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What is Ethereum? — The Ulti­mate Begin­ners’ Guide

What is Ethereum?


Ethereum is an open-source blockchain-based plat­form that essen­tial­ly enables hun­dreds of decen­tral­ized cryp­tocur­ren­cies and projects to be built and deployed exist with­out hav­ing to build their own blockchains.

With the sec­ond largest mar­ket cap in the cryp­tocur­ren­cy world, Ethereum has drawn a lot of atten­tion from investors and cryp­to enthu­si­asts alike.

Ethereum not only presents a sig­nif­i­cant change to the sta­tus quo, it also allows for the quick devel­op­ment and deploy­ment of new appli­ca­tions pre­sent­ing niche solu­tions for var­i­ous indus­tries.

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 world-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:

Dr. Gavin Woode, Ethereum Co-FounderBit­coin 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 tech­nol­o­gy 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 isa data­base with no cen­tral serv­er that keeps track of every trans­ac­tion and exchange. The vast major­i­ty of cryp­tocur­ren­cies and decen­tral­ized projects run on some appli­ca­tion of blockchain.
  • We’ll jump into decen­tral­ized apps—referred to as dapps–in greater detail lat­er, but just know they are appli­ca­tions that serve a spe­cif­ic pur­pose to a user. Fas­ten your seat­belts, some of these dapps are amaz­ing.

Ethereum’s appeal is that it’s 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:

  1.    Com­pen­sate the min­ing full nodes that pow­er its net­work. This keeps things run­ning smooth­ly at an admin­is­tra­tive lev­el.
  2.    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. Buterin became a co-founder of Bit­coin Mag­a­zine and a lead­ing writer for the pub­li­ca­tion. Buterin cur­rent­ly serves on the Edi­to­r­i­al Board of Ledger.  As a peer-reviewed schol­ar­ly jour­nal, Ledger pub­lish­es orig­i­nal research arti­cles on cryp­tocur­ren­cy and blockchain tech­nol­o­gy.  The pub­li­ca­tion shows inter­est in any top­ics relat­ing blockchain to math­e­mat­ics, com­put­er sci­ence, engi­neer­ing, law, and eco­nom­ics.

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.

Ethereum’s Found­ing Team

The core Ethereum found­ing team in 2014 con­sist­ed of Vita­lik Buterin, Mihai Alisie, Antho­ny Di Iorio, and Charles Hoskin­son, addi­tion­al­ly attract­ing the atten­tion of Joseph Lubin to join the team. Lubin moved on to found the now near 1,000-employee Brook­lyn-based “ven­ture pro­duc­tion stu­dio” Con­sen­Sys.

Rumored to be one of the top buy­ers in the Ethereum crowd­sale, Lubin, who had been fund­ing Con­sen­Sys with his stash of Bit­coins, says he began sell­ing some of his Ethers last year to fund the firm’s devel­op­ment

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.

Ethereum’s Chal­lenges and Ini­tia­tives

Han­dling finan­cial trans­ac­tions alone presents huge­ly com­plex prob­lems in terms of reli­a­bil­i­ty and secu­ri­ty.  And since the Ethereum net­work com­pris­es a gen­er­al pur­pose blockchain that han­dles assets oth­er than mon­ey, more com­plex chal­lenges arise beyond mere finan­cial trans­ac­tions.  Mov­ing into the future, Ethereum con­fronts issues of scal­a­bil­i­ty, ener­gy con­sump­tion, secu­ri­ty, pri­va­cy, and decen­tral­iza­tion.

Beyond Mon­ey

As a gen­er­al pur­pose blockchain, Ethereum needs a mech­a­nism to rep­re­sent assets oth­er than mon­ey.  The ERC-721 stan­dard has been cre­at­ed to trans­act unique items of val­ue.  The ERC acronym stands for Ethereum Request for Com­ment and pro­vides a for­mal process for the Ethereum Foun­da­tion to improve its prod­uct.  The ERC-721 stan­dard orig­i­nal­ly drove the devel­op­ment of the high­ly suc­cess­ful Cryp­toKit­ties col­lectibles, but it allows for the rep­re­sen­ta­tion of any dig­i­tal asset.

Casper The Friend­ly Final­i­ty Gad­get

Any blockchain relies on a trust­wor­thy, fair, secure, and reli­able con­sen­sus pro­to­col for plac­ing trans­ac­tions onto the sys­tem.  Like Bit­coin, Ethereum uses a Proof of Work (PoW) approach, but the Ethereum blockchain plans to imple­ment a Proof of Stake (PoS) algo­rithm.

Ethereum casper

The Casper final­i­ty gad­get imple­ments PoS as an inde­pen­dent mod­ule.  As an inde­pen­dent mod­ule, Casper lives on top of the cur­rent PoW sys­tem, mak­ing the Ethereum net­work a hybrid sys­tem of both PoW and PoS.  Also as an inde­pen­dent mod­ule, this allows the PoW por­tion of the net­work to be removed at a lat­er date.

The Casper PoS pro­to­col uti­lized game the­o­ry incen­tives to main­tain the integri­ty of the sys­tem.  It also pro­vides ben­e­fits of greater secu­ri­ty and reduces the mas­sive ener­gy con­sump­tion required by PoW min­ing.

Scal­ing the Heights

Scal­ing presents a great chal­lenge for Ethereum, as it does for oth­er blockchains.  Scal­ing defines a system’s abil­i­ty to han­dle a large and grow­ing work­load with­out show­ing strain or stress to the sys­tem.  Think of this both as a system’s pow­er and effi­cien­cy to com­plete tasks and also as a user expe­ri­ence chal­lenge. If a user waits too long for a response after click­ing a but­ton, frus­tra­tion results, and users give up on the sys­tem.

The web con­front­ed this prob­lem in the ear­ly days as well.  In the first web appli­ca­tions, every action a user took on a web page result­ed in the entire page hav­ing to be reloaded from the serv­er and ren­dered again on the client’s brows­er.  Web 2.0 came along, intro­duced the abil­i­ty to refresh only the rel­e­vant part of the page, and respon­sive user inter­faces became the norm on the inter­net.

Vita­lik Buterin on Scal­ing

Vita­lik Buterin iden­ti­fies scal­ing as a pri­ma­ry con­cern that needs to be addressed in blockchain tech­nol­o­gy.  He made the fol­low­ing com­ments in Sep­tem­ber 2017 in an inter­view with Naval Ravikant at the Dis­rupt SF 2017 con­fer­ence.

Bit­coin is cur­rent­ly pro­cess­ing a bit less than three trans­ac­tions a sec­ond; and if it goes close to four, it’s already at peak capac­i­ty. Ethereum over the last few days, it’s been doing five a sec­ond.  And if it goes above six, then it’s also at peak capac­i­ty. On the oth­er hand, Uber on aver­age — 12 rides a sec­ond, Pay­Pal — sev­er­al hun­dred, Visa — sev­er­al thou­sand, major stock exchanges — tens of thou­sands.  And if you want to go up to IoT, then you’re talk­ing hun­dreds of thou­sands…”

The New Blood of Plas­ma Bring­ing Fresh Life To the Net­work

What the Light­ning Net­work brings to Bit­coin, Plas­ma brings to Ethereum.  Joseph Poon (the cre­ator of the Light­ning Net­work pro­to­col) and Vita­lik Buterin joint­ly design and archi­tect Plas­ma.

Efforts like Light­ning and Plas­ma ease stress on the net­work by tak­ing work offline to a side chain.  Users engage in mul­ti­ple trans­ac­tions over time on a chan­nel on the side chain with­out uti­liz­ing the main blockchain at this point.  After a num­ber of trans­ac­tions com­plete, the final state of these trans­ac­tions moves over to the main blockchain as a sin­gle trans­ac­tion with a sin­gle fee.  Mul­ti­ple inter­ac­tions to process there­by reduce to a sin­gle action on the blockchain, con­se­quent­ly reduc­ing strain on resources and improv­ing scal­a­bil­i­ty.

Swim­ming With the Shards

Com­put­er sci­ence boils down to the art of putting some­thing some­where, then retriev­ing it when you want it.  Stor­ing only what you require in a man­ner that makes retrieval sim­ple and ele­gant, and retriev­ing only what you need, and doing it all as quick­ly as pos­si­ble defines effi­cien­cy.  Shard­ing presents a tech­nique for stor­ing data in an effi­cient man­ner to improve retrieval.  And effi­cien­cy deter­mines scal­a­bil­i­ty.

Shard­ing basi­cal­ly defines ways to break data into sep­a­rate pieces and store them sep­a­rate­ly.  Con­se­quent­ly, you only have to deal with the small piece con­tain­ing the data you are inter­est­ed in and not wade through every piece of data con­tained in the entire sys­tem.  Data­base tech­nol­o­gy has long uti­lized shard­ing to increase scal­a­bil­i­ty, and now the Ethereum Foun­da­tion research­es how shard­ing can improve blockchain tech­nol­o­gy.

Raiden of the Lost Ark

Sim­i­lar­ly, Raiden also presents side chain capa­bil­i­ty sim­i­lar to Light­ing and Plas­ma.  Raiden is not a project of the Ethereum Foun­da­tion but a prod­uct of an inde­pen­dent com­pa­ny.

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.

Will the Real Killer App Please Stand Up

While Bit­coin pro­vides a net­work for finan­cial trans­ac­tions, Ethereum aspires to pro­vide a plat­form for decen­tral­ized appli­ca­tion devel­op­ment.  Ulti­mate­ly, a pro­gram­ming plat­form requires good appli­ca­tions built on it to be tak­en seri­ous­ly. Cryp­toKit­ties gained pop­u­lar­i­ty for a while, but we con­tin­ue to wait and see how well Ethereum serves as a foun­da­tion for appli­ca­tion devel­op­ment.

Quartz asked Vita­lik Buterin “What decen­tral­ized apps do you find inter­est­ing? on Sep­tem­ber 14, 2017.  He answered as fol­lows:

There are a few cat­e­gories that are flour­ish­ing already. Some of them are var­i­ous finan­cial appli­ca­tions, finan­cial con­tracts, deriv­a­tives, things like Mak­er. Games are anoth­er one. In the non-finan­cial space, iden­ti­ty ver­i­fi­ca­tion is get­ting to be a big one. With pre­dic­tion mar­kets, Augur and Gno­sis are going to be fair­ly suc­cess­ful. Also in the not-quite finan­cial space there’s an inter­est­ing thing called Akasha. It’s an Ethereum-based forum that uses ether-based cryp­tocur­ren­cy mech­a­nisms to man­age things like upvote and down­vote and spam pre­ven­tion.”

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.

what is golem gnt

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.

Check out our Golem Beginner’s Guide.

what is augur

AugurAugur’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 pow­er­ful pre­dic­tive data for vir­tu­al­ly any indus­try. Pre­dic­tion mar­kets are more accu­rate at fore­cast­ing than indi­vid­ual experts, tra­di­tion­al opin­ion polling, and sur­veys.

Check out our Augur Beginner’s Guide.

what is civic

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.

Check out our Civic Beginner’s Guide.

omisego (OMG)

OmiseGOOmiseGO 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.

Check out our OmiseGO Beginner’s Guide.

what is storj

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.

Check out our Storj Beginner’s Guide.

For more dapps, check out the State of the Dapps.

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:

  1. 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.
  2. 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.
  3. 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:

  1.    Get whitelist­ed by rep­utable fig­ure­heads in the Ethereum com­mu­ni­ty
  2.    Get vot­ed on by those who held DAO tokens
  3.    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).

Ethereum Classic

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.

dao hack

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 Long Road of the Future

Soft­ware nev­er stops chang­ing until peo­ple stop using it.  The Ethereum Foun­da­tion fol­lows a roadmap of future mod­i­fi­ca­tions and enhance­ments to the sys­tem.  No sys­tem ever runs fast enough, so scal­ing con­tin­ues to devel­op.  Pri­va­cy remains para­mount, and research into zero-knowl­edge proofs con­tin­ues.  Decen­tral­ized sys­tems demand con­stant atten­tion to secu­ri­ty.  Many aspects of the future remain unknown.  Some new and pop­u­lar appli­ca­tion not yet on the mar­ket may well demand new capa­bil­i­ties from the sys­tem.  As the world changes, Ethereum con­tin­ues to evolve.

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:

  1. 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.
  2. Smart con­tracts and pro­gram­ming will be much eas­i­er to work with. Gas is also going to be adjust­ed for bill set­ting.
  3. 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.
  4. 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, 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.

How to Buy Ethereum

The eas­i­est way to buy 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:

Arti­cle first appeared on Coin­cen­tral

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