WTF is Ethereum?

Ethereum is the second best known blockchain after Bitcoin. So if you haven’t heard of it, it’s a pretty big deal.

Ethereum was developed by a global group of programmers including Vitalik Buterin and Dr Gavin Wood, and it first went live in 2015. The Ethereum Foundation was set up as a non-profit organisation in Switzerland to run the project.

Ethereum logo

WTF is Ethereum?

Ethereum is a public blockchain, so anyone can go online, download the whole record of transactions (the ledger) and see all the transactions happening. It was built by a group of developers who saw blockchain could be used for much more than people paying each other or buying and holding some currency (Bitcoin).

Ethereum works a bit differently to Bitcoin РI wrote about how Bitcoin works as a digital currency and a payments network here.  Ethereum is basically a platform Рit works like iOS or Android in a mobile phone and you can build different applications on top of it.

The whole thing works through the ‘Ethereum Virtual Machine’. The EVM runs the environment for the blockchain to work.

I like to visualise Deep Thought from Hitchhikers’ Guide to the Galaxy or Hal in the Space Odyssey films; the supercomputer powering the Ethereum network. But the EVM definitely doesn’t look like them and isn’t actually a physical computer, it is a virtual thing supporting the blockchain.

EVM machine

 

Characteristics of Ethereum

You can use Ethereum for loads more things than Bitcoin, because of the possibility of building applications on its platform. So you can build cryptocurrencies, like Bitcoin, but you could also build your own company and run it digitally, or create applications for verifying documents.

And that’s why Ethereum is so cool – it was the first wide-use platform using blockchain. So in the future, some of the apps you use most often on your phone could be built on Ethereum without you even realising. All the more reason to understand a bit about how it works.

The way Ethereum works is similar to the Bitcoin blockchain – it uses the system called ‘proof of work’ to add new blocks to the chain (see my article on How blockchain works for what proof of work is). The miners in the Ethereum network use their electricity to mine and add new blocks, and in return they are rewarded with ‘Ether’.

Mining hammer ether

Ether is the cryptocurrency that is used in the network in mining, and is also used by developers who build the applications on Ethereum to pay for services. So that’s why people refer to ether as the ‘crypto-fuel’, because it is used to power and maintain the Ethereum network.

The Ethereum team led by Vitalik Buterin plan to change from proof of work to ‘proof of stake’ in the near future. Proof of stake is just a different method of adding blocks to the blockchain, but it uses less electricity and is therefore more environmentally friendly and easier to scale with the system.

Ethereum is faster than Bitcoin – it can maintain approximately 14 transactions per second whereas Bitcoin only handles 7 per second. But for a payment network, this is still extremely slow – VISA can handle around 45,000 transactions per second. So there are still many developments needed before Ethereum can be used for large volumes of activity at speed.

Smart contracts

A smart contract is a piece of code that you can program to do something once something else has happened. It’s like a contract in digital form, that can be set up to run how you want and will then automatically follow those rules.

Smart contracts are only as good as the developers writing them, and it’s early days for different uses but lots of industries are getting excited about using them, for example supply chains, insurance, finance etc.

Some companies doing interesting things with Ethereum and/or smart contracts are:

Etherisc – an insurance company, the Flight Delay dapp (decentralised application) will automatically pay out insurance premiums if your flight is delayed, by checking flight information from airline companies.

Indorse – LinkedIn on a blockchain – you can create your own digital profile and get digital signatures from people in your industry to act as references proving you have certain skills

Augur – create markets around any event, people can bet on the outcome and the result is determined by the wisdom of the crowd.

ICOs

A new crazy phenomenon called an ‘Initial Coin Offering’ or ICO has sprung up this year. You’ve probably read about it in the news because it’s sending people a bit mental and they’re throwing money at it like nobody’s business.

The name is similar to an initial public offering or IPO, where a company lists on a public exchange and anyone can buy their shares.

Ethereum actually issued one of the first ICOs before the term even existed. The non-profit Ethereum Foundation created 60 million ether which was given to people who donated to what was called the ‘pre-sale’.

Companies are creating are often built on top of Ethereum. It’s become so common that there is a standardised version of the tokens called ‘ERC20’. This means anyone can build a token using the same snippets of code, and therefore the token can be used across lots of different applications. Particularly handy if I wanted to create WTFCoin, for example, and I wanted as many people as possible to be able to use it.

Big Business and private networks

It’s not just people buying tokens and ether who are getting involved in the Ethereum network. Big companies are also using the platform to build stuff. The Enterprise Ethereum Alliance (EEA) is a consortium of over 180 members including Microsoft, JP Morgan and Samsung.

Business skyline

Companies crossing industries like technology and financial services have come together under the EEA umbrella to work on developing blockchain tech using Ethereum to create private blockchain networks. Currently Ethereum is a public network, but JP Morgan has built an alternative private network built on Ethereum called ‘Quorum’ for example, where companies can execute transactions in a private group.

One day private and public blockchains might merge and function alongside each other. Then people using them could get the various benefits of privacy, speed and decentralisation together. Some say there will soon be no distinction between public v private, and that blockchains will evolve to have different levels of permissions, being both private and public at the same time.

What’s the end game?

Vitalik Buterin has said his ultimate goal for Ethereum is to scale the platform so that anyone can mine ether and support the Ethereum network on their personal laptop. He wants the transaction speed per second to get faster than VISA so that people can use the network quickly and easily for whatever applications they want.

Ethereum might not be the platform that wins out in the end as the largest or most used blockchain. But it was the first platform-based blockchain application and many other blockchain projects are building on its ideas. So knowing what it is and how it functions means you can understand how to build stuff with it, or how the applications of the future will work.

Next time that **** in the pub is trying to tell you all about the money they’re making from Bitcoin investing/mining, tell them blockchain is bigger than that and they should read about Ethereum. We haven’t even thought of all the possible things blockchain can do yet, but Ethereum and its dapps (decentralised applications) show a lot of potential.

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