When learning about cryptocurrencies, the first logical step is to study bitcoin, since it was the first decentralized digital currency and the original use of blockchain technology. The very next step should be to learn what is, since it has been the blockchain protocol where developers and entrepreneurs can build decentralized financial applications.
While it’s different from bitcoin in many ways, Ethereum shares some aspects in common. For one, both of them address the democratization of the Internet in some way. With bitcoin, it is digital payments and ‘Internet money’. With Ethereum, it’s the democratization of apps in a way that disrupts the way we use the Internet.
Both the Bitcoin and Ethereum Networks are distributed public blockchains, meaning they are run by a network of users and servers throughout the world. But Ethereum is distinct in that it provides a building environment that developers can use to create unique blockchain applications.
What is Ethereum and How Does it Work?
In the simplest of terms, Ethereum is an open-source software platform based on blockchain technology. It enables developers and tech teams to build apps upon it. These apps are decentralized, so they are commonly referred to as DApps.
Smart contracts on the Ethereum platform are programmable, self functioning agreements that allow startups to create DApps for exchanging digital assets, such as content or crypto tokens. What smart contracts enable is the automated exchange of assets to run without the risks of censorship, loss of downtime, or any outside manipulation. All of these things are the risks we take when using fiat currencies.
What is Ethereum Mining?
Miners of Ethereum run nodes with Ethereum’s software and are all part of Ethereum’s worldwide network, the Ethereum Virtual Machine. Miners who run a node participate in a Proof of Work (PoW) consensus mechanism, a programmable way to verify and process Ethereum transactions while earning newly minted ETH tokens.
July 22, 2021 Update: Ethereum is now in the process of migrating to an ETH 2.0 system where as PoW is now longer used for mining and Proof of Stake is now the consensus mechanism. Essentially, PoW means that complex mathematical puzzles must be solved by miners to win a block of transactions to verify, whereas Proof of Stake means that miners must stake a number of ETH tokens and perform certain governance tasks.
What is Ethereum used for? Creating DApps
Because of the open-source nature of Ethereum, it may remind you of Linux, which is also open-source and offers an environment where developers can build applications. Ethereum’s platform is similar, however, the software developers who create on the Ethereum platform have very distinct capabilities:
- To run applications on Ethereum, users can use ether (ETH) as the “gas” or fee for transactions.
- Developers can create a new utility, platform, exchange or governance token for their app, which will be compatible with global crypto markets.
- When developing apps elsewhere, developers depend on 3rd parties to facilitate exchanges of value within that application. Think of a gaming app where you buy skins. To have money to buy some in-game accessory, you must send money from a 3rd party (a bank, and maybe a payment processor, too). With a DApp, however, the exchange values can be in terms of tokens. In the case of Ethereum, it would be ether (gas) or any other Ethereum-based token.
Example of an Ethereum DApp
To gain a better understanding of how an Ethereum
Cryptokitties built its application on the Ethereum platform. Basically, it’s a game where you can buy, own and trade uniquely designed animations of ridiculously adorable cats. The focus of this project centers on the fact that these tradeable cats are blockchain assets. The more unique and scarce they are, the higher their perceived value is as an asset.
How you use ether
Miners of the Ethereum Network mine ether cryptocurrency (and earn it) by processing transactions for DApp users. Owners of Cryptocats use ether to buy, sell and trade. Whenever they take part in any one of these activities, miners deal with the transaction.
How it’s decentralized
No central authority can remove or change a Cryptokitties asset once you’ve created one. Additionally, these ERC-721 tokens are decentralized because a network of nodes running the EVM accomplishes the transaction
How it’s 3rd party-less
There is no 3rd party necessary with the ownership of Cryptokitties assets. Just as you would with other crypto coins, you hold the seed phrase and maintain the ownership of your digital assets. Owners of Cryptocats can trade these assets on the Ethereum network.
Additionally, their scarcity (which may increase value) does not have to be verified by an outside agency. For each of these assets, the scarcity details are written right into the code. Lastly, a 3rd party could be present to enable a fiat purchase of ETH to use in Cryptokitties. But it is not necessary. Ether can simply transfer from one wallet holding ETH directly to your Cryptokitties wallet.
The Philosophy Behind Ethereum
According to the white paper, the following five design principles are at the heart of the Ethereum Network:
- Simplicity: The idea is to make the ecosystem simple to use for the average programmer.
- Universality: The scripting language and smart contract technology used by Ethereum enable developers to enjoy a full range of creative potential.
- Modularity: Ideally, the protocol allows developers to make small modifications while the application stack continues to function. Originating from the idea of benefiting the whole network with eath new
DApp, this system encourages usability among developers.
- Agility: Basically, the protocol itself can adapt and is not set in stone. When opportunities to scale or increase security arise, the Network can take advantage of them for the benefit of all users.
- Non-Discrimination and Non-Censorship: Regardless of the types of DApps created with the Ethereum Protocol, they will not face restriction or censorship. Any regulations with the Network will focus on avoiding harm to the system.
What the Ethereum platform has brought to modern-day business is the ability for limitless creativity within a decentralized ecosystem. This cryptocurrency-fueled Network uses smart contracts to automate and secure the exchange of value in almost any business scenario.
While bitcoin invites us all to participate in a peer to peer, global system of money, Ethereum creates the World Computer which developers anywhere can use to create the next generation of computer applications.
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