What Is Ethereum? (ETH)

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What Is Ethereum? (ETH)

The Beginner’s Guide to Ethereum

One of the most ambitious blockchain projects, Ethereum (ETH) seeks to use cryptocurrency to decentralize products and services in a wide range of use cases beyond money.

If Bitcoin seeks to serve as a digital gold, Ethereum has taken a different approach, generalizing so its users can create any number of custom assets and programs governing their operation.

This has led to (perhaps imperfect) comparisons that Bitcoin is more like email (a very powerful, special-use tool), whereas Ethereum has more in common with the web browser (its goal being to enable programs users can interact with and create).

This analogy is effective in communicating Ethereum’s scope, as its team would create its own virtual machine and scripting language (needed to execute its programs), raise funding through the sale of its own new money (ether) and introduce a concept called “state” to cryptocurrency.

Put simply, Ethereum tracks changes (transactions confirmed on the blockchain) as well as potential changes yet to occur (state), a difference that gets to the heart of its vision.

On Ethereum, these multi-step computing functions are called “smart contracts.” Larger constructions of many smart contracts, in turn, are called decentralized applications (dapps).

While primitive today, there is a belief such programs could one day be used to create software that mimics the behavior of some of the world’s largest internet companies.

Amazon, as an example, can be thought of as a kind of state service that connects buyers using a simple web interface to a massive, ever-updating inventory stored on databases. In this case, a for-profit company plays the role of middleman and technology steward.

Ethereum, in this way, can be viewed as an early attempt to use cryptocurrencies to create competitive markets governing different parts of these now-monopolistic services.

As of 2020, Ethereum’s developers are in the early stages of delivering on this idea, and are preparing an overhaul of its core code called “Ethereum 2.0” that will usher in new changes.

WISDOMTREE PHYSICAL ETHEREUM

ETHW/WETH

INVESTMENT STRATEGY

ETHEREUM

A more extensive list of founders and contributors can be found on Ethereum’s Wikipedia.

Who Created Ethereum?

Ethereum was the brainchild of then 20-year-old Russian-Canadian Vitalik Buterin. According to Buterin, he was inspired to create Ethereum after realizing it might be possible to apply Bitcoin’s design more broadly to mitigate the “horrors” of centralized web services. In a famous example, Buterin cited slights suffered playing the popular online game World of Warcraft, as developers at the time could make arbitrary changes despite the wishes of users. Buterin would later receive a Thiel Fellowship to pursue Ethereum full time, and set to work creating a non-profit to help launch the project. In early 2014, the Ethereum Foundation sold 72 million ETH in an online crowdsale, which generated roughly $18 million in funding for the effort. Ethereum would go on to attract a passionate community of users, many of whom continue to spearhead its development today. Other notable community figures include:

Gavin Wood
Author of the Ethereum yellow paper specifying its virtual machine
Jeff Wilke
Creator of the first Ethereum software implementation
Joseph Lubin
Founder of Consensys, a major ethereum investment incubator
Vlad Zamfir
Cryptographer focused on protocol development and game theory

How Does Ethereum Work?

It can be said there are always two Ethereums, Ethereum as it works today and the Ethereum the developers hope to one day complete when they finish their roadmap. So, while Ethereum has accomplished much since its 2015 launch, it’s important to remember that not all of its proposed features have been implemented.

Tendermint

Proof-of-Stake

Tendermint

The most essential element to this layered design is the Tendermint BFT engine, the part of the network that allows developers to build blockchains without having to code them from scratch. Tendermint BFT is an algorithm used by the network of computers running the Cosmos software to secure the network, validate transactions and commit blocks to the blockchain. It connects to applications through a protocol called the Application Blockchain Interface. Tendermint Byzantine Fault Tolerance (BFT) Central to Tendermint is Tendermint Core, a proof-of-stake (PoS) governance mechanism that keeps the distributed network of computers running Cosmos Hub in sync. In order for the participants (“validator nodes”) to power the blockchain and vote on changes, they need to first stake ATOM. To become a validator, a node needs to be in the top 100 of nodes staking ATOM. Voting power is determined by the amount of ATOM staked Users can also delegate their tokens to other validators, allocating votes to them while still earning a portion of the block reward. Validators are incentivized to perform honestly, because users have the flexibility to easily switch between the validators they delegate ATOM to, depending on their voting preferences.

Why Does ETH Have Value?

The main cryptocurrency powering Ethereum is called ether, a portion of which is minted in every block and distributed to miners.

Notably, Ethereum does not place a limit on the amount of ether that can be minted. Rather, the supply of ether is programmed to increase 4.5% each year, with 2 ETH now minted each block.

This reward has been decreased twice in the network’s history, and was originally set at 5 ETH.

Changes to the monetary policy are generally proposed by developers. Nodes and miners running the software can then accept or decline to upgrade their software to accept the change.

Miners also earn ETH in the form of fees for computations processed by the network. Fees are not paid in ETH, but rather paid in “gas,” a special computational unit.

The more complex the computation, the more gas a given program will require.

This means that any applications or protocols operating on top of Ethereum must continually purchase and spend ether, creating a continued demand for the asset.

Why Use Ethereum?

At a time when many cryptocurrencies have struggled to generate a single use case, Ethereum is perhaps unique in that it has passed through several distinct phases of strong demand.

DeFi

ICOs

Private blockchains

DeFi

The most recent wave of innovation on the network, decentralized finance (DeFi) has found entrepreneurs using Ethereum to create protocols that replicate traditional financial services. These have included projects like MakerDAO, which designed a protocol that decentralizes the management of a cryptocurrency pegged to the U.S. dollar. Other DeFi projects have sought to automate and decentralize financial services like lending and borrowing.

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What Is Ethereum? (ETH)