Initially introduced in 2008 and officially launched a year after, Bitcoin has become the basement for the whole new industry of decentralized payments. The blockchain technology that stands behind Bitcoin makes it possible to transfer value directly between two parties without going through a financial institution.
However, apart from transferring funds outside of the all-seeing eye of governments, this decentralized payment system has much more to offer to its users. When applied to various economic areas, the idea of decentralization turns out to have a truly limitless potential. Ethereum has become the next milestone in the blockchain industry development as it offers a practical approach to this new technology.
In this article, we are going to review in details what is Ethereum, how it works, how it can be applied in practice and its advantages and disadvantages for end users. There will be no crazy technical definitions, but still, it’s recommended to have at least a basic understanding of how blockchain works.
What is Ethereum?
Ethereum is an open-source, decentralized platform based on the public blockchain with the smart contract functionality. The core blockchain technology that stands behind this project is very much similar to Bitcoin, but the smart contracts bring it to a new level and provide a much broader set of features for developers all over the world.
First introduced by genius 19-year-old Vitalik Buterin in 2013, Ethereum platform has become the first standard for creating decentralized applications and the second most popular cryptocurrency after Bitcoin.
What is Ethereum Virtual Machine?
Ethereum Virtual Machine or EVM is the heart and the soul of the Ethereum platform. This is the software running on the Ethereum network that makes it possible to launch any program. It enables developers all over the world to create thousands of different apps on blockchain using any programming language.
Before Ethereum was created, crypto projects were mostly focused on improving Bitcoin’s functionality without adding anything major on top. The offered improvements were mainly about increasing the transaction speed (e.g., Litecoin) and making payments more difficult to trace (Bytecoin).
Developers who utilized Bitcoin’s open code for creating new projects saw the potential of expanding the decentralization principle to other areas. There were two ways for them to move on: either spend lots of time and efforts on adding new features to the code they already had or to develop a new blockchain and the new platform that would utilize Bitcoin‘s main principles and offer the needed improvements. Vitalik Buterin, Ethereum’s creator, has selected the second option. He has developed Ethereum Virtual Machine that provided developers with multiple opportunities for developing decentralized applications.
What is gas?
While the cryptocurrency utilized by Ethereum network is called Ether tokens, there is also one more unit called ‘Gas’ that is needed to send funds.
Simply put, this is the fee that you pay to the network to be consumed by EVM for executing a given transaction. Note that this is not a separate cryptocurrency, you cannot go to an exchange platform and buy some gas there. Gas is calculated in Ether and is included in the transaction costs.
The gas price is not fixed, and it depends on how much the Ethereum network is overloaded. Since Ethereum allows to process 19 transactions per second at the maximum, the more people want to send funds in a given moment of time, the higher is the gas price and the longer is the confirmation.
You can check the recommended gas price on EtherGasStation. Also, Metamask, one of the most popular Ethereum wallets, has added the recommended fees right into its interface.
What are smart contracts?
The idea of smart contracts is not new. It was first introduced by Nick Szabo in 1996. Vitalik Buterin utilized this model to enhance Ethereum blockchain with new powerful features.
Smart contracts are the name of the computer code that triggers transferring of funds on the blockchain in case some specific conditions are met. These are self-executing automated contracts, the instructions written with the help of the programming language Solidity. They follow the IFTTT (If-This-Then-That) logic. The main value of the smart contracts is that they make it possible to put almost any conditions into the code and thus eliminate the need of the third parties to control the execution of these conditions.
Just imagine: instead of paying lawyers, notaries, banks and other inevitable blood-sucking companions of any serious deal you simply put all the conditions of the deal into the code. This code transfers the money from one side of the deal to the other instantly as soon as the conditions are met – without holidays, coffee-breaks and any other delays. When put onto the blockchain, smart contracts run exactly as they are programmed to without any chance of fraud, downtime or third-party interference.
What are decentralized apps?
Decentralized apps or shortly Dapps are the applications that perform special functions and are based on the smart contracts and the blockchain. To better understand how Dapps work let’s first look at the logic of traditional web-based applications.
With decentralized applications, it’s all the same on the surface. The difference is that the users’ data is grabbed by the smart contract and stored on a decentralized blockchain. Since the blockchain is immutable and unhackable, it provides a much higher level of security and gives users back the control over their data.
Examples of Ethereum-based Dapps
Among most popular Dapps on Ethereum are the following:
- 0x: a decentralized exchange platform. Instead of entrusting your funds to a third-party platform that can be hacked, gain back the control over your funds and switch them securely between your wallets.
- Basic Attention Token: a decentralized advertising platform. Users get a reward for the ads they watch, and advertisers show their ads only to those users who are interested in their products.
- BlockchainCuties: a decentralized online game. Following the CryptoKitties success, many projects have launched analogous games. Apart from Ethereum-based cuties, this game also supports EOS and Tron that have much higher capacity.
Advantages and disadvantages of Ethereum
We’ve already mentioned some of the advantages that Ethereum offers to developers and end-users in comparison with traditional centralized platforms. However, it’s good to sum everything up in one place.
- Immutability: It’s impossible to alter the data once it is placed on the blockchain.
- Corruption- and tamper-proof: Since the blocks of Ethereum blockchain are produced by multiple nodes all over the world there is no central party to govern the network.
- Security: The lack of the central point that can be hacked in conjunction with cryptographic techniques used in the transaction model makes the Ethereum network secure.
- 100% uptime: Decentralized applications, smart contracts, and the whole Ethereum ecosystem are always running, and there’s no way to switch them off.
- The complex programming language: As we’ve already mentioned above, Ethereum is based on Solidity. This is a very complex language, and one can easily make a mistake while writing code. And although the network itself is secure, the mistakes in the dapps’ code make them vulnerable to hacks and may lead to users’ money loss. The most famous case is the DAO (Decentralized Autonomous Organization) hack that led to $50 million worth of Ether stolen in 2016.
- Irreversible transactions: The biggest pros of the blockchain turn out to be its biggest cons as well. If your funds are hacked or stolen due to the issues in the code, there’s no way to get a refund.
- Low capacity: Ethereum network allows processing 19 transactions per second at the maximum. This is nothing compared to VISA’s several thousand TPS.
- High transaction fees: This disadvantage is the direct result of the previous one. The more people try to send funds in a given moment of time the higher are the fees and the longer it takes for a transaction to be confirmed on the network.
After reaching its all-time high of 1,400+ USD in January 2018, ETH price dropped below 100 USD by December. There are many reasons for that, and one of them is directly connected to the issues of the platform that we’ve described above.
However, the project may still revive since the Ethereum community is big, and there are many developers working to improve its technical features. For one, Buterin declared his plans to switch the platform from the Proof-of-Work to the Proof-of-Stake mining algorithm to increase the transaction speed and decrease the fees. Another solution that should help to improve the scalability of the network is called sharding, and it is also on Buterin’s roadmap.
All-in-all, the potential of the platform is great, so don’t be too eager to bury it together with the whole blockchain industry.