What is Ethereum, and Why Is It So Revolutionary?
Ethereum’s development was funded through the public pre-sale of Ether for Bitcoin back in July 2014.
Overall, the 42-day pre-sale raised a total of 31,591 Bitcoins - which was valued at $18,439,086 at the time - in exchange for 60,102,216 Ether. The price of one Ether throughout this period was approximately $0.40.
Following this, the platform was initially released in July 2015. It has since become massively popular.
Ethereum is a blockchain-based open-source smart contract system, meaning any developer can build on it. It is the platform most commonly used to create DApps (decentralized applications).
Ethereum is the underlying network behind the cryptocurrency, Ether (ETH). Ether currently is the second largest cryptocurrency right after Bitcoin.
Over the past few months alone, we have witnessed its value triple from under $300 to over $1,400.
Ethereum vs. Bitcoin - What’s the Difference?
The structure of the Ethereum blockchain shares many similarities with that of Bitcoin. Both blockchains are essentially a record of every single transaction. Each node in the blockchain keeps a copy of the ledger.
However, Ethereum has aimed to deviate from Bitcoin’s design quite significantly. While it does heavily borrow from Bitcoin’s protocol and blockchain design, it has been designed to support far more applications than just money.
The major difference is that in addition to storing all of the Ether transactions, each node in the blockchain also stores the most recent state of each smart contract.
Ethereum is Turing-complete. This means that theoretically, anything can be calculated, given enough processing power and enough time, and it is this that enables the implementation of smart contracts. As a security measure, Bitcoin is not Turing-complete. Hence, does not have such flexibility. This is perhaps Ethereum’s biggest innovation.
Ethereum has significantly faster transaction times than Bitcoin. The average block time for Ethereum is 14 to 15 seconds. For comparison, the average block time for Bitcoin is around 10 minutes.
Also, the Bitcoin supply is finite. Its block rewards halve every four years, whereas the same amount of Ethereum will continue to be released each year.
What is a Smart Contract?
A smart contract is a peer-to-peer contract that runs on the Ethereum network and essentially provides services in exchange for a unit of currency known as ‘gas’.
Smart contracts form the basis of many new applications. They are one of the major features of Ethereum that sets it apart from other blockchains.
They have several purposes:
- Storing information about an application.
- Acting as a ‘multi-signature’ account between multiple participants, so that funds are only transferred when a certain number of people are in agreement.
- Managing agreements and trades between users.
- Providing utility to other contracts.
Smart contracts allow users to carry out transactions in a safe and secure manner, without the involvement of a third-party. All transactions are tracked, and they are irreversible.
Smart contracts are designed to automatically execute the instructions they have been given.
The simplest way to explain how the process works is by using the concept of a vending machine: you decide what you want to buy, insert your money, input your choice into the machine, and then the machine automatically outputs your request. The process is instant, and it does not require the involvement of a shop assistant.
There are many benefits to using smart contracts. Some of these include:
- Increased Security: Once a smart contract has been executed, it cannot be reversed. Hence, it cannot be changed without your permission.
- Increased Speed: The process is automated, meaning there is no need to wait for confirmation from a third-party.
- Reduced Cost: The process is automated, meaning there is no need to pay a ‘middleman’ or a third-party to regulate it.
Using Ethereum for ICOs
Initial Coin Offerings (ICOs) are fast becoming an increasingly popular way for startups to raise capital. They are essentially a means of crowdfunding for project development through the sale of digital coins or tokens.
Unlike Initial Public Offerings (IPOs) which require companies to sell shares or equity to the public, an ICO does not dilute the ownership of the founders.
Most ICOs make use of Ethereum’s smart contracts to keep a record of their tokens and transactions. As a result, the explosion in the popularity of ICOs is largely a result of the growth of the Ethereum blockchain.
Ethereum has made it easier than ever for companies to create their own coins by offering a standardized method on its blockchain known as the ERC-20 protocol. This is simply a set of guidelines set to facilitate the integration of currencies. As a result, it allows all ERC-20 tokens to be interchanged with each other.
Many companies have raised significant amounts of money with nothing more than a white paper and a credible concept.
While this has provided some great opportunities for many startups with credible ideas, it has also caused some controversy and led to multiple ICO scams that have conned people out of significant amounts of money.
Ethereum’s founder, Vitalik Buterin, frequently reminds users of the presence of ICO scams and warns users to be careful.
The Future of Ethereum
Over the next few years, it is likely that cryptocurrencies will only continue to become more popular and more valuable. However, the future of Ethereum is looking particularly bright.
The reason behind Ethereum’s recent value spike is likely to be as a result of the anticipated scaling solutions that are on the horizon as part of Ethereum’s roadmap.
In particular, there has been increasing hype over the Casper update, which is designed to change Ethereum from a Proof-of-Work system to Proof-of-Stake.
Ethereum’s co-creator, Steven Nerayoff, has predicted that Ethereum will witness a sharp price spike in 2018 as a result of these updates.
It is even possible that in the future, Ethereum could actually overthrow Bitcoin and take its place as the ‘King of Cryptocurrencies’.