-fork product that does everything similar to the original pre-The Dao blockchain, but on a smaller scale.
- Lisk, which has achieved some success in working with side chains in order to optimize its network and reach its scalability.
The cost of the ETH token depends on supply and demand, like any other asset. If the development of new DApps continues and the Ethereum network keeps on attracting investors, the price will rise. This also applies in reverse.
Although Ethereum can be considered as a veteran by the standards of the cryptocurrency world, the technology is still at an early stage of its development. Many in the crypto community have held their breath and are waiting on how it will realize its lofty vision.
Ethereum allows users to use blockchain not only to record and store transaction data. It opened it to new areas, laying the brick of a potential IT revolution — one that decentralizes a number of processes and abolishes mediation in many areas.
That is why Ethereum is so popular. And the fact that the network is constantly evolving only adds prestige to it.
Read More: In CoinQuora’s Ethereum 101 section, we discuss more topics regarding Ethereum.