With the second largest market cap in the cryptocurrency world,
Ethereum has drawn a lot of attention from investors and crypto
enthusiasts alike.
This relatively new cryptocurrency not only
presents a significant change to the status quo, it also allows for the
quick development and deployment of new applications. Ethereum
essentially enables dozens of new and extremely innovative
cryptocurrencies to exist.
While Ethereum’s utility is obvious to
programmers and the tech world at large, many people who are less
tech-savvy have trouble understanding it. We’ve designed this guide to
appeal to both crowds and expose anyone from complete crypto beginners
and intermediates to this potentially game-changing cryptocurrency.
Ethereum vs. Bitcoin
If you’re interested in Ethereum, chances are you have some sort of foundational knowledge of
Bitcoin.
All cryptocurrencies inevitably get compared to Bitcoin, and it frankly makes understanding them much easier.
Bitcoin
launched in 2009 as the world’s first cryptocurrency, with the single
goal of creating a decentralized universal currency. This currency would
not require any intermediary financial institutions, but would still
ensure safe and valid transactions. This was made possible by a
revolutionary technology called the “
blockchain.”
The
blockchain is a digital ledger, continuously recording and verifying
records. It’s used to track and verify Bitcoin transactions. Since the
global network of communicating nodes maintains the blockchain, it’s
pretty much incorruptible. As new blocks are added to the network, they
are constantly validated.
Similar to Bitcoin, Ethereum is a
distributed public blockchain network. While both Ethereum and Bitcoin
are cryptocurrencies that can be traded among users, there are many
substantial differences between the two.
Bitcoin, for example,
utilizes blockchain to track ownership of the digital currency, making
it an extremely effective peer to peer electronic cash system. Ethereum,
on the other hand,
focuses on running the programming code of an application. Application developers largely use it to pay for services and transaction fees on the Ethereum network.
Both
Bitcoin and Ethereum are “decentralized,” meaning they have no central
control or issuing authority. Respective miners run each network by
validating transactions to earn either bitcoin (for Bitcoin) or ether
(for Ethereum).
If you’re still having trouble making the distinction, the words of
Dr. Gavin Wood—one of Ethereum’s Co-Founders—might help:
“Bitcoin
is first and foremost a currency; this is one particular application of
a blockchain. However, it is far from the only application. To take a
past example of a similar situation, e-mail is one particular use of the
internet, and for sure helped popularise it, but there are many
others.”
Dr. Gavin Wood, Ethereum Co-Founder
Ethereum is simply the application of blockchain for a completely different purpose.
What is Ethereum?
Simply put, Ethereum is a blockchain-based decentralized platform on which decentralized applications (Dapps) can be built.
- Remember,
blockchain is the structure the vast majority of cryptocurrencies run
on. It’s a database with no central server that keeps track of every
transaction and exchange.
- We’ll jump into decentralized
apps—referred to as dapps–in greater detail later, but just know they
are applications that serve a certain purpose to a user. Fasten your
seatbelts, some of these dapps are amazing.
Ethereum’s appeal is that it is built in a way that enables developers to create smart contracts.
Smart contracts
are scripts that automatically execute tasks when certain conditions
are met. For example, a smart contract could technically say, “pay Jane
$10 if she submits a 1000 word article on goats by September 15, 2018,”
and it would pay Jane once the conditions are met.
These smart
contracts are executed by the Turing-complete Ethereum Virtual Machine
(EVM), run by an international public network of nodes.
The cryptocurrency of the Ethereum network is called
ether. Ether serves two different functions:
- Compensate the mining full nodes that power its network. This keeps things running smoothly at an administrative level.
- Pay people under smart contract conditions. This is what motivates users to work on the Ethereum platform.
If you’re still a little confused, don’t worry. The underlying technology is complicated even at a surface level.
By
the end of this guide, you’ll have a better understanding of Ethereum
than 99.999% of people out there… and that’s a pretty good start!
We’ll
go over things such as how Ethereum functions, Ethereum’s history, and
some of the exciting dapps running on the Ethereum platform.
Welcome to a Wild Ride: Ethereum
In 2011, a 17 year old Russian-Canadian boy named Vitalik Buterin learned about Bitcoin from his father.
In
2013, after visiting developers across the world who shared an
enthusiasm for programming, Buterin published a white-paper proposing
Ethereum.
In 2014, Buterin dropped out of the University of Waterloo after receiving the
Thiel Fellowship of $100,000 to work on Ethereum full-time.
In 2015, the Ethereum system went live.
In 2017, Ethereum hit a cap rate of $36 billion dollars.
Whether
you’re looking at this from an investment standpoint, tech perspective,
or witness to history; Ethereum is extremely exciting.
Buterin’s
goal was to bring the same decentralization from Bitcoin to more than
just currency. This could be accomplished by building a fully-fledged
Turing-complete programming language into the Ethereum blockchain.
The
Ethereum white paper
goes into detail for some of the potential use cases, all of which
could be built through decentralized apps on the Ethereum network. The
list goes on and on:
- Token Systems
- Financial Derivatives
- Identity and Reputation Systems
- File Storage
- Banking
- Centralized Autonomous Organizations
- Insurance
- Data Feeds
- Cloud Computing
- Prediction Markets
By
building these apps on the Ethereum network, these dapps can utilize
Ethereum’s blockchain instead of having to create their own.
The Ethereum Virtual Machine
Early
blockchain applications like Bitcoin only allowed users a set of
predefined operations. For example, Bitcoin was created exclusively to
operate as a cryptocurrency.
Unlike these early blockchain projects, Ethereum allows users to create their own operations. The
Ethereum Virtual Machine (EVM) makes this possible. As Ethereum’s runtime environment, the EVM executes
smart contracts.
Since every Ethereum node runs the EVM, applications built on it reap
the benefits of being decentralized without having to build their own
blockchain.
Smart Contracts
Smart contracts are strings of computer code capable of automatically executing when certain predetermined conditions are met.
Instead
of requiring a single central authority to say “yay” or “nay,” these
contracts are self-operated. This not only makes the entire process more
effective, it also makes it more fair and objective.
For example, a simple smart contract use case would be:
- Jim wants to bet Sarah 100 Ether (ETH) that the price of ETH will be above $1000 on August 30th, 2018.
- They agree on a data feed to be used to determine the ETH price.
- They each escrow 100 ETH to a smart contract, with the winner taking the full 200 ETH.
- On August 30th, 2018 the data feed is queried and the contract immediately executes sending money to the winner.
Using the smart contract, there’s no need for Jim and Sarah to trust each other. They just have to trust the data feed.
Keep in mind that this is only a very simple example. Many smart contracts are extremely complex and can work wonders.
The takeaway: Smart contracts can automate a variety of tasks, without requiring intermediaries.
All a smart contract needs is the arbitrary rules written into it.
Now, let’s move on to the Dapps.
Decentralized Apps (Dapps)
Most
of us have a pretty good understanding of what an application (app) is.
An application is formally defined as a program or piece of software
designed and written to fulfill a particular purpose of the user. We use
apps every day: Apps allow us to check our bank balance, scroll through
a live feed of pictures, or even launch a Flappy Bird into oblivion.
Now
take this definition and ~*~decentralize~*~ it. Dapps serve similar
functions, but run on an entire network of nodes rather than a central
source. The fact that they are decentralized gives dapps an enormous
advantage over traditional apps.
You know when Instagram is down
because the server is down? This doesn’t happen with dapps. How about when Zomato
got hacked and exposed the information of 17 million people? This doesn’t happen either.
Moreover, Dapps are:
- Open Source
– Dapps allow users to view the app code on both the frontend and
backend. No sketchy “allow us to use your location” nonsense unless
otherwise stated.
- Autonomous – Dapps automatically act by the rules encoded into them. No room for outside corruption.
- Secure – Data and protocols are stored on the blockchain cryptographically. No hacks.
- 100% Uptime – The blockchain is always running, meaning zero downtime for dapps. No crashes.
- Easier to Implement
– Developers wanting to take advantage of blockchain technology do not
need to create a new blockchain. The framework is there, saving dapp
creators a ton of time and effort spent creating a potentially subpar
framework. In order to run on this decentralized network, dapps just pay
transaction fees.
In many cases, front-end users can’t even
distinguish dapps from regular apps. Dapps typically use
HTML/JavaScript web applications to communicate with the blockchain,
appearing the same to users as many applications you’re already using
today.
Ethereum Dapps Use Cases
Fasten your seatbelts and get your Twitter-fingers ready, it’s finally time for the most exciting part of this guide.
Ethereum’s
intersection with the real world is paved with innovation and
disruption. There are already a huge number of projects, both live and
in development, built on the Ethereum network. Here are just some of the
most successful and promising of these dapps.
Golem:
The Golem project aims to make a global supercomputer easily accessible
to anyone. It’s essentially the first decentralized sharing economy of
computing power. As a global market, users would be able to make money
by “renting” out their idle computing power, or spend money to have
access to a supercomputer. Hold up, have you ever used a supercomputer?
Supercomputers cost between a million dollars and a good fraction of a
billion dollars. The modern Tianhe-2 Supercomputer has the power of
roughly 18,400 Playstation 4s. Golem’s goal is to make this sort of
power easily accessible anywhere in the world at an infinitesimal cost.
Augur: Augur’s
goal is to utilize a decentralized network to create a powerful
forecasting tool using prediction markets. Augur would reward users for
correctly predicting future events. While at a surface level it may just
seem like a decentralized betting platform (which is still worth a
lot), Augur could potentially provide provide powerful predictive data
for virtually any industry. Prediction markets are more accurate at
forecasting than individual experts, traditional opinion polling, and
surveys.
Civic:
Civic aims to protect user’s identities and provide blockchain-based,
secure, low-cost, on-demand access to identity verification. This would
not only prevent and provide users with assistance for identity fraud,
but it would also remove the need for constant personal information and
background verification checks. Think about how many times you’ve left
your social security number with someone’s assistant and you can see the
benefits of Civic.
OmiseGO: OmiseGO
vision is to solve the problems and inefficiencies of financial
institutions, processors, and gateways by enabling decentralized
exchange on a public blockchain at a lower cost and high volume. This
means anyone will be able to conduct financial transactions such as
payments, payroll deposits, B2B commerce, supply-chain finance, asset
management, and loyalty programs without having to rely on a single
server… and without exorbitant fees! The system is built in a way that
allows the best currency (whether fiat or decentralized) to win.
Storj:
Storj’s aim is to make it possible for users to rent out their excess
hard drive space in exchange for the crypto STORJ. Users could therefore
also use Storj to rent additional hard drive space.
These are
only a handful of different dapps all running on the Ethereum platform.
What really stands out with dapps is how their founder are able to
“raise” real capital by selling tokens. Whereas traditional apps have to
seek outside investment or IPO, a dapp can simply “ICO” and raise the
capital they need to build their company. While this removes friction
from the financing processes, it has unfortunately also made it possible
for many sub-par dapps to ICO and take advantage of eager speculators.
For more dapps, check out the
State of the Dapps. You find some
upcoming ICOs here.
Ethereum vs Bitcoin: Continued
Now
that you have a decent understanding of what Ethereum is and how it
functions, it’s useful to revisit how it compares to Bitcoin at a
technical level.
While the two cryptocurrencies serve different purposes, Ethereum provides a number of benefits over Bitcoin:
- Shorter Block Times
– On Ethereum, blocks are mined roughly every 15 seconds compared to
Bitcoin’s 10-minutes rate. This shorter time allows the blockchain to
more quickly start confirming transaction data, although it also means
more orphaned blocks.
- More Sophisticated Fee Structure
– Ethereum transaction fees are based off storage needs and network
usage. Bitcoin transactions are limited by block size and compete with
each other.
- More Sophisticated Mining – Bitcoin mining
currently requires ASICs (Application-Specific Integrated Circuits),
necessitating a large amount of capital investment to mine. Ethereum’s
mining algorithm was designed with ASIC-resistance in mind, thus
leveling the playing field and aiding in the decentralization of mining.
Ethereum
arguably currently functions better than Bitcoin as a currency. With
Ethereum, you can reliably send transactions faster,
pay lower transaction fees, and mine at a more profitable rate (although it still has its downfalls for miners).
Read: Is Ethereum Mining Profitable?
However,
Bitcoin does have a relatively more stable price—and therefore
functions as a better value storage option—from a trading and value
storage perspective. Ethereum is much younger but has covered a
substantial amount of ground in recent years. Although Ethereum
certainly shows promise as a currency, its true potential lies in
features nonexistent in Bitcoin’s code.
The DAO: Trouble in Paradise
The
most famous DAO was simply known as The DAO. The nearly identical name
causes a lot of confusion for people and gives DAOs a bad reputation.
The
DAO was a decentralized autonomous organization primarily functioning
as its own investor-directed venture capital fund. It didn’t have the
conventional management structure or board of directors, was not tied to
any particular government, and instead ran on open source code. The DAO
was set up to give funders the power to vote for which dapps deserved
investment through DAO tokens.
Dapps had somewhat of an approval process:
- Get whitelisted by reputable figureheads in the Ethereum community
- Get voted on by those who held DAO tokens
- Get an approval of 20% in the vote in order to receive a share of DAO funds they required to get started.
The
DAO is most famous for the largest crowdfunding campaign in history,
raising over $150 million in ether from more than 11,000 investors. The
DAO is also most infamous for getting hacked for $50 million. This hack
inevitably caused a split in the Ethereum community, creating what we
now know as Ethereum (ETH) and Ethereum Classic (ETC).
The
hack happened because of The DAO’s “Split Function.” Funders who wanted
to exit The DAO could use its “Split Function,” which would give them
back the ether they had invested. The only stipulation was that existing
funders had to hold their ether for 28 days before they could withdraw
them.
On June 17th 2016, an unknown person or group of people took
advantage of a lapse in the Split Function’s security with a simple
recursive function. This frustratingly easy hack allowed the hacker(s)
to repeat their request to withdraw the same DAO tokens multiple times
before the system registered it as $50 million.
The news of this
hack created chaos in the Ethereum community. While this hack had
nothing to do with the Ethereum platform and everything to do with The
DAO platform, many members of the Ethereum community were invested in
The DAO. The community as a whole had 28 days to come up with a
solution, which ended up being to “fork”—stop the current blockchain
entirely and create something new from scratch.
The new Ethereum
(ETH) is the result of the fork, and is essentially the blockchain
before the hack. The old Ethereum (Ethereum Classic – ETC) is still
running the original blockchain with the hack included.
The vast
majority of the Ethereum community including the Ethereum founders
pivoted along with ETH, with a small minority staying loyal to the
original blockchain.
Future Updates to Ethereum
The future for Ethereum is bright, but it is not without its potential uncertainty.
A
notable event on the horizon is the Metropolis hard fork that is set to
occur in late September. This hard fork indicates some major upgrades
for the platform including:
- Increased anonymity with new
zero-knowledge proofs, or “zk-SNARKs.” This means users will be able to
conduct transactions at much more secure levels of anonymity than ever
before.
- Smart contracts and programming will be much easier to work with. Gas is also going to be adjusted for bill setting.
- Masking
will increase security on the network. Users will be able to determine
the address for which they have a private key, and this will protect
them from quantum computer hacking.
- A “difficulty bomb” will be
included in the upgraded, meaning mining will become much more
difficult. This is a significant step as Ethereum transitions from
proof-of-work (PoW) to proof-of-sake (PoS).
We won’t know
how this hard fork will affect the price of Ethereum as markets could
adjust in a variety of ways. If the upgrades attract more users, the
price could rise. However, if mining becomes more difficult and slows,
the price could fall.
The next upgrade after Metropolis is referred to as Serenity, which should increase stability and
encourage more investment.
Final Thoughts
While
there is a lot of speculative interest around Ethereum, it’s important
to note that the Ethereum and dapp communities are very much focused on
building a tangible future.
Ethereum is a phenomenal application of the blockchain and has made it possible for hundreds of projects to exist.
“Blockchain
solves the problem of manipulation. When I speak about it in the West,
people say they trust Google, Facebook, or their banks. But the rest of
the world doesn’t trust organizations and corporations that much — I
mean Africa, India, the Eastern Europe, or Russia. It’s not about the
places where people are really rich. Blockchain’s opportunities are the
highest in the countries that haven’t reached that level yet.”
Vitalik Buterin, Ethereum Founder
The
primary goal of Ethereum’s founders isn’t to create a cryptocurrency
that makes speculators a ton of money; it’s to change the world. The
Ethereum community attracts ideological supporters in the same way
Bitcoin and other cryptocurrencies do, but it’s use cases give it life
far beyond that of other coins.
Want to Invest in Ethereum?
The easiest way to invest in Ethereum is by using a cryptocurrency exchange. We’ve compiled a
list of the best exchanges where you can buy Ethereum. On this page you can find key details of these exchanges, as well as links to their individual reviews and user guides.
If you’re new to the world of cryptocurrency,
Coinbase offers one of the simplest ways to buy, sell, and store Ethereum.
For those interested in regular trading, the following exchanges may be more suited to your needs:
How to Buy Ethereum
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