Ethereum Fundamentals (1/6)

Beginner Level

Contents

What is Ethereum?


Ethereum is a decentralised computing platform. You can think of it like a laptop or PC, but it doesn’t run on a single device. Instead, it simultaneously runs on thousands of machines around the world, meaning that it has no owner.

Ethereum, like Bitcoin and other cryptocurrencies, allows you to transfer digital money. However, it’s capable of a lot more – you can deploy your own code, and interact with applications created by other users. Because it’s so flexible, all sorts of sophisticated programs can be launched on Ethereum.

Simply put, the main idea behind Ethereum is that developers can create and launch code which runs across a distributed network instead of existing on a centralised server. This means that, in theory, these applications can’t be shut down or censored.



What’s the difference between Ethereum and ether (ETH)?


It might be unintuitive, but the units used in Ethereum are not called Ethereum or Ethereums. Ethereum is the protocol itself, but the currency that powers it is simply known as ether (or ETH).


What makes Ethereum valuable?


We touched on the idea that Ethereum can run code across a distributed system. As such, programs can’t be tampered with by external parties. They’re added to Ethereum’s database (i.e. the blockchain ), and can be programmed so that the code can’t be edited. In addition, the database is visible to everyone, so users can audit code before interacting with it.

What this means is that anyone, anywhere, can launch applications that can’t be taken offline. More interestingly, because its native unit – ether – stores value, these applications can set conditions on how value is transferred. We call the programs that make up applications smart contracts . In most cases, they can be set to operate without human intervention.

Understandably, the idea of ‘programmable money’ has captivated users, developers, and businesses around the globe.


What is the blockchain?


The blockchain lies at the heart of Ethereum – it’s the database that holds the information used by the protocol. If you’ve read our article What Is Bitcoin?, you’ll have a basic understanding of how a blockchain works. The Ethereum blockchain is similar to Bitcoin’s, although the data it stores – and the way it stores it – is different.

It helps to think of Ethereum’s blockchain as a book that you keep adding pages to. Each page is called a block, and it’s filled with information about transactions. When we want to add a new page, we need to include a special value at the top of the page. This value should allow anyone to see that the new page was added after the previous page, and not just inserted into the book randomly.

In essence, it’s a bit like a page number that references the previous page. By looking at the new page, we can say with certainty that it follows from the previous one. To do this, we use a process called hashing.

Hashing takes a piece of data – in this case, everything on our page – and returns a unique identifier (our hash). The odds of two pieces of data giving us the same hash are astronomically low. It’s a one-way process, too: you can easily calculate a hash, but it’s virtually impossible for you to reverse the hash to get the information used to create it. We’ll get into why this is important for mining in a later chapter.

Now, we have a mechanism to link our pages together in the correct order. Any attempt to change the order or remove pages will make it apparent that our book has been tampered with.

Want to learn more about blockchains? Be sure to check our beginner’s guide to blockchain technology. (end of July)



Ethereum vs. Bitcoin – what’s the difference?


Bitcoin relies on blockchain technology and financial incentives to create a global digital cash system. It has introduced a few key innovations that allow the coordination of users around the globe without the need for a central party. By having each participant run a program on their computer, Bitcoin made it possible for users to agree upon the state of a financial database in a trustless, decentralised environment.


Bitcoin is often referred to as a first-generation blockchain. It wasn’t created as an overly complex system, and that’s a strength when it comes to security. It’s kept intentionally inflexible to prioritise security at its base layer. Indeed, the smart contract language in Bitcoin is extremely constrained, and it doesn’t accommodate applications outside of transactions very well.

The second generation of blockchains, by contrast, is capable of more. On top of financial transactions, these platforms enable a greater degree of programmability. Ethereum provides developers with much more freedom to experiment with their own code and create what we call Decentralized Applications (DApps).

Ethereum was the first of the second-generation wave of blockchains and remains the most prominent one to date. It bears similarities to Bitcoin and can perform many of the same functions. Under the hood, however, the two are very different, and each has its own advantages over the other.


How does Ethereum work?


We could define Ethereum as a state machine. All this means is that, at any given time, you have a snapshot of all the account balances and smart contracts as they currently look. Certain actions will cause the state to be updated, meaning that all of the nodes update their own snapshot to reflect the change.


A transition in Ethereum’s state.


The smart contracts that run on Ethereum are triggered by transactions (either from users or other contracts). When a user sends a transaction to a contract, every node on the network runs the contract’s code and records the output. It does this by using the Ethereum Virtual Machine (EVM), which converts the smart contracts into instructions the computer can read.

To update the state, a special mechanism called mining is used (for now). Mining is done with a Proof of Work algorithm, much like Bitcoin’s. We’ll get into more depth on this shortly.


What is a smart contract?


A smart contract is just code. The code is neither smart, nor is it a contract in the traditional sense. But we call it smart because it executes itself under certain conditions, and it could be regarded as a contract in that it enforces agreements between parties.

Computer scientist Nick Szabo can be credited with the idea, which he proposed in the late 1990s. He used the example of a vending machine to explain the concept, stating that it could be viewed as a precursor to the modern smart contract. In the case of a vending machine, there is a simple contract being executed. Users insert coins, and in return, the machine dispenses a product of their choosing.

A smart contract applies this kind of logic in a digital setting. You could specify something simple in the code like return ‘Hello, World!’ when two ether are sent to this contract.



In Ethereum, the developer would code this so that it can later be read by the EVM. They then publish it by sending it to a special address that registers the contract. At that point, anyone can use it. And the contract can’t be deleted unless a condition is specified by the developer when writing it.

Now, the contract has an address. To interact with it, users just need to send 2 ETH to that address. This will trigger the contract’s code – all the computers on the network will run it, see that the payment has been made to the contract, and record its output (‘Hello, World!’).

The above is perhaps one of the most basic examples of what can be done with Ethereum. More sophisticated applications that connect many contracts can – and have – been built.


Who created Ethereum?


In 2008, an unknown developer (or group of developers) published the Bitcoin whitepaper under the pseudonym Satoshi Nakamoto. This permanently changed the digital money landscape. A few years later, a young programmer called Vitalik Buterin envisioned a way to take this idea further and apply it to any type of application. The concept was eventually fleshed out into Ethereum.

Ethereum was proposed by Buterin in a 2013 blog post entitled Ethereum: The Ultimate Smart Contract and Decentralized Application Platform. In his post, he described an idea for a Turing-complete blockchain – a decentralised computer that, given enough time and resources, could run any application.

In time, the types of applications that could be deployed on a blockchain would be limited only by the developers’ imaginations. Ethereum aims to find out whether blockchain technology has valid uses outside of the intentional design limitations of Bitcoin.


How was ether distributed?


Ethereum launched in 2015 with an initial supply of 72 million ether. More than 50 million of these tokens were distributed in a public token sale called an Initial Coin Offering (ICO), where those wishing to participate could buy ether tokens in exchange for bitcoins or fiat currency.


What was The DAO and what is Ethereum Classic?


With Ethereum, entirely new ways of open collaboration over the Internet have become possible. Take, for instance, DAOs (decentralised autonomous organisations), which are entities governed by computer code, similar to a computer program.

One of the earliest and most ambitious attempts at such an organisation was ‘The DAO’. It would have been made up of complex smart contracts running on top of Ethereum, functioning as an autonomous venture fund. DAO tokens were distributed in an ICO and gave an ownership stake, along with voting rights, to token holders.

Not long after its launch, however, malicious actors exploited a vulnerability and drained almost a third of the DAO’s funds. It’s worth bearing in mind that, at that time, 14% of the entire ether supply was locked up in the DAO. Needless to say, this was a devastating event for the still-fledgling Ethereum network.

After some deliberation, the chain was hard forked into two chains. In one, the malicious transactions were effectively ‘reversed’ to restore the funds – this chain is what’s now known as the Ethereum blockchain. The original chain, where these transactions weren’t reversed, and immutability was maintained, is now known as Ethereum Classic.

The event served as a harsh reminder of the risks of this technology, and how entrusting autonomous code with large amounts of wealth can backfire. It’s also an interesting example of how making collective decisions in an open environment can pose significant challenges. Overlooking its security vulnerabilities, though, The DAO perfectly illustrated the potential of smart contracts in enabling trustless collaboration on a large scale over the Internet.



Next Chapter : What Is Ethereum? (2/6)

-> Where does ether come from


Source : Binance

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