Ethereum has taken the world by storm...but how does it work and why is it becoming so popular?
This guide will teach you everything you need to know about Ethereum.
Read on or skip to the section you're interested in...
1. What is Ethereum?
Ethereum can be thought of as a virtual supercomputer.
It's designed as a platform to host applications that can run without the need for human interference.
These applications are called 'Decentralized Apps', and I'll explain how they work later in this guide.
The cryptocurrency, Ether (usually referred to as Ethereum) is the currency or utility token that you pay to use this virtual network.
2. How Ethereum Works.
2.1. Ethereum Blockchain.
Like Bitcoin and other cryptocurrencies, Ethereum has it's own blockchain.
This is like a record of all transactions on the Ethereum network. It's stored on nodes (computers, miners, etc.) across the world.
However, while Bitcoins blockchain just stores transaction records, Ethereums blockchain also hosts smart contracts and decentralized applications (DApps).
Smart contracts are contracts programmed to run by themselves. In simple terms, this means: If x happens, y results.
(I'll explain Smart Contracts in more detail below).
The Ethereum blockchain keeps a record of the latest execution of each smart contract.
2.2. How Do Transactions Work?
Transactions, whether they are simple money transfers or executions of smart contracts or DApps, require gas.
Gas can be thought of as transaction fees. You pay for gas using Ether.
Transaction fees go to miners (explained below).
2.3. What is Ethereum Used for?
Since you can program different smart contracts and DApps on the Ethereum blockchain, Ethereum use cases are only limited by the imagination.
Ethereums innovation in this regard has even led to copycats trying to mimic Ethereums popularity and success.
Note: Want to see how Ethereum works in the 'real world'?
Check out section 7 of this guide for some examples.
2.4. Smart Contracts.
As mentioned, smart contracts are contracts that are programmed to run by themselves.
So why is this helpful?
Smart contracts can eliminate the inefficiencies often caused by middlemen.
Smart contracts get rid of middlemen like banks and even service providers like Airbnb and Uber.
For example, banks are usually the ones that give people loans.
Instead of having a bank, smart contracts could be written so that loans are disbursed once certain conditions are fulfilled.
For instance, once you pay your loan amount, funds could be disbursed into your account automatically without the need for a loan collector.
For something like Airbnb, instead of having Airbnb connect renters and landlords, smart contracts could grant a renter access to an apartment once he or she makes a payment.
The examples are endless.
Smart contracts could be revolutionary and have the potential to upend many industries and business models.
2.5. Mining Ethereum.
When you make a transaction, this transaction is broadcast to the Ethereum network.
Miners verify transactions and group them into blocks (groups of transactions), which are added to the blockchain (groups of blocks or all Ethereum transactions).
The way that miners verify Ethereum transactions is via proof of work. However, they are planning to move towards "proof of stake".
Miners, using their mining devices, such as computers or specialized mining devices, perform computationally difficult work.
Whoever finishes this work first gets to add a new block to the blockchain.
For their efforts, miners are paid in transaction fees (gas paid for in Ether) and newly created Ether (if they finish the work first).
3. History of Ethereum.
3.1 Who Created Ethereum?
The founder of Ethereum, Vitalik Buterin, published the idea of Ethereum in late 2013 in a whitepaper.
Buterin had originally pushed for application development (DApps) on Bitcoins blockchain, but others in the Bitcoin community didnt share his vision.
This led him to create Ethereum.
Ethereum was officially announced in January 2014 and other team members included influential cryptocurrency figures:
Ethereums ICO took place from July 2014 to August 2014. Crowd sale participants paid for Ether using Bitcoin.
A year later, in July 2015, Ethereum went live.
3.2. Ethereums Growth.
People realized the potential of Ethereum (Blockchain 2.0), and Ethereum quickly gained in popularity.
3.3 Ethereum Hacks.
While Ethereum has risen quickly in the cryptocurrency sphere, its unfortunately suffered some high profile hacks.
Here's a couple of examples.
Though The DAO was the largest crowdfunding campaign in history (at the time), it was unfortunately hacked.
One third of The DAOs funds were stolen (valued at about $50 million at the time).
The community was split with regards to how to deal with the hack, which led to the split of Ethereum (discussed below).
Parity is an Ethereum wallet provider thats had a run of bad publicity.
In July 2017, $30 million in Ether was stolen from Parity wallets.
3.4. Ethereum Classic.
The aforementioned DAO hack was the first of its kind in the Ethereum community.
People werent sure with how to deal with the hack and two camps emerged.
On the one hand, some wanted to hard fork (split) the Ethereum blockchain to restore the stolen funds.
The other side argued doing so would go against the immutability ethos of blockchain.
This disagreement led to the split of Ethereum into Ethereum (forked blockchain) and Ethereum Classic (unchanged blockchain).
4. Benefits Of Ethereum.
Here's a few of Ethereum's benefits (we'll come onto it's disadvantages next)
Nothing can be censored on Ethereum because of blockchain technology.
Data is hosted on nodes across the world so censorship or changing of data wouldnt be possible without controlling thousands of nodes.
Since Ethereum isnt held on one server (centralized) and is instead hosting on thousands of nodes (decentralized), there's no downtime.
(Unless all nodes crash at the same time which is rare).
With the introduction of Smart Contracts, Ethereum is a very versatile platform and could revolutionise many industries (as mentioned earlier with banking and Airbnb.
Ethereum is one of the most popular platforms for launching ICOs.
Ethereum's blockchain makes it relatively easy for developers to create DApps, DAOs and other crypto-assets.
Therefore it's become an increasingly more popular and convenient platform for ICOs and developers to launch from.
Mining and transferring tokens is faster on the Ethereum blockchain, especially when compared to Bitcoin.
Transferring Bitcoin can take 10 minutes (or even longer) - whereas transferring Ethereum takes a matter of seconds.
5. The Disadvantages Of Ethereum.
Ethereum uses its own programming language, Solidity.
Developers unfamiliarity with Solidity has led to code being written incorrectly, which led to problems like The DAO hack.
Projects similar to Ethereum have emerged addressing this issue and allow programmers to use more familiar languages like Javascript.
Ethereum, like Bitcoin, is facing problems, as it grows more popular.
The fact that games like CryptoKitties can cause network congestion is a cause for concern.
If Ethereum cant handle many transactions, some critics are wondering how will it ever scale to meet the demands of a mainstream user base?
Transaction fees on the Ethereum platform are paid in Gas - and they can quickly inflate.
In fact, transaction fees increased by up to 70% for Ethereum at peak usage.
As you can see in the chart below, transaction fees have fluctuated dramatically over the last few months.
Another technical problem with Ethereum is that sometimes the Ethereum wallet won't sync properly with the blockchain.
This means sometimes users can't see their wallet's actual balance - and the figures are can be inaccurate.
As you can imagine, that's a bit worrying for some users!
You can find more details about this here.
6. Ethereum vs. Bitcoin.
So what are the biggest differences between Ethereum and Bitcoin?
Smart Contracts the main difference between Ethereum and Bitcoin is that Ethereum allows for smart contracts and DApps instead of just payments.
Faster Transactions the time for a single Ethereum block to be mined is measured in seconds vs. minutes (Bitcoin).
Purpose Bitcoin is more like a store of value, whereas Ethereum allows decentralised apps to be developed on it's platform.
Functionality Ethereum's technology is designed to allow DApps and smart contracts for developers. Ethereum is more versatile than Bitcoin in this respect.
Proof Of Work Vs Proof Of Stake Whilst Bitcoin and Ethereum are both currently mined using Proof Of Work, this could change soon.
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