Ethereum & dApps
Ethereum is a blockchain-based innovation that has followed in the footsteps of Bitcoin over the last decade. It is a public, open-source, distributed software platform that allows developers to build and deploy decentralized applications.Often the word “Ethereum” is used to refer to both the network and the Ethereum native token, Ether (ETH).
History of Ethereum
In 2015, Ethereum was launched by Vitalik Buterin along with a team of impressive cryptographers after Buterin published an introductory whitepaper in 2013. Only 19 years old at the time, Ethereum’s founder was one of the pioneers of expanding the reach of blockchain technology to more use cases beyond stores and transactions of value (digital money). In May 2021, he became the world’s youngest crypto billionaire.
In 2014, Buterin and some other early contributors founded the Ethereum Foundation, a non-profit organization dedicated to Ethereum’s research, development, and growth. The foundation's first task was to host the Ethereum crowdsale, raising a value in Bitcoin equivalent of US$18 million at the time, in exchange for about 60 million Ether. The Ethereum Foundation continues to be the primary funding organization, issuing grants to research teams and projects focused on Ethereum.
What is Ethereum?
The majority of online services and businesses today are centralized. This means that the activities of each participant and flow of all information come from and are controlled by a single central source. In these systems, individuals rely on the central authority to send and receive information. Centralized systems come with significant weaknesses as they are vulnerable to a single point of failure, easily corrupted, and experience performance bottlenecks. The solution to these problems are decentralized applications, with the Ethereum platform making this possible.
Ethereum is a multipurpose platform that aims to create a decentralized version of the internet. It hosts a fully decentralized app store and payment system on its network. Blockchain, the technology that Ethereum is built upon, removes this central point of failure and solves the issue of trust between parties, instead placing trust in the system.
Most importantly, Ethereum is known as the “world’s programmable blockchain” and enables users to create decentralized applications on Ethereum’s blockchain. Bitcoin created a solid foundation for the exchange of value but had limited functionality beyond that. Ethereum substantially expanded the capabilities beyond money systems by adding logic and programmability. Bitcoin was the first example of digital currency that created solid fundamental security foundations but ran into issues when trying to build more advanced applications upon it. It did not offer the flexibility that Ethereum now provides. On Ethereum, users can build distributed applications with no regulation or censorship and use smart contracts to conduct safe and reliable transactions with each other.
The key feature of programmability has encouraged innovation across many industries resulting in the creation of new products and services that can improve different areas of our lives. These applications can be entirely new ideas or decentralized versions of already existing concepts. Everything from social media networks, to complex financial agreements, to securing healthcare data can benefit from Ethereum’s technology. In the not-so-distant future you may be going to an Ethereum-based dApp for a loan instead of your bank!
Ethereum vs. Bitcoin
Although both Ethereum and Bitcoin use blockchain technology to validate and publicize every transaction of their cryptocurrency, Bitcoin is solely a currency whereas Ethereum is an entire software platform.
Ethereum and Bitcoin have two different purposes. Bitcoin was built to create a new global currency and payment system that connects consumers directly with suppliers, thereby lowering transaction fees and removing the need for intermediaries—such as banks. Ethereum on the other hand was built to liberate users from centralized systems that impose strict regulations and have shocking security vulnerabilities.
Another major difference between the two is how activity and transactions are validated. Bitcoin’s blockchain completely decentralizes the cryptocurrency by requiring a network of millions of network participants (miners) to solve complex mathematical problems to validate the transactions, instead of asking a central power such as a bank to verify them. Ethereum requires only thousands instead of millions of network participants to validate activity on the platform making the confirmation times much faster than Bitcoin’s.
How does it work?
As was mentioned earlier, Ethereum is a decentralized system, which means it uses a peer-to-peer approach with no central governing party. The network is fully autonomous and run by thousands of volunteers’ computers from around the world, meaning that it can never go offline. These volunteers run “nodes” who download the entire Ethereum blockchain to their computers and fully enforce all rules of the system. To maintain the integrity of the network and incentivize honest behavior by the volunteers, all participants are financially rewarded for validating the nodes. The reward is in the form of ETH - Ethereum’s native token.
The Ethereum platform provides and is powered by the second largest cryptocurrency token in the world - Ether. Unlike Bitcoin, the supply of Ether tokens is unlimited and provides a much faster confirmation time (12 seconds vs. ten minutes).
Ether is a digital asset, similar to Bitcoin, but also acts as a digital fuel. The Ethereum network requires a currency to pay for the computational resources required to run the applications and programs built on the network. You can imagine the Ethereum network as a highway with all of the decentralized applications on the network as vehicles on the highway. If a user wants to change something in one of the dapps on Ethereum, they need to pay a transaction fee so that the network can process the change (similar to how drivers pay tolls to drive on a highway).This transaction fee is called “gas,” aptly rounding off our metaphor The transaction fees are automatically calculated based on how much ‘gas’ an action requires. The amount of required fuel is calculated based on how much computing power is necessary and how long it will take to run.
Decentralized Applications (dApps)
Exchanging value through Ethereum’s native token (ETH) is the main application of the Ethereum blockchain today, but the technology has numerous other applications. While Bitcoin aims to disrupt online banking and day-to-day transactions, Etheruem aims to use the technology to replace internet intermediaries. In today’s world, intermediaries are everywhere and help us achieve speed and convenience for many tasks. Examples of these include email services and social media networks, each controlled by a central company like Google (Gmail) or Facebook. There have been many recent instances of internet intermediaries who have abused their control through data-censorship or accidentally sharing sensitive user data through hacks.
Decentralized applications are a growing movement of applications that use the Ethereum network to remove backend centralization. dApps disrupt traditional business models and invent new ones, and have the potential to change the relationship between companies and their customers altogether. Ethereum is giving the power back to the users. The users of dApps become the only ones that can modify their applications and access their own personal information. The app store can’t impose regulations on them, and companies can’t store their information.
On the surface, many dApps might look and feel like regular apps, but behind the scenes they have code running on a decentralized, peer-to-peer network. This is different from a traditional app where the backend code is running on a centralized server. dApps benefit from some key features including freedom from censorship, built-in payments, ability to plug & play, one time anonymous logins, cryptography-backing, and no down-time.
DApps use the Ethereum blockchain to store data and smart contracts for their application logic.
A smart contract is a set of rules programmed onto a blockchain, which defines the terms of a particular transaction. Upon the receipt of a given trigger or input, the smart contract will execute and perform its assigned tasks. These rules cannot be altered or manipulated. Additionally, the rules of smart contracts are deterministic - they leave no room for interpretation. Once smart contracts are deployed on the Ethereum network you can’t remove them.
Smart contracts are often compared to vending machines - if you supply it with the right funds and the right selection, you will get what you want. Like vending machines, smart contracts can hold funds. This smart contract code mediates agreements and transactions in dApps. dApps can be decentralized because they are controlled by the logic written into the contract, not an individual or a company.
Smart contracts enable a majority of the use cases for Ethereum. For example, the insurance sector can speed up and streamline the claims process using smart contracts. Policy terms are encoded into the smart contract. A life insurance policy would be triggered when a notarized death certificate is provided as the input to trigger the release of payment to named beneficiaries. Or in the case of travel insurance, flight data provided by airlines could serve as the input to compensate travellers for delayed or cancelled flights.
Applications of Ethereum
The Ethereum blockchain can be applied to any situation that requires trust between parties. Below are some examples of where innovation is occurring on Ethereum’s blockchain.
Payments: The economy is based on transactions. Ethereum technology enables people to exchange anything of value in a risk free manner. For example, instead of buying a song from a platform like iTunes, you can buy it directly from the artist by initiating a contract with them to buy the song. When the buyer puts money into an escrow account, the song will be downloaded.
Banking: The use of Ethereum-based technology can speed up transactions and simplify several financial procedures. It can be used for liability management, automatic payments, stock splits, and dividends. For example, when a bond is about to mature, a smart contract will be triggered and automatically transfer the money to the bearer’s account.
Supply Chain Management: By using smart contracts, supply chains can be significantly improved. For example, items can be tracked within the supply chain with full visibility and transparency. This can improve inventory tracking and reduce fraud.
Data Management: The Ethereum blockchain can be used to solve issues of identity theft and data monopoly. For example, instead of inputting your credit card information when making an online purchase, you could store it in a secure dApp that can only be accessed by you. You can still easily make the purchase, but your data remains safe and only accessible by someone you authorize.
Voting: Voting systems can use Ethereum to make the results of polls publicly available. This technology can ensure transparent and fair democratic processes by eliminating voting malpractices. The automation and security provided by Ethereum’s blockchain technology could also significantly reduce the costs of running an election. In 2018, Thailand’s main opposition political party was the first in the world to use blockchain in a live e-voting system involving more than 120,000 members.
The Ethereum blockchain brings its core principles of trust, transparency, security and efficiency into any service, business, or industry. As a result of Ethereum, we will see the integration of an increasing number of Ethereum-based dApps into our day-to-day lives. A lot of this innovation will take place on the back-end of existing technology, ultimately improving what already exists.
Future of Ethereum
The demand for the Ethereum network has been steadily rising. This demand has recently been driven by the rise of DeFi (decentralized finance), stablecoins, and NFTs (non-fungible tokens).
Earlier this year the first phase of an upgrade called “Ethereum 2.0” was launched which addressed some of Ethereum’s tech issues on speed, efficiency, and scalability. Another technical adjustment is expected to go live in July 2021 which aims to reduce the volatility of Ethereum’s fees by introducing a mechanism to burn some of those transaction fees, which would slow the token’s issuance.