What is Ethereum? The Most Comprehensive Guide for Beginners
Ethereum is a technological platform to revolutionize the digital world. Ethereum aims to transform the workings of the internet entirely. If fully actualized, it will change the course of many events – including the ways to handle finances, store data, make contracts and establish trust.
In this article, we would attempt to answer the following questions –
- What is Ethereum?
- What is the vision of Ethereum?
- What are the various aspects of Ethereum?
- What is Ethereum Mining?
- What are the use cases of Ethereum?
- What is the prominent issue Ethereum faces?
- What is the future of Ethereum?
Hopefully, you would know all about Ethereum and its prospects by the end of this article.
But before diving into the details of Ethereum, let us first understand its predecessor – Bitcoin, and the technology it functions on – Blockchain.
You would develop a better understanding of Ethereum and its functions by learning about Bitcoin and Blockchain.
Bitcoin – The Predecessor
In 2008, Satoshi Nakamoto created a lot of rumbles when he announced Bitcoin. For the first time, the programming of currency was possible. Transactions could be made on a peer-to-peer network, ruling out the need for ‘intermediaries,’ trusted or otherwise. Bitcoin showed the world that mathematics could assume the role of a “trusted intermediary.”
But is Bitcoin just another digital version of traditional currency? Definitely not!
How is Bitcoin different?
- It is decentralized.
- It has a limited supply.
- It allows anonymous identities through pseudonyms.
- It is immutable.
- It is highly divisible. (Satoshi, the smallest unit, is one-millionth of a Bitcoin and roughly equals to USD 0.0000896749).
Bitcoin was initially used as an umbrella term to refer to the following two aspects:-
- The cryptocurrency – A piece of code representing some digital assets.
- The Blockchain – The underlying framework upon which the currency functions.
The Bitcoin blockchain was limited to financial transactions only. Hence, it compromised the prospects of blockchain technology.
But what is Blockchain Technology? Let us understand it first.
By definition, a Blockchain is a ‘shared ledger’ or a ‘distributed database’ containing the data in the form of ‘blocks.’ Each ‘block’ includes information on the previous and the following block, creating an immutable chain of blocks.
A crucial aspect of this technology is that it allows you to add only newer data. A piece of information cannot be removed after it is tapped into the chain.
Unlike traditional databases, a blockchain is not ‘stored’ on a single computer. Instead, it works with a peer-to-peer network where each computer functions as a ‘node.’ Each node executes and records anything that happens on the Blockchain, making Blockchain a ‘shared ledger.’
Consequently, there is no single entity that controls the processes. The entire network of voluntary participants is in charge, making it ‘decentralized.’
The process is automated. It functions solely based on mathematical conditions agreed upon by the participants.
What is Ethereum?
The official website’s definition of Ethereum is as follows:
“Ethereum is a global, open-source platform for decentralized applications. On Ethereum, you can write code that controls digital value, runs exactly as programmed, and is accessible anywhere in the world”.
One significance of Ethereum is that it liberated the blockchain technology from the financial limits of Bitcoin and expanded its scope. It showed the world how other industries could benefit from its application.
So, Ethereum is a one-of-its-kind programmable blockchain.
For example, Imagine that a skeleton is given to you and is modifiable. You have to tweak the bones, layer the muscles, place the organs and put in the finishing touches. In the end, you have an all-new human to yourself, made to your choice and requirements.
The implication of the example mentioned above is real and is indeed the fundamental function of the Ethereum. It allows you to create your own blockchain-based applications that can run on the Ethereum network.
Like Bitcoin, the Ethereum architecture also has two aspects:
- The cryptocurrency
- The Ethereum blockchain.
The ‘native’ cryptocurrency of Ethereum is named Ether.
Ether was created to financially support the Ethereum project and not the other way around. This feature is an essential difference between Ethereum and its predecessor, Bitcoin.
The importance of this technology is not in what it is. It is in what it can do in the avenues that it opens up to the digital world.
What is the vision of Ethereum?
We can list some of the mainstream uses of the internet as follows –
- Uploading/ downloading
- Watching videos
- Playing games
- Preparing documents
- Storing/ retrieving files
- Sending emails
- Chatting, and many more.
For all of our everyday usage, we are dependent upon a client-server network. The data is stored in a central computer or ‘server’ that your computer can access. All the personal information you provide on the internet (card details, DOB, and more) is stored on some server.
The servers themselves are computers and cannot ‘make sense’ of your data. However, the human owners of these servers can.
Most of these servers are either owned by government agencies or by private corporations.
It is quite evident that such data can be misused. Like Brian Behlendorf, some have regarded this centralized structure as the internet’s ‘original sin.’
The blockchain technology (in general) and mainly the Ethereum exist to remedy this.
Ethereum’s vision is to build a ‘new internet.’ One that would be decentralized as it was always meant to be. An internet where,
- Peer-to-peer networks would replace the client-server model.
- Any data would be owned only by its creator.
- There would be no monopoly of data.
- Applications won’t steal data in the name of ‘tailor-made’ services.
Ethereum strives to ‘democratize’ the internet and wants to build a ‘world computer.’
At this point, some of the obvious questions that come to mind are:-
- What tools does Ethereum have?
- What benefits does Ethereum bring to the table?
- How does Ethereum plan to overcome the inevitable obstacles?
So now, let us try and find the answers to these.
Aspects of Ethereum
You must have realized by now that Ethereum is a multifaceted domain. It has many aspects to it and it is through these aspects that the technology functions.
For our purpose, we must consider them individually.
1.Ethereum Smart Contracts
Smart contracts are a crucial element of some of the blockchain platforms, including Ethereum.
The National Institute of Standards and Technology (NIST) of the United States of America defines smart contracts as –
“A collection of code and data (sometimes referred to as functions and state) that is deployed using cryptographically signed transactions on the blockchain network.”
Smart contracts utilize mathematical algorithms, hence they eliminate the requirement of middle-men to uphold their sanctity and ensure enforcement.
To comprehend how it works, consider the following example.
Imagine a newspaper vending machine. You have to put a coin in to get a newspaper.
Suppose you put in a coin, and you still don’t get a newspaper. What should happen next?
This is a kind of scenario where a smart contract can help.
Trust builds through smart contracts in any blockchain-based transaction. It is a code that automatically performs a predefined function on meeting the pre-set conditions. Ethereum smart contracts have extensive functionality as compared to many other blockchain-based smart contracts.
Ethereum’s programmability enables developers to use it in unique ways. Thus, they can include many variations to suit the requirements.
This was made possible by the Ethereum Virtual Machine or EVM.
2. Ethereum Virtual Machine (EVM)
It was EVM innovation which made Ethereum what it is today. The much-honored ‘programmability’ of Ethereum is due to the EVM.
Before Ethereum, blockchain-based application developers had to perform tedious and time-consuming tasks like the following–
- Modify Bitcoin’s functionality
- Expand Bitcoin’s functionality
- Alternatively, build a new blockchain from scratch.
Then came the Ethereum Virtual Machine with a wholly different and more adaptable approach. Among other things, it allowed developers the liberty to use any/every programming language available.
Consequently, developers could create a variety of specialized “decentralized applications” or dApps with unprecedented levels of ease and efficiency. It is through these dApps that the practical applications of any blockchain (including Ethereum) occur.
The dApps are decentralized and mostly open-source with no central governing authority. They are reward oriented and protocol-based.
To learn more about dApps, read our in-depth Insights on “What are dApps.”
3. Blockchain Validation
Ethereum (and Blockchain, in general) rules out the need for trusted intermediaries such as banks. However, if not by intermediaries, how do we know that a transaction is valid?
Blockchain technology answers this question in the form of ‘validation.’
Validation is the process by which the nodes verify the legitimacy of any new transaction. A new block is added after it is validated. In this way, the transaction is verified and ensured that the nodes are all on the same page.
A transaction is validated with regards to some standard and predefined criteria. The developer of the Blockchain defines these criteria.
Although every node can validate a transaction upon meeting specific criteria, not every node participates actively. Those who validate the transaction are known as validators.
The process of validation is known as mining and the validators are regarded as miners. Mining is one of the most fundamental aspects of any Blockchain.
In the next section, let’s highlight some of the essential details about Ethereum Mining.
Ethereum Smart Contracts
Smart contracts are a crucial element of some of the blockchains, including Ethereum. They may have a ‘non-actionable’ part that contains legalities like a traditional contract. However, the most exciting feature of smart contracts is the ‘actionable’ part.
Unlike traditional contracts that rely on humane intermediaries to uphold their sanctity and to ensure their enforcement, smart contracts (like the Ethereum smart contracts) perform the same function utilizing mathematical algorithms.
To understand how it works, imagine a vending machine. You put a coin in and you get, say, a newspaper. You don’t put a coin in, you don’t get one. Great! Now, you put in a coin, and you don’t get a newspaper. What should happen next?
This is a kind of scenario where a smart contract can help. So, to define, a smart contract is a code which automatically performs a predefined function on meeting predefined conditions. It is through smart contracts that trust is built in any blockchain-based transaction.
That said, the fact remains that Ethereum smart contracts are somewhat different from others in the sense most other blockchain-based smart contracts have limited functionality.
Ethereum’s programmability, however, enables developers to use it in unique ways. Thus, they can include much nuances to suit the specifics of the requirement. This was made possible by the Ethereum Virtual Machine or EVM.
Ethereum Virtual Machine
It’s worthwhile to reiterate the limited functionality of the blockchains before Ethereum. The process of developing any blockchain-based application in those times could be summarized as follows. The developer had to either –
- Modify and expand the Bitcoin’s functionality. This was both tedious and time-consuming.
- Alternatively, build a new blockchain from scratch. That isn’t everyone’s cup of tea.
Then came the Ethereum Virtual Machine with a completely different, more adaptable approach. Among other things, it allowed developers the liberty to use any and every programming language available.
Consequently, developers could now create a variety of specialized “decentralized applications” or dApps. That too, with unprecedented levels of ease and efficiency. It is through these dApps that the practical applications of any blockchain, Ethereum included, occur.
That said, one might ask, “What are dApps?.” “How are they different from regular applications?.” Well, these are questions that demand a full-length article.
To learn more about dApps, read our in-depth Insights on “What are dApps.”
In this blog, we will restrict ourselves only to those aspects of dApps which are relevant to understand the concept of Ethereum.
These are decentralized and open source (mostly). There is no central governing authority. dApps are reward oriented and are protocol based.
Now, the next fundamental aspect is Ethereum Mining. But, before we discuss that we must understand the crucial concept of Blockchain validation.
Ethereum (and Blockchain in general) rules out the need for trusted intermediaries such as banks. However, it gives rise to the question – If not by intermediaries, how do we know that a transaction is valid?
Blockchain technology has the answer to this question in the form of ‘validation.’
So, broadly speaking, validation is the process by which the nodes verify the legitimacy of any new transaction. A new block is added only after it is validated. In this way, not only the transaction is verified, but it is also ensured that the nodes are all on the same page.
A transaction is validated with regards to some standard, pre-defined criteria. These criteria are defined by the developer of the Blockchain.
Although every node can validate a transaction upon meeting certain criteria, not every node participates in the process actively. Those who do that are those who validate the transaction are known as validators.
The process of validation is known as mining. Consequently, the validators are regarded as miners. In fact, mining is one of the most fundamental aspects of any Blockchain. And, Ethereum is no exception. In the next section, let’s highlight some of the essential details about Ethereum Mining.
What is Ethereum Mining?
Mining is the process that helps in validating the transactions so they can be sequenced and stored in the form of blocks. As already mentioned, every transaction or addition to the blockchain must be validated. This is done by the miners on the network.
Now, you may ask, what miners get as a ‘reward’ for performing this function? And the answer is Ether! For every successful validation, the miner is rewarded with Ethers.
Ether can be used in the following ways:
- It works like any other cryptocurrency. It can be stored in Ethereum wallets and transferred among users.
- It can be used to buy Ethereum Gas. If you wish to make any transaction on the EVM or if you want to execute a smart contract, you will need gas.
- In the Proof of Stake (PoS) consensus algorithm, mining power is proportional to the number of tokens in the Ethereum wallet.
Apart from generating Ether, mining plays another crucial role in the Ethereum network. The miners, so to say, assume one of the critical functions of the banks in the real world. Just like banks maintain records of financial transactions, miners do the same for blockchain transactions. Doing so, they ensure that double-spending, frauds, and the likes are prevented.
The process of mining, for any given blockchain, is based on either of the two major consensus algorithms – Proof of Work and Proof of Stake.
The first is the traditional way, used by Bitcoin. It is more cumbersome as it requires enormous computing power. The second is a more evolved and effective method, soon to be implemented by Ethereum. Presently, however, Ethereum uses a protocol which is a hybrid of the two.
Next, some present-day use cases must be discussed to highlight the significance of Ethereum in the business world.
Some Use Cases of Ethereum
Ethereum has not only transformed the blockchain world but has also helped the evolution of many other industries. For instance,
- Santander Bank, in collaboration with ConsenSys, has developed a cash tokenization utility system. It enables the user to make domestic or international within seconds using the Ethereum platform.
- uPort is building a universal ID which could be used to log into various platforms. The ID would be an address on Ethereum.
- GridPlus is using Ethereum to digitize the power grid to reduce the cost of electricity.
Now that we have discussed almost every aspect of Ethereum, let us also take a look at some issues that it faces at present.
Scalability – A Hindrance to Commercial Adoption
On the point of scalability, the Ethereum blockchain is still suffering like all others. Primarily, this issue can be understood in terms of the blockchain’s capacity to support transactions per second.
On the one hand, giants like PayPal, MasterCard, and others are handling huge numbers of transactions per second (TPS). VISA, the benchmark in this regard, handles around 1,700 TPS.
On the other hand, Bitcoin has an average TPS of 4.6 while Ethereum’s maximum capacity is 15 TPS at present.
Also, reaching peak capacity does cause the network to slow down. This was seen in 2017 when participants on the Ethereum network were given the scope to “buy and breed crypto-pets.” The hype was immense, and this led to a slowdown of transaction speed on the network.
So, does this mean that this is somewhat the end of the road for Ethereum? Well, not really.
The Future – Ethereum 2.0
Also known as Serenity, the plans for Ethereum 2.0 were announced by Vitalik last year at Devon. If everything goes according to the plan, Serenity will handle about 15,000 TPS within the next three to four years. Moreover, it is expected to reduce the transaction costs on the Ethereum network significantly.
In doing so, several major forks (modifications) have been planned by the team. Some of these include structural upgradations.
The Ethereum 2.0 blockchain will function at three levels:
- Main Chain: The original Ethereum blockchain.
- Beacon Chain: The level dedicated solely to validation using the PoS consensus and for overall coordination.
- Sharding Chain: The level for smart contract executions and data storage.
Apart from the structure, the consensus protocol will also be modified. Also, the ‘miners’ in the process are expected to be replaced by ‘validators.’ In all, the process of mining is also expected to change, and the future looks bright indeed.
The rate at which humankind is progressing, digitization is assuming an increasingly crucial role in our lives. With a vision to remedy some of the central problems of digitization, Ethereum burst into the scene in 2015. Since then, it has moved only in the forward direction.
Ethereum has taken forward the motion that the innovation of the Blockchain technology had initiated. The movement towards a new, decentralized internet. Building upon the pioneering contributions of Bitcoin, Ethereum has opened further, unprecedented avenues in the blockchain world.
First, it has presented a plausible alternative to the problems of a centralized internet. Second, it has heightened the possibilities of pragmatic, real-life application of blockchain. Furthermore, it has liberated the technology from the financial limitedness which burdened it in the Bitcoin era.
Ethereum’s journey faces some downs. Scalability is the major issue which hinders its mainstreaming. The vigor of its team constantly strives to find new solutions. Consequently, Ethereum 2.0 is on the way to resolve the issue for good by 2022.
In all, Ethereum does seem to be the forebearer of a bright future for the blockchain industry. Moreover, by extension, other industries are very much likely to benefit from it.
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