What is Ethereum? Here’s everything you need to know

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Ethereum stock 4

Edgar Cervantes / Android Authority

Ethereum has reigned supreme as the second-largest cryptocurrency by market capitalization for several years now. Since its release in 2015, it has promised disruption in several industries, ranging from financial services to supply chain management. Ethereum has also revolutionized the startup crowdfunding landscape, as demonstrated by single-handedly enabling the Initial Coin Offering (ICO) boom of 2017.

Unlike Bitcoin, Ethereum is not designed for the singular purpose of wealth transfer or serving as a store of value asset. Instead, it was the first to implement the concepts of smart contracts and decentralized applications. Ethereum is designed to eliminate mediators and intermediaries from just about any service you can think of — including lending, advertising, and property ownership, to name a few.

Let’s take a comprehensive look at how the underlying technology works and why the cryptocurrency community thinks it may be worth a trillion dollars or more someday.

See also: The best crypto wallets for Android

Understanding the basics

Cryptocurrencies are a relatively new technology. To that end, here are a few terms and phrases that you may come across while reading this article:

Altcoins: An altcoin is simply a colloquial or informal term for cryptocurrencies other than Bitcoin. Usage of this term has somewhat diminished in recent years. However, you may still find many in the cryptocurrency community refer to ETH and other tokens as altcoins.

Layer-2 scaling solutions: As the name suggests, second layer or layer-2 scaling solutions offer an alternative approach to boost a cryptocurrency network’s transaction capacity. In a nutshell, they move transactions off the main ledger and onto a secondary network, which is much more economical and faster. This is usually achieved at the expense of security or decentralization but can be useful anyway for small, everyday payments.

Consensus: Cryptocurrencies such as Ethereum are essentially a shared ledger spread across computers globally. In the absence of a central authority, new  transactions added to this ledger must be vetted for accuracy and validity. To ensure that only legitimate transactions are recorded, a consensus mechanism or algorithm is typically used to ensure the decision-making process is fair and inclusive.

What is Ethereum, and how does it differ from Bitcoin?

Ethereum logo on Coinbase

Edgar Cervantes / Android Authority

Like the vast majority of cryptocurrencies on the market today, Ethereum is based on blockchain technology. Just like how traditional currencies differ from each other in terms of money supply and monetary policy, no two blockchain-based cryptocurrencies are ever quite the same. The vital underpinnings of blockchain technology are all present, though — Ethereum is decentralized and trustless, just like Bitcoin.

Ethereum extended Bitcoin’s vision to decentralize the world of finance by proposing the concept of programmable contracts. Often referred to as smart contracts, these are essentially a digital agreement between two parties that is every bit as binding as a legal contract on paper.

In our day-to-day life, traditional digital contracts are omnipresent but limited in scope. For one, neither party usually has a method of enforcing the terms of the agreement. Non-compliance cannot be penalized either unless you choose to approach a mediating authority like a court.’

Smart contracts are one of the core benefits to Ethereum over other cryptocurrencies.

Ethereum-based smart contracts fix both these issues, all in a completely automated way. While Bitcoin can execute simple, smart contracts via multi-signature wallets, Ethereum’s implementation is far more powerful and robust.

Under the hood, a smart contract is actually just a piece of code that lives on the Ethereum blockchain. The code essentially looks like this: “If X happens, do Y.” Once signed by both parties, the contract is irrevocable. Blockchains are immutable and tamper-resistant, which means transactions cannot be modified once recorded. By extension, this also prevents one party from changing the terms of the contract for self-gain.

You may wonder how Ethereum solves the problem of non-compliance in digital agreements without any intermediaries or third-party intervention. The answer is pretty straightforward — you attach a monetary value to the contract in the form of ether (ticker ETH), Ethereum’s native cryptocurrency.

For instance, in the supply chain industry, a smart contract could be used to initiate a payment automatically upon receiving a shipment of goods. Another example would be an online betting or prediction platform, which can automatically and transparently dispense funds to the winner as soon as the match’s outcome is decided.

Such use-cases usually involve a bundle of smart contracts designed to work in tandem and an external oracle to know when real-world events have occurred. Without going too deep into the specifics, know that these smart contract bundles are often referred to as decentralized applications in the cryptocurrency industry.

On that note, let’s explore how Ethereum promises to or has already revolutionized various services and industries.

Decentralized Apps (dapps): The future of the Internet?

Crypto.com exchange and debit card 3

Edgar Cervantes / Android Authority

We entrust intermediaries and third parties with our data and money with seemingly every action on the Internet. Even the simple act of watching a YouTube video, for example, involves Google acting as the middleman for dispensing ads to viewers and payments to creators. In an ideal world, this relationship would be frictionless. However, accusations of bias and censorship against internet companies are commonplace these days. This has left many to question if intermediaries have too much control and power over our lives.

Decentralized applications aim to fix this problem by eliminating third parties and replacing them with transparent contracts on a blockchain. Take cryptocurrency exchanges, for instance.

Similar to a stockbroker, these platforms allow you to exchange one digital asset for another. However, many of them have lost user funds to hacks over the years, with lackluster security practices likely to blame. What’s more, they often charge exorbitant fees to deposit, trade, and withdraw cryptocurrency.

Uniswap, a popular Ethereum-based dapp, is a platform that uses smart contracts to establish the same functionality as a traditional crypto exchange minus the middleman. This means you no longer have to entrust your funds to a centralized custodian.

When you’re ready to make a trade on Uniswap, all you need to do is initiate a transfer to the provided address. Then, a smart contract will automatically release the other side of the trade. As long as the contract’s code is robust and trustworthy, the chances of you losing money is non-existent.

Ethereum dapps are also permissionless. The absence of a middleman means that no one can control or censor your transactions for any reason. In contrast, a traditional app developer or company could shut down your account or go bankrupt overnight — leaving you in limbo.

It’s worth noting, however, that not all decentralized applications or smart contracts are transparent and trustworthy. In fact, the phrase smart contract refers to the fact that the code lives on the Ethereum blockchain as machine-readable bytecode. The latter is an important distinction because the onus is on the developer to write bug-free code and later open it to audits from the community. If a project or contract is relatively unknown, you cannot trust it — just like with any other kind of app.

ERC-20 Tokens: Lowering the barrier for token development

Notably, developers can also create their own tokens on top of the Ethereum blockchain to complement their decentralized application. This means that developers of small applications don’t have to deal with the complexities of creating and securing their own decentralized network.

These tokens each have their own unique name, price, and distribution model. However, they are fundamentally smart contracts recorded on the Ethereum blockchain. The specification for such tokens was standardized back in November 2015, under the title ERC-20 (Ethereum Request for Comment 20). The name is simply a reference to the way Ethereum handles feature proposals from the public.

The Brave web browser is a popular example of this concept in action. On the…

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