ZoneBitcoin EditorialIf you are wondering what Ethereum is, how it works and what it is used for, you will find the answers to your questions in this article.
You will also see why and how Ethereum could drastically change some of our industries or at least improve them.
Yes, indeed, when we talk about Ethereum, we are not just talking about a cryptocurrency or an evolved blockchain. The whole purpose of this article is to present to you the broad outlines of this blockchain which has opened the way to what we call decentralized finance.
What is Ethereum?
It's not easy to describe Ethereum in a single sentence since Ethereum is a real Eco-system in its own right. Ethereum was designed as a platform to host applications that can run autonomously.
These different applications are what we call "Dapps: Decentralized applications". The cryptocurrency of the Ethereum blockchain is called "Ether" (often mistakenly called ethereum).
How and why was Ethereum created?
The Russian-Canadian founder is called Vitalik Buterin and he had originally published the idea for Ethereum in a white paper in 2013. He had wanted to create what was missing for him at the time, namely the ability to develop applications on the Bitcoin blockchain .
Many members of the Bitcoin community had shown their disagreement with such a deployment. This is how he decided to create his own blockchain independent of Bitcoin, namely Ethereum.
The project was therefore officially launched in January 2014 with an ICO which took place between July 2014 and August 2014. A year later, in July 2015, Ethereum officially became operational. That said, at this stage, Vitalik is not alone and he is surrounded by relatively influential people in cryptocurrency. We can name among his team, Charles Hoskinson (the founder behind Cardano), Anthony Di Iorio (founder of Jaxx), Mihai Alisie (co-founder of Bitcoin Magazine in which Vitalik had written articles – well written otherwise).
For the small clarification, initially, the ETH token was sold at $0,311 per token. Today, in January 2020, the token reached $1200…
So, Ethereum did not invent blockchain technology per se. That was done by Bitcoin and Satoshi Nakamoto. But Ethereum allowed it to be used and improved exponentially. That is why Ethereum was initially called "blockchain 2.0". It is certainly a technology similar to Bitcoin, but richer and more sophisticated.
How does Ethereum work?
Just like Bitcoin, Ethereum has its own blockchain. The principle is the same at this level: all transactions are recorded on the Ethereum network. Everything is recorded on so-called nodes throughout the network in the world. While Bitcoin's blockchain only records transaction records, when it comes to Ethereum, it's a bit more than that. Ethereum will also host what we call smart contacts (the smart contracts) Et les Dapps.
The smart contracts are contracts that are programmed to operate autonomously. For example, a smart contract can be summarized in the following equation: If x happens then y results. So, the smart contact activates and triggers automatically. No need to have a human behind to activate the contract. I will go into more detail about what a smart contract is in this article.
Why do we talk about decentralization?
Thus, with Ethereum, servers and clouds are replaced by a network of systems called nodes. These nodes will store the entire blockchain. And logically, the more nodes there are, the more network is decentralized and therefore, the more secure it is.
This different information held on the blockchain is fully verified by what is called "consensus". Basically, more than half of the nodes must agree to affirm that the information is correct. Once it is validated by the majority, then it is recorded and validated on the blockchain. This is why hacking blockchains (all blockchains, even Bitcoin) is an impossible mission. To do this, you will need to control more than half of the network to force a consensus.
How do transactions work?
Transactions, whether simple money transfers or executions of smart contracts or dApps, require what is calledgas". In fact, gas is also considered transaction fees. You pay for the gas with Ether and the transaction fees go to the Ethereum miners.
What is Ethereum used for?
Everything that makes Ethereum strong is precisely smart contracts and dApps. In fact, anything is possible with these two building blocks of Ethereum. This is also why Ethereum is somewhat at the origin of all the different concrete applications of the blockchain that we can see. Bitcoin, for example, is solely dedicated to payments. Moreover, Bitcoin has scalability problems for greater use.
As for Ethereum, it should rather be seen as a matrix for other projects. This is also how we talked about "blockchain 2.0" with the arrival of Ethereum because we had just gone beyond the framework of cryptocurrencies used only for payments.
What are smart contracts?
Understanding what Ethereum is is like understanding what smart contracts are. In fact, when we understand smart contracts (how they work) then we finally understand why Ethereum is revolutionary.
This is how we understand how much of an impact it can have on our everyday lives.
So, as we saw briefly above, smart contracts are contracts that are programmed to work by themselves. Basically, a contract can be summed up as "if x then y". Concretely, for example, if we take an example of a home rental service like Airbnb, it comes down to this: For example, we can define a smart contract that says that a person who pays so much, to have access to the house. Thus, the contract activates itself if the person pays so much. This can apply to all sectors.
That's just one example and there are a thousand other possible examples. There are endless possibilities; The only limit is our imagination.
Likewise, if the conditions of the contract are not met, then the contract will not activate. Can you imagine the power of the thing? A contract that activates only if conditions are met. No more need for manual human presence (and therefore subject to defects and slowness).
What are Dapps (Decentralized Applications)
The dApps are simply applications that are not going to run on a traditional central server like other applications. There, these applications will run on a blockchain. In fact, dApps are really at the heart of Ethereum's design. The founders wanted developers to be able to develop solutions within Ethereum. This is why they implemented a language specific to Ethereum: Solidity.
For those who don't know computer coding, imagine that Solidity is a kind of JavaScript (one of the most used programming languages).
It is Solidity which is used to create dApps. This encourages developers to create more and more applications. Some say that in a few years, dApps could even replace traditional centralized applications. This will be particularly true and relevant in sectors like banking, medical services, e-commerce etc.
How does the Ethereum system (Mining and Staking) work?
You know, a blockchain works according to particular mechanisms. We are not going to go into detail here on Proof of work and POW for example. That said, I'll tell you enough so you understand how it works.
Ethereum mining: the earlier version of Ethereum
So, when we make a transaction on Ethereum, it is recorded on the Ethereum network, okay. Originally, Ethereum worked with the Proof-Of-Work mechanism like Bitcoin. So, it was the miners who verified the transactions and grouped them into blocks on the blockchain. Many people have participated in the growth of Ethereum by doing Ethereum mining. This is how, over time and very quickly, Ether became the 2nd cryptocurrency in terms of total market capitalization.
It was only recently that Ethereum decided to migrate to Proof Of Stake in order to overcome the disadvantages of Proof of Work.
The big disadvantage of POW is that it consumes a lot of computing power and electricity. Therefore, it is expensive and very bad for the environment. This is also the reason (among others) why Ethereum decided to move to POS.
Ethereum in POS version: Ethereum 2.0
This method consumes much less electricity. This is why the stacking is very popular in the community. In the PoS version, users with a lot of Ether are randomly selected to verify network transactions.
These users will be rewarded with fees instead and it will consume much less energy and electricity. Users selected in the PoS to verify transactions are called “stakeholders”.
–>Read the article to understand « The Ethereum Merge.
The great division of Ethereum: Ethereum Classic and new Ethereum
At a time when Ethereum was starting to get traction, there was a crowdfunding round for the venture capital project “The DAO”.
There was a big hack on the network. A huge hack. It was, in fact, the largest crowdfunding campaign at the time. And there was a huge hack. A third of the DAO's funds were stolen (at the time it was worth $50 million). It was a great tragedy and that's when there were splits in the community.
In fact, more than just a huge financial loss, it was rather a huge loss of confidence that was dramatic. At that time, there was an awareness of the entire community that what we call "the attack surface" (i.e. the number of flaws exploitable by hackers) was strong. It was therefore absolutely necessary to secure the computer system of smart contracts. In short, it was the entire security of Ethereum that had to be rethought.
This is actually how there was a big fork on Ethereum. Basically, there were two camps. Some wanted a hard fork (a big split) of the Ethereum blockchain in order to restore stolen funds. So, coming back and touching the blockchain then. Which goes against the irreversible nature of blockchain. It is precisely this point which was criticized by the other camp, which did not want to touch the immutability of the blockchain; It was against the very ethics of blockchain! It is this disagreement which led to the split of Ethereum (ETH) and Ethereum Classic (ETC, the original blockchain).
What are the advantages of Ethereum?
Even if by quickly explaining what Ethereum is, we can understand its advantages. However, here are the concrete advantages of Ethereum.
Transparency: Nothing can be hidden on Ethereum simply because it is blockchain technology. Data and transactions are hosted on nodes across the world. In fact, you cannot modify or hide data without controlling half of all new data. Which is technically extremely difficult, if not impossible.
Continuous service: Ethereum is not hosted on a single server (centralized) and instead it is hosted on several thousand nodes (decentralized). As everything is on networks and on the internet, it therefore works continuously. There is no downtime (unless by chance all nodes go down at the same time).
Adaptable and Versatile: With smart contracts, Ethereum is fundamentally a very versatile platform. Ethereum can literally be adapted to every possible sector imaginable. From insurance to real estate rental, including medical and commercial logistics.
Ideal for financing: It should still be remembered that Ethereum is the one that made it possible to do so many ICOs. It was completely crazy at the time to be able to raise funds (and millions) so easily and simply.
Technically accessible: Ethereum allows developers around the world to relatively easily create dApps and even create tokens easily. Basically, Ethereum allows us to create projects, real startups, quickly.
Transaction Speeds: Compared to the Bitcoin blockchain, token transfer is much faster on Ethereum. Transferring Bitcoin can take 10 minutes (or more) – while transferring Ethereum only takes a few seconds.
What are the disadvantages of Ethereum?
Yes, there can't be only advantages. So let's now see the disadvantages of Ethereum.
Unknown programming language : Ethereum uses its own programming language, Solidity. It is said that the big DAO hack was made possible because of poor code writing…. Projects similar to Ethereum then appeared to solve this problem. This allows developers to use more familiar and well-known languages like Javascript, for example.
Scalability issues : Ethereum, just like Bitcoin, is facing problems linked to ever-increasing use. For example, we have seen cases of enormous congestion on the network... If Ethereum cannot handle many transactions, some people are wondering (rightly) how it will evolve to meet the demands of a large user base. audience?
inflation. Transaction fees on the Ethereum platform are paid in gas (or gas) – and the latter can rise quickly. Here again, this is a major problem which can prevent proper use of tokens on Ethereum. Lire: Why are gas fees on Ethereum high?
Security and bugs: Like any technology, Ethereum has been prone to security vulnerabilities and bugs in smart contract code. Errors in contracts can lead to significant loss of funds, as happened with some notable incidents such as The DAO hack in 2016.
To find out more, you can consult our article which covers in detail the reproaches and criticisms addressed to Ethereum.
What is the difference between Bitcoin and Ethereum?
Ethereum versus Bitcoin. So what are the biggest differences between Ethereum and Bitcoin?
More complete and versatile: Smart Contracts – the main difference between Ethereum and Bitcoin is that Ethereum allows smart contracts and DApps instead of just payments.
Faster transactions – mining time for a single Ethereum block is measured in seconds compared to minutes (Bitcoin). Purpose – Bitcoin is more like a store of value, while Ethereum allows decentralized applications to be developed on its platform.
Feature – Ethereum’s technology is designed to enable DApps and smart contracts. This is what makes Ethereum much more versatile than Bitcon. In addition, with the new version of Ethereum, there will also be the difference between POW and POS (proof-of-work versus prof-of-stake).
How can Ethereum be used?
We will now see the concrete uses that can be made with Ethereum. We have covered the key elements in this article but here we need to go in more depth.
Decentralized Autonomous Organizations (DAO).
DAOs are decentralized, autonomous organizations that operate using smart contracts. Smart contracts contain the rules and operational structure of the organization, eliminating the need for centralized control and leadership.
For example, members can submit proposals, which are then voted on by the entire organization. If a proposal gets enough votes, it is automatically approved without the need to count votes or move the initiative forward. While a DAO is decentralized, it is owned by those who purchase its tokens. Tokens give members voting rights proportional to the percentage of the organization's tokens held by members.
Perhaps the most famous example of a DAO is “The DAO,” which was a decentralized venture capital fund. Investors in the DAO were given voting rights on investment proposals proportional to the amount of DAO tokens they owned. Unfortunately, “the DAO” was hacked (as mentioned earlier).
Clea says, despite the flop of The Dao, experimentation in this area has never really stopped. And, even in 2019, we even saw a boom in these new projects.
For example, we have seen DAO creation systems on the mainnet with Aragon and Colony.
- the availability of the three main DAO creation systems on the mainnet: Aragon, DAOstack or, colony.
- the appearance of DAOs to manage protocols like Polkadot to name just one of the best known.
- Also, we find DAOs of the decentralized jurisdiction type with kleros or, Aragon court.
(We are preparing a dedicated article on DAOs)
Initial Coin Offering (ICO).
The initial coin offerings (ICO) allow entrepreneurs to raise funds quickly and easily. Imagine a kind of crowdfunding platform but this time in crypto. It's a bit the same idea. Anyone can participate and buy tokens from the said company.
ICOs have been victims of their success and today there are regularizations that have been put in place. Indeed, there have unfortunately been far too many crypto scams… In fact, states have imposed strict regulations. This is also what explains why there have been fewer ICOs launched in recent years.
Another thing to take into account is the fact that some projects have been able to raise hundreds of millions of dollars. However, such a level of financing for a company at the beginning of its development is not relevant. Likewise, there were projects that raised millions when there weren't even real working products! However, some don't even have functional products!
This explains why new variants of ICO have appeared like IEOs, for example. These still constitute fundraising but they have the advantage of being legally regulated. For the investor, it is also a guarantee of security.
—> To find out more on the subject: What is the difference between an IPO, an ICO, an STO and an ETO?
Initial coin offerings, or ICOs, are one of the most famous uses of Ethereum.
Yes, this is one of the best-known uses of Ethereum: being able to create tokens and thereby raise funds. Although there are ICOs that have taken place on other platforms, the largest majority have been carried out on Ethereum in terms of number of projects.
It was especially in 2017 that ICOs became extremely popular. There were new projects launched almost every day and the amounts raised were incredible. We are talking about raising millions of euros in a few days, even in a few hours. According to the ICOdata site, ICOs raised more than $6 billion in 2017 with 875 projects launched.
And on the coinist site, you can also see the 50 best ICOs of all time with the amount raised for each of them.
Decentralized Applications (DApps)
After ICOs, the other major use that we can make on Ethereum and which also gives all the strength to this ecosystem, is decentralized applications. Today, there are thousands of them.
At first glance, what we can say about Dapps is that they are classic applications, like those we know and use every day. However, as their name suggests, Dapps operate on decentralized networks. Therein lies the big difference.
We can code relatively simply with the computer language created by Ethereum: Solidity. This allows everyone to be able to develop applications that will run on the Ethereum blockchain.
Some are more or less popular like CryptoKitties who was one of the first to gain notoriety.
There are many other decentralized applications that are also well known. We can talk about OmiseGO which was one of the largest Ethereum ICOs of 2017 (raising $25 million). The company behind the project, Omise, is a Southeast Asian payment services company. With OmiseGO, the company seeks to develop a platform that enables value exchange and various payment solutions in different currencies (both cryptocurrencies and fiat currencies like dollars, for example).
Omise itself is already a well-established company with over 100 employees, offices across Asia and recognition such as being named “” by Forbes Thailand in 2016.
How to buy Ethereum and store it securely?
In fact, you can buy Ether on almost all exchange platforms for buy cryptocurrencies.
If you simply want to buy some to keep and possibly resell later, then the ideal would be to use simple platforms like BitPanda or Binance for example.
To know the difference between a hot and a cold wallet, just remember this: If a wallet is connected to the Internet, then it is called hot. We say "hot" because it is riskier to keep them on a platform that is linked to the Internet (and therefore to hackers etc.). If it is not connected to the Internet, it is called a cold wallet. When storing private keys, it is recommended to use a combination of hot and cold wallets for optimal security.
As with Bitcoin, to have ether, you will need to have a dedicated address.
As for keeping your Ether, of course, the ideal would be to use what we call cold wallets rather than hot wallets. Besides, if this is still a vague concept for you, read the article on different wallets and crypto wallets.
Overall, you can choose a Ledger or a SafePal wallet for example, especially if you don't plan to use them regularly.
Otherwise, to use your wallet properly, you must opt for specific wallets. I recommend the following tutorials to install an Ethereum wallet according to the rules of the art.
- Installer MyEtherWallet
- Installer MetaMask (Tutorial)
In fact, using dedicated Ethereum wallets likeMoney app for example allows you to benefit from dApps and especially the services of the Challenge, for example.
Store on a decentralized wallet
You can store your public and private keys directly in a wallet on your computer or on your smartphone. For a decentralized wallet, you can for example choose the Exodus wallet. You can also choose Jaxx where you can store up to 13 different cryptocurrencies.
You can also use and secure your cryptocurrencies even more by using Exodus and Trezor. (Attention : Exodus is not compatible with Legder).
In the same wallet, there is also the Jaxx wallet.
Final Word on Ethereum: Can it Really Change the World?
So, I think that so far you know the main points and the most important points to know. Besides, there are many applications and sites on Ethereum. They are used more and more and the craze is ever stronger.
In fact, all this new technology is already a big step towards the future for many people! But, despite all these advances, we must not forget that this remains a new technology. Some reviewers say the platform is too complicated for most users.
Some compare Ethereum to DOS because DOS needs Windows to make it friendly and easy to use. So, maybe this is just what Ethereum needs to achieve mass adoption. No?
That being said, with the new Ethereum version, we will certainly move to another milestone…I have a future article on the subject for you!
You can see the explanatory video on what is Ethereum by clicking here:
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This does not constitute investment advice. Always do your own research before investing.
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