What is Ethereum? The Most Comprehensive Guide for Beginners
In essence, Ethereum is an experiment to revolutionize the digital world. It is one of the most daunting endeavors ever undertaken in this regard. Ethereum aims to transform the workings of the world-wide-web completely. And, it’s brimming with the potential to disrupt many, if not most, aspects of the internet. If fully actualized, it’ll change the way finances are handled, data is stored, the contract is made, trust is established, and who knows what more.
Ethereum is the outcome of the interactions between two major, often contradictory, pillars of the tech world. One, the decentralized system introduced by the Bitcoin Blockchain. Another, the centralized web-storage, often owned and controlled by the giants.
The prodigious Vitalik Butarin realized the grave ramifications of the latter. Doing so, he worked upon the Bitcoin framework with the aim to take it a step further. During 2013-15, he indeed came up with an alternative. Something that could challenge the monopoly of the corporations.
Yet, until this day, very few are actually aware of Ethereum, and it’s prospects. Also, authorities and others have often assumed a contrary position. In some sense, such an attitude emanates from lack of proper understanding and, of course, from prejudices.
Now, in this blog, the attempt would be to answer the pertinent question – What is Ethereum? Among other things, we will discuss the Ethereum Blockchain, Ethereum Smart Contracts, Ethereum Wallet, and Ethereum Virtual Machine. The purpose is to present an overview of the entire Ethereum architecture while briefly addressing the concerns regarding “What is Ethereum Mining?”
Hopefully, by the end of it, the aware reader would see the prospects what Ethereum holds for the internet’s future, our future.
Bitcoin – The Predecessor
In 2008, Satoshi Nakamoto created a lot of buzz when he announced Bitcoin. For the first time, the currency could be programmed. Transactions could be made on a peer-to-peer network, ruling out the need for ‘intermediaries,’ trusted or otherwise.
Bitcoin showed the world that it was indeed possible for mathematics to assume the role of a “trusted intermediary.” So, is Bitcoin just another digital version of traditional currency? Definitely not! It isn’t. It is decentralized. Also, it has limited supply, allows pseudonymity of the users, is immutable, and is highly divisible (F.Y.I. – Satoshi, the smallest unit, is one-millionth of a Bitcoin and roughly equals USD 0.0000896749).
There’s another crucial point to be borne in mind. Under the umbrella term – Bitcoin – we actually refer to two aspects. One, the cryptocurrency. A piece of code representing some digital asset. Another, the blockchain. The underlying framework upon which the currency functions. Commonly, people usually speak of Bitcoin in the first sense only.
For all it was worth, the Bitcoin blockchain was still limited to financial transactions and only to that. This stunted the prospects of the blockchain technology in itself. This, however, didn’t go unnoticed under the keen eyes (literally so!) of Vitalik. The coming of the Ethereum was a paradigm shift indeed.
Let us understand the underlying technology – Blockchain.
By definition, a Blockchain is a ‘shared ledger’ or a ‘distributed database’ wherein all the data is contained in the form of ‘blocks’. Each of this block contains information about the previous and the following block forming an immutable chain of blocks.
A crucial aspect of this technology is that it allows only newer data to be added. Once tapped into the chain, a piece of information simply cannot be removed. That is immutability raised to the power of infinity!
Now, what does the term ‘shared ledger’ imply? 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 of them executes and records anything that happens on the blockchain. Consequently, there is no single entity that controls the processes. The entire network of voluntary participants is in charge. Hence it is decentralized.
The process is automated. It functions solely based on mathematical conditions, agreed upon by the participants.
What is Ethereum?
The landing page of the project’s website reads,
“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”.
Let’s get along and break down this long explanation.
First of all, one thing that makes Ethereum significant is that it liberated the blockchain technology from the bounds of Bitcoin’s financial limitedness. It expanded the scopes manifold. It showed the world that not only the crypto industry but also other industries could benefit from its application.
So, Ethereum is a one-of-its-kind programmable blockchain. Imagine. The skeleton is given and is modifiable. The user has to tweak the bones, layer the muscles, place the organs, and put in the finishing touches. And so you have an all-new human to yourself, made to your choice and requirements.
The analogy is fictitious, but the implication is not. This is, indeed, the fundamental function of the Ethereum. It allows us to create our own blockchain-based applications. These applications can be run on the Ethereum network.
Like Bitcoin or any other blockchain, the Ethereum architecture has two aspects – the cryptocurrency and the Ethereum blockchain.
The ‘native’ cryptocurrency of Ethereum is named Ether. In the latter part of this article, we would return to the question of mining Ether. After all, that is still the most common usage of Ethereum. And why not? This is where the money is. Yet, we mustn’t repeat the common mistake of equating Ether and Ethereum.
The former is only a part of the latter. Also, as Vitalik himself points out time and again, Ether was created to financially support the Ethereum project and not the other way around. This is another essential difference between Ethereum and its predecessor, Bitcoin.
Now that we have an overarching understanding of what Ethereum is and how it came into being, we are in a position to dive deeper into its details. 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.
Before getting into all of that, we must be clear about the vision that Vitalik and the Ethereum community wants to achieve. Thus, the next section.
The Ethereum Vision – Building a New Internet
Consider any of the mainstream uses of the internet. Browsing, uploading, downloading, watching videos, playing games, preparing documents, storing and retrieving files, sending emails, chatting, and more.
For all of our common usage, we are dependent upon a client-server network. That is to say that the data is stored in a central computer or ‘server’ which the client computers (you, for instance) can access upon request. All the personal data that you provide on the internet (card details, DOB, and more) is stored on some server or the other.
The servers themselves are computer and cannot ‘make sense’ of our data. However, the human owners of these servers can and most of these servers are either owned by government agencies or by private corporations.
Given that, and cases like The Cambridge Analytica, it is quite evident that such data can be misused. That too, against the very owner of the data. Some, like Brian Behlendorf, have regarded this centralized structure as the internet’s ‘original sin.’
The blockchain technology, in general, and the Ethereum, in particular, exists to remedy this. Its vision, in short, 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, and there would be no monopoly of data, at least.
- Applications won’t steal data in the name of ‘tailor-made’ services.
To use a clićhe, Ethereum wants to build a ‘world computer.’ The discourse around the Ethereum also has, time and again, featured the word ‘democratize.’
That is that. This is what the Ethereum strives to achieve. But how? What tools does it have? What pragmatic benefits does it bring to the table? How does it plan to overcome the inevitable obstacles? These are some of the obvious questions which some to the mind at this point.
So now, let us try and find the answers to these.
Aspects of Ethereum
In all likelihood, you have realized by now that Ethereum is a multifaceted domain. It would be naive to regard the Ethereum architecture as one concrete, homogeneous whole. It has many aspects to it, and it is through these that the technology functions. For our purpose, we must consider them individually, even if briefly so.
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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