Ethereum is the hottest new use of blockchain technology, but the innovation is still young, having launched only two years ago. Despite this fact, use of the technology has grown fast, reaching the billion-dollar mark and gaining worldwide attention. But what is Ethereum and how does it work?
Ethereum is a network of computers, all running on the Ethereum blockchain and allowing people to exchange coins. In this way, it’s similar to the popular cryptocurrency Bitcoin. In fact, over the past couple of years, Ethereum has risen to become the second most popular digital currency in the world — second only to Bitcoin.
The structure of the Ethereum blockchain is similar to Bitcoin’s, in that it shares the record of an entire transaction history, but what makes Ethereum different from Bitcoin is different is that it features additional applications, such as “smart contracts” and “crowdfunding.”
The founder of Ethereum, Vitalik Buterin, envisioned blockchain technology that expanded outside the traditional boundaries of peer-to-peer transactions and saw something greater — an innovation that would open doors to new applications and uses, with a streamlined approach to the technology. But how?
Before the creation of the Ethereum blockchain, applications were designed to complete a limited set of operations. There was a defined limit as to what they could do. For example, Bitcoin and similar cryptocurrencies were developed to operate exclusively as “peer-to-peer currencies” and this was the only function in which they served. But developers needed something with greater functionality.
The inventor of Ethereum, Vitalik Buterin, discusses his thought process when creating this technology:
“I thought [those in the Bitcoin community] weren’t approaching the problem in the right way. I thought they were going after individual applications; they were trying to kind of explicitly support each [use case] in a sort of Swiss Army knife protocol.”
The inventor had an idea for a totally new approach. Unlike traditional blockchain applications, which were rooted in the basic function of creating and implementing cryptocurrencies, Buterin’s vision was to understand the problems in the market and develop a new use of the blockchain technologies.
One of the core innovations of Ethereum, and a large differentiator among other offerings, is the Ethereum Virtual Machine, which makes the process of creating blockchain applications easier and more efficient.
When Buterin visualized Ethereum, he imagined that instead of needing to build an entirely original blockchain for each new application, the new blockchain technology could enable the development of potentially thousands of different applications — all within a single platform. This idea eventually became the Ethereum Virtual Machine. But what is this “machine” and how does it work?
The Ethereum Virtual Machine serves as the runtime environment for “smart contracts” within Ethereum (more on smart contracts in a minute). EVM acts as a “sandbox” on an isolated network, which means that it’s isolated from other processes of the host computer system.
Every node on the network runs “EVM implementation” and executes based on a defined set of instructions. Plus, every operation that is executed within EVM is simultaneously executed by every single node within the network. This process is called “gas,” which is basically an Ethereum transaction code that triggers data reads and writes and does extensive computations. Each operation that a user completes on the network has a cost, which is measured by “gas.” Each “gas” unit is paid for using Ether, which is the coin currency of the Ethereum network.
Equally important, EVM ensures that programs do not have access to one another’s state, which ensures that communication is established without the risk of potential interference. And because EVM is isolated from the main network, it’s the perfect testing environment (which is why many refer to it as a “sandbox”).
For example, a company can generate a smart contract in EVM without negatively affecting the main blockchain operations. Most think of EVM as a learning environment to better understand Ethereum; but at its core, this technology is focused on creating a decentralized and autonomous environment.
At the core of the Ethereum technology is the Decentralized Autonomous Organization, also known as the DAO. The goal is to codify the roles within the decision making of an organization — and get rid of the need for people to govern documents. Once created, the technology governs and implements the terms outlined and coded into a contract. But how does it work? Here is a quick breakdown of the process.
Tokens contributed to the organization are essentially voting rights, and it’s important to note they are not ownership. In fact, the majority of the time a DAO is not owned by any single person or a group of people. Instead, it essentially self-runs and self-manages on the Ethereum network, as the terms of smart contracts are deployed and executed, which brings us to smart contracts. What are they and how do they work?Start mining today
The Ethereum platform is built to allow for “smart contract” creation. Developers can create these new types of contracts, known as “autonomous agents”, as one white paper called them. The language used in the contracts is called “Turing-complete” and provides a complete set of computational instructions. But you may be wondering, “What is a smart contract, how does it work and what can you do with it?” Here is a quick rundown.
Simply stated, smart contracts are programs that are executed exactly as the creator sets them up. For example, let’s say that you want to rent a house. You can set up the contract and handle payment through cryptocurrency. Once the specified amount of Ether is received, the key is released, and arrives on a specified date according to the contract.
But let’s say that the tenant pays the agreed-upon amount and the key does not arrive. The system automatically generates a refund, without requiring any user input. In contrast, if the key is sent as planned, the system releases the fee to the landlord and the key to the tenant as outlined by the contract.
The blockchain system works on a basic “if-then premise,” and is visible to hundreds of people. As a result, the delivery is designed to be transparent and flawless. Plus, the code can’t be interfered with by any party without the other’s knowledge, because all parties are alerted simultaneously. But what does an actual “smart contract” look like? Let’s look at a screenshot of an actual contract to get a sense of how these contracts are designed.
Screenshot location and credit: https://www.ethereum.org/token.
The major benefits of these smart contacts are accountability and the assurance that terms will be executed as outlined. But there are a few more benefits in the design of this technology.
Smart contracts have many benefits, which is likely why organizations such as Microsoft, Intel and Cisco have joined the Enterprise Ethereum Alliance to support this new technology. Here are a few more major benefits of these contracts:
Autonomy. There isn’t a need to rely on a third party to confirm the agreement. This reduces the danger of a third party manipulating the contract, because execution is solely managed by the network, rather than other parties who may be biased or implement the contracts with errors.
Backup. The blockchain ensures that the document is duplicated many times over, so there is no risk of losing the document.
Speed. Smart contracts use software code to automate tasks, which streamlines efficiency and helps companies implement faster agreements.
Accuracy. Smart contracts are faster and easier than traditional contracts, and are less likely to contain errors.
Are you thinking of using smart contracts? If so, it helps to understand the ways in which people are using these contracts. The uses are varied, anywhere from management to government to the supply chain to real estate. For example, let’s look at a quick real-estate example.
Let’s go back to that real-estate rental example highlighted above. Normally, if you were listing a property for rent, you’d need to pay a property manager or, at a minimum, have someone draft a contract to execute once you’ve located the right tenant. But smart contracts help to cut these costs. When it’s time to receive payment, that payment receipt is tracked on the ledger and everyone can view it. Brokers, real-estate professionals and other experts could benefit from these types of contracts.
Another example applies to the healthcare market, which is under intense scrutiny and regulation, especially around issues that concern privacy. With smart contracts, personal health records could be stored on the blockchain with a private key that would grant access only to those individuals who are authorized. Receipts for surgeries could then be stored on the blockchain and automatically sent to insurance companies for review and payment. The blockchain ledger can be used for a variety of purposes, including general healthcare management — such as supervising medications, tracking test results and much more.
Ethereum provides a new option, one that moves away from a centralized environment and to one that is more open and transparent. But this new technology does not come without flaws; mostly because codes are written by humans, so code is only as good as the people who write it.
There can be bugs in the code, which can lead to unintended actions within the system. Plus, if a code becomes problematic, there is not always an efficient method for quickly stopping an attack or exploitation of the weakness, other than obtaining network consensus and rewriting the underlying code.
For example, the DAO was hacked in June 2016. At that point, the value of Ether, which is the currency of Ethereum, had risen to over $20; a sharp increase from the start of the year. After the hacking, the price briefly dropped to $0.10, but eventually recovered to over $300 on cryptocurrency exchanges. However, the incident was not without consequences, with the hacker stealing $55 million of the virtual currency Ether from a user.
While it’s possible to stop an attack, it does often take time and quick action, and while these attacks are rare, they show how potential flaws can be exploited within the system.
Ethereum takes a fresh new look at blockchain technology by taking the fundamentals of cryptocurrency, and expanding that thinking and applying it to a larger scale. With the technology so young, we’re just now fully understanding the potential and realizing what applications could be created in the future. Yet, Ethereum and Ethereum Mining shows great potential to decentralize many of the world’s day-to-day operations through a technology that is vastly different from what’s been used in the past.
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