Those who are just getting their feet wet in the cryptocurrency business will soon realize that Ethereum is the place to be. It rethought blockchain and showed the world that the intriguing technology could be used for more than just financial transactions.
Ethereum, which debuted five years ago, has actively advocated for a reevaluation of international monetary systems.
Decentralized finance offers a possible future for those who have been neglected by the current financial system (DeFi). To an unprecedented degree, smart contracts guarantee that every party involved in a transaction has complete and accurate information at all times.
With the advent of internet marketplaces, anyone can make a killing off of selling handmade goods.
Many problems have arisen for Ethereum. Its unique qualities that set it distinct from other cryptocurrencies have also made its market survival uncertain. Everything looks like it will work out in the end, though.
What Is Ethereum?
Ethereum is a platform for launching decentralized apps (DApps) and digital currencies on a global scale. Soon after its release in 2015, it reached the pinnacle of the digital currency industry.
According to CoinMarketCap, Ethereum is now only second in popularity after Bitcoin, with a market value above $460 billion and controlling more than 10% of the cryptocurrency industry.
Vitalik Buterin, a Russian-Canadian computer programmer and one of the founders of Bitcoin Magazine, is credited with creating Ethereum. Like Bitcoin, he envisioned a platform that would allow for financial transactions between users directly, but which would also be able to host “decentralized” applications.
Starting in January 2021, Ethereum’s price surged beyond $1,000 and hasn’t looked back since, fueled by the overall cryptocurrency market’s bullish behavior and long-awaited updates to the network.
As of this writing, Ethereum has more than 90% of the altcoin market share, making it the uncontested ruler of all cryptocurrencies.
So, Why Call It “Ethereum”?
Vitalik Buterin, developer of the cryptocurrency Ethereum, revealed on the Ethereum Community Forum that the name was derived from a science fiction novel. He had found the name when looking through a Wikipedia article on various science fiction components.
Particularly appealing to him was the use of the word “ether,” which formerly denoted the unreal material once thought to permeate space’s outskirts and make light transmission possible. In a similar vein, Buterin intended Ethereum to serve as a platform for various uses.
After months of what he called “frustrating labor” on “cryptocurrency 2.0” (or the so-called “second generation of blockchain”), Buterin initially introduced Ethereum in a white paper in 2013. This idea expands blockchain’s potential applications beyond digital currency.
The Concept’s Origin
There are a few motivations behind the creation of Ethereum. Buterin’s aversion to hierarchy is one example. The second reason was that he wanted to use blockchain for anything other than financial transactions.
Cryptocurrency 2.0 was focused on making Bitcoin better rather than using blockchain technology to develop new and useful solutions. These upgrades helped Bitcoin in a number of ways, including in terms of its privacy, its safety, and its speed.
Buterin told Wired that Bitcoin developers used a “Swiss army knife” approach to leveraging blockchain to enable various features, effectively aiming to create a new cryptocurrency from scratch. He had the idea for Ethereum because he thought blockchain technology might be used to power many interesting new applications.
And so, inspired by that flash of insight, Buterin began to draft the project’s white paper. His friends sent it to their friends, and so on. The response to the proposal on this small network was largely positive.
When Buterin presented the idea at a Bitcoin conference, the details began to come together. Developers and investors were coming up after his address to offer their assistance in getting the project off the ground.
Anthony Di Iorio, Charles Hoskinson, and Gavin Wood are just a few examples of the early developers that contributed to Ethereum. Through an Ether crowd sale, the team was able to raise the Bitcoin equivalent of $18 million to support the project. With these funds, the Ethereum Foundation was established, and it continues to guide Ethereum’s future.
Launch of the Ethereum network occurred in July of 2015. The team implemented a bug bounty scheme to perform stress tests on the network and discover security flaws in advance of the launch. After testing several variations, they settled on the “Olympic” prototype.
The DAO Event
No discussion of Ethereum’s past would be complete without mentioning the devastating DAO hack, which rocked not just Ethereum but the whole cryptocurrency sector.
To put it simply, the DAO was an autonomous, decentralized network built on the Ethereum platform. In a decentralized autonomous organization (DAO), smart contracts regulate business logic and decisions are made without any central authority.
A decentralized autonomous organization (DAO) is an organization in which all members have an equal say and the rules are publicly available on a distributed ledger. Bitshares creator and first proponent of the DAO concept Dan Larimer originally articulated the idea.
It was the DAO that kicked off the trend of decentralized organizations on the Ethereum blockchain. The Decentralized Autonomous Organization, or “The DAO,” was a venture capital fund that planned to support projects built on Ethereum. Slock.it, an early blockchain company, conceptualized and created the DAO.
In the short time since its introduction on April 30, 2016, the DAO has been a huge success in the Ethereum community, raising over $100 million in financing.
However, this vision of the DAO was cut short when a hacker stole $50 million worth of DAO tokens through a security flaw. A heated discussion broke out after the event in the Ethereum subreddit. What should be done to lessen the damage and recover the misplaced money?
Ultimately, the majority of the community voted in favor of a hard fork, a major protocol change that would require the Ethereum blockchain to split in two.
After the fork, there are now two versions of the cryptocurrency: Ethereum (which uses the more widely known blockchain) and Ethereum Classic, which uses the original blockchain.
The original version of Ethereum, known as Ethereum Classic (ETC), has been enhanced and is still tradable today. Ethereum (ETH), however, is seen by many investors as more reliable and safe. The latter is now the most extensively traded cryptocurrency and the standard for usage in smart contracts.
The fork in the Ethereum blockchain was a watershed point in the development of digital currencies. Keep in mind that Ethereum was just behind Bitcoin in terms of overall blockchain interest.
Most people don’t like hard forks since they go against the grain of consensus in blockchain procedures. Also, they often lead to discord and squabbling among blockchain users.
Those who remained loyal to Ethereum Classic held the view that any worthwhile cryptocurrency project should be able to weather the vagaries of public opinion. They saw starting a hard fork as giving in, as betraying the notion of cryptocurrencies as decentralized and immune to manipulation. Because to the Ethereum blockchain fork, the concept of cryptocurrency being unhackable is now under question.
The price of Ethereum dropped from above $20 to below $13 amid the drama.
Many Protocol Updates
Supporters of Ethereum would be happier if the project had just gotten off to a solid beginning. However, Ethereum is well-known for its developing difficulties, including scalability concerns.
Ethereum’s transaction rate has been stagnant at about 15 per second for quite some time (TPS). In order to compete with established payment systems like Visa, it would need to process much more transactions per second. When making a transaction on the Ethereum network, users and developers typically have to pay a hefty charge due to the network’s slow transaction processing times.
The Ethereum Foundation has expressed frustration with this issue. However, Buterin has stated publicly that the high transaction fees and other technological flaws were his biggest mistake in launching Ethereum (gas fees).
Ethereum’s protocol has been updated several times over the years to address these inefficiencies. Frontier is the name given to the very first protocol. There have been various revisions to the protocol since then. Some examples include the Muir Glacier and Constantinople and the Ice Age.
Ethereum 2.0 (Eth2) is the most recent and will include a complete redesign of the network. The transition from the Proof of Work consensus method to the Proof of Stake method is an important improvement.
In order to confirm and authenticate new transactions on the Ethereum blockchain, miners are required to use a consensus process called Proof of Work.
To complete this task, each miner in the network must make a series of educated guesses until one of them discovers the proper “hash,” which will provide access to the next batch of transactions. The Proof of Work technique consumes huge quantities of power due to the enormous computational power required for this guessing.
Instead of relying on computational capacity to solve an algorithm, Proof of Stake instead awards block validation privileges to network users in proportion to the number of tokens they possess. Proof of Stake is speedier (leading to faster transactions) and less energy-intensive than Proof of Work since it does not need the investment of processing resources.
Today’s Applications for Ethereum
Ethereum is the first blockchain project to really liberate the potential of the underlying technology.
Ethereum was the first to pioneer the daring experiment of decentralized apps, and now, five years later, it’s the dominant platform in this space. EVM, or the Ethereum Virtual Machine, is a component of Ethereum that facilitates the development and execution of Ethereum-based applications. Check out some of the amazing progress being made with Ethereum.
Applications that are decentralized (DApps)
The notion of decentralized apps was pioneered by Ethereum (DApps). We refer to these programs as “authorities” since they defy control by any central entity.
Compare this to the decentralized nature of social media platforms like Facebook and Twitter. Their management and control of operations are vested in the founders and boards of the respective firms. On the other hand, decentralized apps are not like this at all. To explain how:
- Having no claim to anything. A decentralized application (DApp) is permanently live on Ethereum once it has been released. An app can’t be removed if the owner decides to do so. To put it another way, the DApp you love will be there for the foreseeable future.
- Censorship-Resistant. Decentralized applications are unrestricted and immune to censorship. Do you recall when Amazon and Apple banned the social media platform Parler? The app’s failure is impossible if it was built on Ethereum.
- No Rest Period In contrast to traditional apps, decentralized ones seldom crash. DApps rely on a global infrastructure of decentralized computers. If a handful of nodes in the network fell down, the system as a whole would still be functional.
- Frictionless Payments. Users of centralized apps typically have to go through hoops before they can make a purchase. Some services are inaccessible to users who don’t have bank accounts. Built-in support for payments over the Ethereum blockchain is one of the many benefits of using DApps.
- Secure. A malicious actor would have a hard time taking down a DApp since they couldn’t feasibly target all the machines in the network. But even if they did, the cost would be so prohibitive that it wouldn’t be worthwhile.
- Immutable. The blockchain cannot be modified. They are designed to prevent data from being stolen, lost, or altered once it has been uploaded to the network. If, for instance, Facebook were built on Ethereum, neither you nor Facebook could remove your content.
Ethereum’s smart contracts are another innovative feature. To make legally binding, self-executing, and immutable agreements with other parties, an increasing number of people are turning to blockchain-based smart contracts.
All the details of a deal are stored in a smart contract. Once the terms have been satisfied, the contract will check its own validity and enforce itself.
In contrast to a traditional contract, which relies on paper and pen, a “smart contract” is entirely digital and based on a set of rules that each party must follow. The consequences for breaking the regulations outlined in the contract are also detailed here.
What makes smart contracts so revolutionary is that they allow commerce to be conducted between people who have never met and have no reason to reveal their identities. Due to the smart contract’s ability to carry out its terms autonomously and enforce compliance, there is no need for either side to rely on the other to keep their end of the agreement.
The lack of overbearing regulation by any one entity is a major plus. Not only are pricey middlemen like attorneys unnecessary, but they also add unnecessary bulk to the process.
Nick Szabo, an expert in both computer science and the law, is credited with conceptualizing smart contracts. In 1996, he coined the term “smart contracts,” which he defined as “a collection of commitments, stated in digital form.” However, smart contracts could not be deployed until blockchain technology became available.
Bitcoin may have pioneered the concept, but it lacks the functionality to implement the notion. Yes, Ethereum can. There are three key ways in which smart contracts diverge from the norm:
- Undeniable. Smart contracts require irrefutable evidence. A party to a smart contract cannot contest their participation.
- Distributed. On the Ethereum network, smart contracts are duplicated across the network of computers (or “nodes”). That contributes to their safety.
- Trustless. The participants to a transaction need not know or trust one another. Because the contract’s execution is totally automated, this is the case.
- Transparent. As a public blockchain, all entries on the Ethereum blockchain are accessible to the public. Consequently, all participants to a transaction can log in at any moment to confirm the particulars.
- Immutable. Once a smart contract is enforced, no one, not even the participants to the transaction, can alter its terms.
- Deterministic. A deterministic program consistently yields the same outcomes. There is no difference. This implies that the conclusion of a smart contract is identical across all nodes.
The principle of decentralized finance (DeFi) is that all people, regardless of race, gender, or socioeconomic background, should have equal opportunity to participate in and benefit from the global financial system. An estimated 1.7 billion individuals don’t have access to formal banking services today. That leaves you defenseless against emergencies and unable to save for better times.
By eliminating middlemen and centralized control, DeFi aspires to make finance more accessible to the general public. A connection to the Internet is all that’s required to use DeFi. It makes no difference if you don’t have identification or if you’re located in a remote area.
Smart contracts are the driving force behind DeFi, which means that users not only save money and time, but also avoid having to go through time-consuming and inconvenient identification and verification procedures in order to gain access to services.
There are no regulatory barriers to entry into the financial system, such as a bank checking your income or credit history.
DeFi is an innovative concept because it places personal financial decision-making where it belongs, with individual consumers. It removes economic authority from hierarchical systems and returns it to everyday people. In this day and age, a multi billionaire businessman in New York City has the same access to banking options as a small-town Ugandan shopkeeper.
As of May of 2021, a staggering $78 billion + is secured in DeFi. That’s a huge increase from January’s total of almost $2 billion. The DeFi industry is full of brave and inventive companies like Compound, MakerDAO, Aave, Uniswap, Curve Finance, and Synthetix.
If not for Ethereum, the cryptocurrency and blockchain industries would be flooded with imitators seeking to address perceived or actual shortcomings in Bitcoin.
The introduction of Ethereum has sparked a surge of originality and innovation. In addition, it has brought about some concrete answers to pressing issues. DeFi provides a path to financial independence for those who were excluded from mainstream banking. To improve their operations, businesses can adopt DAO-style technology and smart contracts. With Eth2, Ethereum’s return is even more impressive. The Ethereum community has high hopes for the future.