The founder of Ethereum, Vitalik Buterin, published the Ethereum whitepaper back in November 2013. In this paper, Buterin showed the unlimited potential of blockchain technology (BT). He recognized that Bitcoin essentially offers only one particular application of BT, a peer to peer electronic cash system that enables online payments, and approached the problem completely differently.
The paper describes a public blockchain system in which network every node runs a special type of Virtual Machine backed by a Turing complete programming language, called Ethereum Virtual Machine (EVM). Therefore, it simplifies a process of making blockchain applications in a way that instead of having to build an entirely original blockchain for every new application, engineers can develop thousands of different decentralized applications, also known as Dapps, on the same platform. As a matter of fact, one could say that Bitcoin is actually a Dapp.
Ethereum introduces the concept of Smart contracts. Substantially Smart contract is just a phrase used to describe a computer code that runs on EVM. It is a self-operating computer program that automatically executes when specific conditions are met. Furthermore, it runs on the blockchain and as a result of that, there is no possibility of third-party interference or fraud.
Despite the fact that smart contracts are meant to make the network fault-proof, hey can only be as good as the people writing their code. There is always room for human error, and any mistake in the code might get exploited. If that happens, there is no direct way to stop a hacker attack or exploitation of said mistake.
Ethereum uses a Proof-of-Work (POW) consensus algorithm. In a POW system, miners validate transactions by performing computational work i.e. by solving mathematical problems.
Miners work to earn Ether which has a double purpose:
- it is used as a tradeable cryptocurrency and,
- Dapps developers use it to pay for transaction fees and services on the Ethereum network.
In addition, there is a second type of token, called gas, and it is used to pay miners fees for including transactions in their block. As far as smart contracts are concerned, every smart contract execution requires a certain amount of gas to entice miners to put it in the blockchain.
Moreover, Ethereum is making preparations to transit to the Proof-of-Stake (POS) consensus mechanism. In the POS system, ‘miners’ are chosen depending on the number of coins they choose to stake.
Contrary to POW, there are no block rewards in a POS system and ‘miners’ rely on two forms of rewards:
- transactions fees and,
- interest on staked coins.
One of the main reasons for these transitions is that POW algorithm is extremely energy-inefficient, in other words, it requires huge amounts of electricity in the mining process. Ethereum is also a great tool for building Decentralized Autonomous Organizations (DAO). A DAO is fully autonomous, decentralized organization with no single leader.
It consists of one or a collection of smart contracts which code is designed to replace the rules and structure of a traditional organization. It operates completely transparently and independently of any human intervention. Everyone who purchases tokens is considered as an owner of DAO.
Last but not least, Ethereum is used as a platform to launch other cryptocurrencies. Ethereum Foundation defined two standards, an ERC20 token standard which developers can use to issue their own versions of tokens and raise funds with an initial coin offering (ICO), and ERC721 token standard which the main purpose is tracking unique digital assets. In conclusion, what is most promising about Ethereum is the fact that any services that are centralized can be decentralized using it.