Well, you certainly DO know how to find your way around the Internet, don’t you? It’s no wonder you’ve accessed this article, your online searching skills are topnotch. Don’t worry though, I;m not just flattering you for the sake of it, you have definitely come in the right place. You were looking for some piece of information written in plain English that could make you understand what this mystic thing called Ethereum is all about right?
Even if you come up with this link by accident, you can count yourself lucky, because you struck gold.
No, no, my blog isn’t a gold mine by any means, Ethereum is or at least has the potential to be one in no time.
By the way, do NOT dare to think you are too late just because you saw how the price of Ether skyrocketed in the first half of 2017. That was just the beginning and luckily for you, you are in the right place, at the right time.
And if you do not believe me, allocate at least several minutes of your time to read the next lines to find out more about this mystery thing called Ethereum. No prior bitcoin or specialized IT knowledge is required, what you are about to read is written in plain English and is fairly easy to understand.
Obviously, it won’t hurt if you check my What Is Bitcoin? article first and learn a thing or two about the digital currency that started it all. Without Bitcoin, most probably Ethereum wouldn’t have existed. How come? Because Ethereum is basically a major upgrade of Bitcoin as you’ll see in the next few lines.
Bitcoin vs. Ethereum
From my What Is Bitcoin? article (haven’t you read it yet?), you may know that Bitcoin was created in 2008 by some unknown person or group with the alias Satoshi Nakamoto. The first bitcoins were mined in January of 2009 by most likely Nakamoto himself (or is it themselves?)
In the following years, many tried to create their own version of digital currency, yet most if not all of them were basically copycats of Bitcoin and didn’t bring any major breakthroughs in the newly-created industry. However, in late 2013, a Russian-Canadian programmer named Vitalik Buterin signaled the need of a different kind of Bitcoin.
Buterin argued Bitcoin needed a scripting language for the ongoing development of the technology. It was like in the early days of the modern computer: computers were only accessible to math geeks and rocket scientists but when programming languages like C appeared, this whole new science suddenly became much more accessible to a wider audience. So, basically, just for the sake of understanding what Buterin meant to say, Bitcoin was a rigid technology with no mainstream accessibility whatsoever. The development of a programming language like C was needed in order for Bitcoin to succeed even further.
But Buterin didn’t reach any agreement with the community, so instead he decided to create a new project from scratch with the help of a Swiss-based company Ethereum Switzerland GmbH. That’s how Ethereum was born.
Ethereum – A Worldwide Programmable Computing Platform
At first glance, Ethereum isn’t much different compared to Bitcoin: it is based on the same blockchain technology proposed initially by Nakamoto (for more info about this topic see Blockchain Explained) and it is mined in a similar way – the specialized users who invest in computer hardware and electricity compete to solve a puzzle, whoever solves it first adds a block of transactions into the blockchain and gets a reward (5 Ether).
Yet, Ethereum is something more than just a big database, a ledger of transactions shared among the users of a network. Thanks to Buterin’s ingenuity, he took the blockchain technology one step further and turned it into a worldwide computing platform with all its resources distributed within a giant network. This computing platform is highly programmable meaning that it isn’t just used for storing transactions but also for creating and hosting applications.
You can think of the Ethereum platform as a new Internet with no centralized hosting servers, but countless computers joining forces and helping maintaining the network. On this new Internet, different applications can be created like Facebook, Instagram, Google Drive, marketplaces like Google Play, games, etc.
Ethereum And Smart Contracts
The most common applications however, commonly used nowadays and the backbones of the Ethereum platform are the so-called smart contracts.
A smart contract is nothing more than a program that self-executes if certain conditions are met. In plain English, it is a digital contract that runs its course without the need of a third party – just like in the case of Bitcoin where the hard code is basically the mint, in Ethereum’s case, the hard code represents the law, the authority (think of escrow) entitled to run the contract between any two parties.
As an example, think of a coffee vending machine. When you want a coffee from a coffee vending machine you initiate a smart contract. You get the coffee IF and ONLY IF you insert a coin in the vending machine. IF and ONLY IF is the condition required for the smart contract to run its course.
Obviously, if you already inserted the coin, you can’t get your coin back. That is why a smart contract is immutable, meaning once executed you can’t change the conditions and will execute as initially programmed. This situation raises problems that cannot be solved the same way as in real life, when a third party ‘takes care’ of your contract. The smart contract doesn’t have flexibility so like in the coffee vending machine situation, there will be situations when you insert the coin but you don’t actually receive anything.
ERC20 Tokens and Initial Coin Offerings or ICOs
Such situations happened in the Ethereum network during the already-notorious Initial Coin Offerings or ICOs. Nevertheless, it wasn’t the smart contract’s fault. The smart contract did exactly what it was programmed to do; the ones who programmed (the actual persons behind the projects) were actually at fault. Or, in some other cases, the one who accepted the smart contract even though there were some obvious signs the coffee vending machine wasn’t working properly.
And this leads us to another functionality the Ethereum platform has: creating your own tokens. Indeed, anyone, given a certain budget of course, can create a token or coin based on the Ethereum platform. This coin must be compliant with a set of rules called the ERC20 protocol thus the name ERC20 tokens.
As you probably have heard as of late, many created their own tokens and launched ICOs to fund their ‘ingenious’ idea. And this is why Ether skyrocketed in the first place, in 2017. Everyone wanted to raise funds through this new, unregulated, and fairly simple crowdfunding method. Just create a number of ERC20 tokens, put them in a smart contract, and voila. Money kept pouring in and most of the investors didn’t have any idea what they were investing in. Soon a problem emerged: many of the projects funded through an ICO didn’t quite deliver so volatility started shaking the market on and on and on…
Ethereum and Decentralized Applications or DAPPs
As a result, the Ether price suffered at times and many ‘investors’ who wanted quick, hefty profits saw their dreams shattered.
Don’t worry though: for the rational, real investor like yourself who does his homework before investing in anything, the opportunity is still there. The ICO frenzy is more or less done as the wannabe investors begin to realize the danger of investing in any ICO they can find, without proper research. And this period could set the stage for the main applicability of Ethereum platform: decentralized applications or DAPPs.
That is why Ethereum was created in the first place: to help smaller projects – that don’t necessarily need their own blockchain – create useful applications without using traditional platforms like Google, Amazon or Facebook that may more or less impede their true potential (censorship, unfair revenue sharing). That is why they are called decentralized in the first place: these applications are built on the Ethereum blockchain which is a computing platform used and maintained by countless computers worldwide (not just a bunch of servers stored in one place and maintained by a handful of people who have all the power on the platform).
Expect a new boom when the DAPP frenzy begins, this time bringing real value into our world.
What is Ethereum?
Now that we explained Ethereum as best as we could, it is time for a quick sum-up meant to clarify once and for all what Ethereum is: