Ethereum is a decentralized software platform (open-source) based on blockchain technology. It enables the creation and execution of so-called smart contracts and decentralized applications (dApps), which we can execute without the influence and control of third parties.
Ethereum is an open-source software platform that focuses on dynamic and decentralized computing. The own cryptocurrency that this system uses is called Ether (ETH).
Ethereum deals with a so-called Blockchain. And thus on the same technical foundation as Bitcoin. However, Ethereum is not a pure cryptocurrency but serves extended functions such as smart contracts as a decentralized ecosystem for blockchain projects of all kinds. Hence, Ethereum can also describe as an open protocol or kit for decentralized applications. More details and backgrounds in the further course of the article.
Our comprehensive article on the blockchain will understand what the blockchain is and how it works.
Ethereum is the alternative to the classic client-server concept, which is widespread on the Internet. Data is stored centrally on servers of large Internet companies or in the cloud and requested and accessed by various devices as required. As is usual for blockchain technology, the data with Ethereum is distributed decentrally on devices worldwide and is publicly visible and traceable. It ensures data integrity and builds Ethereum and the data practically forgery-proof.
Ethereum has its cryptocurrency: Ether or ETH. It is a digital currency that plays similarly to the most popular example Bitcoin and is suitable for payments within the network or as an investment. The Ethereum blockchain now provides the basis for countless other cryptocurrencies that emerged from so-called “Initial Coin Offerings” (ICOs) and are known as ERC-20 token “are implemented on the Ethereum blockchain.
What are cryptocurrencies?
In our comprehensive Articles about cryptocurrencies, you will find out what cryptocurrencies are and,
what different types there are.
Ethereum at a glance
Cryptocurrency Ether (ETH)
founder Vitalik Buterin, Gavin Wood
developer Ethereum Foundation
publication July 30, 2015
Consensus algorithm Proof of Work, soon to be Proof of Stake
Use case Infrastructure, smart contracts, DApps
programming language Go, Rust, C #, C ++, Java, Python
Blockchain size 235 GB (May 2021)
What are the advantages of Ethereum?
The big advantage of Ethereum is the programmability with which the project stands out from Bitcoin, Litecoin, and many simple representatives. Ethereum is known as “cryptocurrency 2.0”, whereby Ethereum is much more than a core cryptocurrency. The ability to coordinate Initial Coin Offerings (ICOs) for crowdfunding of projects, to program a wide variety of decentralized applications (dApps), and to build smart contracts (intelligent contracts) based on Ethereum is what makes the technology so special.
Application examples for Ethereum
Thanks to its programmability, Ethereum provides a particularly wide range of uses and applications. With the support of ICOs, dApps, Smart Contracts, and Defi, The options range from raising capital to simple everyday applications and games to revolutionizing the financial industry and using blockchain technology to bring an entire industry into the digital age.
ICOs – Initial Coin Offerings
Especially in the early days after its publication in mid-2015, it used Ethereum for Initial Coin Offerings (ICOs). There was a real gold rush mood among investors and technology-loving users. But what is an initial coin offering? It is a kind of crowdfunding, with which companies or projects raise capital from many individuals to finance their company or their project. An ICO is therefore very reminiscent of an Initial Public Offering (IPO) or a classic IPO. In return, there are no shares for the investment in an initial coin offering, but coins or tokens – which is why an ICO often calls to as a “token sale.”
A key difference between ICO and IPO: While an IPO on the stock exchange is subject to strict regulations, ICOs are largely unregulated. It offers advantages but also creates a certain degree of uncertainty for investors. There was certainly fraud and, as a result, total losses among investors.
Ethereum itself emerged from an ICO. In 2014 the project raised money for the development – a total of around 18 million US dollars – and in return gave investors the first generated units of their internal cryptocurrency Ether. Their value has increased massively in the years after the first issue. And made the ICO a success for many investors.
In the meantime, the Ethereum ecosystem is often the foundation of new ideas and projects in the blockchain area. A wide variety of projects collect ethers as financing and, based on smart contracts, issue their tokens implemented on the Ethereum blockchain in return. Prominent and successful examples of such ICOs are the Chinese blockchain platform. And cryptocurrency NEO, which goes to the open-source web browser “Brave,” belonging to Basic Attention Token (BAT) as well as the Binance Coin (BNB) of the well-known Chinese Crypto exchange Binance.
dApps – Decentralized Applications
Decentralized Applications, or dApps for short, are also part of Ethereum. As the name suggests, dApps are not executed on a central server but distributed across the entire network, which defines Ethereum. Due to the decentralized architecture, these programs are censorship-resistant and therefore cannot switch off.
The possible uses of dApps are huge, and since Ethereum and other crypto projects are comparatively young technologies, the possibilities are hardly imaginable. In the first few years after the development of Ethereum as a programmable platform for decentralized apps, many dApps were created, including simple games and serious applications from health, social affairs, and finance.
DeFi – Decentralized Finance
Many projects based on Ethereum take care of Decentralized Finance(De Fi) and aim to revolutionize the financial sector. De Fi stands for services in the financial sector that are completely decentralized and run without a mediator. Borrowing, for example, can be made possible for everyone. Decentralized finance projects are:
- based on a blockchain
The goal of many De Fi developers is the digitization; and democratization of various financial products using the Ethereum blockchain. The projects ranged from simple, stable coins to gold investment solutions and issuing and investment platforms to crypto payment services that enable fast and inexpensive cryptocurrencies.
Compared to traditional financial services, decentralized finance solutions offer many advantages. All processes are digital and automated using smart contracts. In contrast to normal banks, weekends and opening times are irrelevant – De Fi applications are available around the clock. Eliminate the Middlemen & their fees, which lowers the costs of transactions. Thanks to the decentralized, predominantly unregulated structure, there are no access restrictions for people in developing countries or people who ordinary banks reject. Concerning decentralized finance and thus the banking of the future, Ethereum and similar platforms offer enormous potential.
Decentralized Finance (Defi) definition in simple terms
In our Article about De Fi, you will find out everything about De Fi and why decentralized systems are heralding the future of the financial world.
Insurance, sports betting, and more
The special properties of ICOs, dApps, and Smart Contracts and the high flexibility of the programmable crypto platform make Ethereum universally applicable. There are no limits to developers’ imagination, which is why Ethereum is conceivable for a wide variety of industries and projects.
The digitization and automation of the insurance industry are conceivable. With the help of simple if-then functions, one can realize numerous insurance benefits. A private pension or life insurance could be paid out automatically without manual intervention or middleman upon reaching retirement age.
The use of dApps and smart contracts for sports betting is also conceivable and, in some cases, already implemented. As soon as the correct result applies, the tokens pay automatically, and the tipper gets a reward.
The Internet of Things is another huge topic that Ethereum has solutions for. Parking meters or locks that automatically register incoming payments and release parking spaces or access points are conceivable.
Important areas of application of Ethereum and Smart Contracts:
- Financial transactions & capital market
- Real estate: land register entries, notarial services, crowd investing, etc.
- Political elections and voting
- Energy industry
- Logistics & supply chains
- Health care (health history)
- Personal details / identity
- Internet of Things
- and much more
How does Ethereum work?
Ethereum is the name and broad-spectrum term for the decentralized and programmable crypto platform developing since 2013. But how does Ethereum work in detail?
Like classic cryptocurrencies, a decentralized network or a system spread worldwide without a central server structure. The Ethereum blockchain forms the familiar database with which all network members- nodes and clients – tasks.
A copy of the blockchain with every transaction and data is in stalk in parts ( light nodes ) or full ( full nodes ) on all participating clients and continuously updated. Mining nodes take over the “mining,” i.e., confirm transactions and thus also generate new units of the internal cryptocurrency ether.
Smart contracts are a very crucial and indispensable part of Ethereum. These are digital contracts achieved in the Ethereum network and automatically execute as soon as the agreed amount of Ether (ETH) receives or another condition is met.
In practice, it works like this: An interested party transfers the required amount of ETH from their Ethereum wallet to the specified ETH address. The smart contract automatically registers the incoming payment with the correct amount, enters it in the public and decentralized blockchain, and releases the corresponding consideration in the form of tokens, features, services, or other goods.
The big advantage: You no longer need a mediator. Everything works transparently, comprehensibly, and automatically according to the if-then principle. With its many copies distributed to clients around the globe,
the blockchain, in which every transaction is practically forgery-proof, ensures the security of both sides concerning manipulation.
What are smart contracts?
In our Articles about smart contracts, you will receive interesting information about the functionality and advantages of smart contracts.
Ethereum Virtual Machine (EVM) and gas
Smart contracts are programmed in the Solidity programming language, translated into bytecode, and executed on the Ethereum Virtual Machine (EVM).
The virtual machine is a vital part of Ethereum and forms the basis for executing smart contracts. The Ethereum Virtual Machine (EVM) is the runtime environment for dApps and other components of Ethereum that works separately from the blockchain. The EVM forms an additional intermediate level that takes on important security functions. The EVM protects the network against DDoS attacks, prevents access to third-party smart contracts, and is also a secure test environment for Ethereum developers.
For the execution of the programmed code in the Ethereum Virtual Machine (EVM) runtime environment, so-called “gas” is due as payment. Each command to execute in the EVM costs a certain amount of gas. So gas is the fuel with which Ethereum works and, in principle, is very similar to the transaction fees for Bitcoin and other cryptocurrencies.
The price of gas fix in “Gwei.” Gwei is the smallest unit of Ether – 1000000000 gwei match 1 ETH. At least 4 Gwei are due, but it is advisable to pay a higher price. Like the Bitcoin transaction fees, the gas pays the speed with which the transaction is processing, verified, and executed by the miners. The better a transaction pays for, the higher the reward. And thus the interest of the miners in realizing the execution quickly. If the amount of gas is too low, a transaction may get stuck and get significantly delay.
Ethereum wallets usually have functions that automatically calculate the gas price and, in addition to the minimum price, offer the option of paying the optimal gas price for a quick transaction with one click.
In common with many simple cryptocurrencies, it is creating new units or coins through mining – that is, the “prospecting” of ETH.
In Ethereum mining, similar to Bitcoin, transactions are made valid by miners. It is currently mainly done through pure computing power based on the proof-of-work principle.
Similar to Bitcoin, the transactions are summarized in blocks, added to the existing blockchain, and validated using the calculation of cryptographic tasks and the creation of a hash. For solving the tasks, i.e., for validating the transactions stored in the block and thus the secure continuation of the blockchain, the miners receive a reward in the form of newly generated ethers.
To increase their opportunities for success, miners form so-called “mining pools” and share the reward. In the beginning, Ethereum mining was attractive to everyone and even possible with gaming graphics cards. In the meantime, however, professional mining rigs with several interconnected graphics cards and, above all, a very low electricity price are necessary to operate Ethereum mining profitably.
However, that could change in the future as Ethereum is to switch from the proof-of-work algorithm (PoW) to the proof-of-stake algorithm, or PoS for short. The proof-of-stake process does away with the immense computing power required for PoW mining. Instead, the generation of new blocks and thus also the distribution of the reward determine energy-saving. And environmentally friendly manner based on the respective share in the network.
Further development of Ethereum
Ethereum is a living project, and development has not standstill. It started in July 2015 as a beta in the “Frontier” phase. Frontier should form the basis and the framework for it and the associated main functions – i.e., lay the foundation for the entire project. The implemented proof-of-work algorithm was and created the base for important components such as dApps and smart contracts.
The second phase of development followed in March 2016: “Homestead. “With Homestead, developers especially troubleshooting attended to eliminate problems, optimizing processes and safety for all involved increase.
The third phase, “Metropolis,” objects to make Ethereum fit for everyday life and the masses. Metropolis creates end consumers and everyday use, and Metropolis also brings light clients with it. Light customers save users from downloading and saving the entire blockchain, several hundreds of gigabytes in range. With so-called “zk-SNARKs, “Metropolis has an innovation in its baggage that enables unidentified transactions.
The fourth & final development phase of Ethereum is named “Serenity” and intends to implement the change from the PoW to the PoS algorithm and be the basis on the way to “Ethereum 2.0”.
The future- From Ethereum to Ethereum 2.0
The up-gradation of Ethereum continues all the time. The developers are working intensively on “2.0” – an improved and future-proof form with which some existing problems should be a thing of the past.
Ethereum 2.0 not only includes the change to the proof-of-stake algorithm and thus the introduction of energy-saving and resource-saving staking, but also the introduction of a new virtual machine or runtime setting called eWASM.
Ethereum founder Vitalik Buterin shared a guideline and thus enabled a look at his vision of Ethereum for the next few years. The implementation of Ethereum 2.0 expects to take five to ten years and categorize into six phases.
The beginning point is phase 0, in which Ethereum reverses to the proof-of-stake algorithm and, in the course of this, also starts the new beacon chain required for this. In connection with this, there is also a new token as a reward for stakeholders: ETH2. In later phases, so-called shard chains for optimal scalability of Ethereum and introducing the new virtual machine, which should provide even more options for developers and their projects, will follow.
Risks and challenges with Ethereum
Due to its programmability and the associated application scenarios, Ethereum is definitely one of the most complex and complicated crypto projects. And that brings with it problems. In the worst case, It becomes a platform for specialists and “nerds” and, due to its complexity, does not leap into people’s everyday lives, which is necessary for sustainable success.
Many critics also doubt simple things. Such as sports betting and sales contracts and even more complex projects relating to insurance, decentralized finance. And implementation of e-government as smart contracts based on Ethereum.
What is important is the trust of people who want to rely on their contracts programming securely. And, accordingly, executed reliably. The “scams” that still occur frequently in the crypto scene keep making headlines. And therefore, a problem for almost all crypto platforms and cryptocurrencies.
It is still missing a real “killer app.” An application scenario for everyone that convinces with the advantages of the blockchain. The special functions of Ethereum and the necessary security.
Ethereum: future and forecast
Regardless of critics and the challenges that undoubtedly exist, Ethereum is certainly one of the most interesting crypto projects. Ether accordingly a cryptocurrency with great potential – this became clear in early 2018 when an ETH was worth more than 1000 euros.
The great advantages of Ethereum include its great popularity in the crypto scene. Numerous active developers use it as the basis for their projects and tokens. And, last but not least, further active development. Vitalik Buterin and other makers did not stop their work after the start of Ethereum in mid-2015. But continue to push their project forward with new developments.
With Ethereum 2.0, the platform should build finally build for the future and even more applications in the coming years. The true potential of Ethereum and Ether will only become clear over time. Perhaps the “killer app” with which Ethereum makes it into the life of the masses is already in development. And will help ETH’s course into new spheres in the future.
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