Ethereum is a cryptocurrency similar to Bitcoin but with some important differences.
Origin of Ethereum
Ethereum was created by one Vitalik Buterin in 2013 and his concept was outlined in a white paper distributed to a few friends initially and then spread from there. It was announced in 2014 as a core project with a team consisting of Buterin, Mihai Alisie, Anthony Di Iorio, Charles Hoskinson, Joe Lubin and Gavin Wood. Buterin presented the concept publicly at a conference in Miami and later held a crowd sale, one of the first ICOs, to help launch Ethereum as a bona fide cryptocurrency.
What is Ethereum?
According to Wikipedia, ‘Ethereum is an open-source, public, blockchain-based distributed computing platform and operating system featuring smart contract functionality. It supports a modified version of Nakamoto consensus via transaction based state transitions.’
However it is a bit more than that. Being a decentralised system, much like Bitcoin, it is autonomous and no one single entity controls it. There is no one single point of failure and as it is run on millions of computers or nodes around the globe is not subject to a single point of failure so as long as there is an internet it will never go down. As with all blockchain platforms, the ability to hack into it is vastly reduced due to the construction of the blockchain with all nodes needing to agree on the transactions offered in a block in order for a block to be completed. Personal information is not entered on the block, it consisting of wallet keys and transaction details only. Etherum differs from Bitcoin in that it has its own blockchain with substantially improved capabilities. Importantly Ethereum is a public open sourced blockchain that is not restricted in the same way as Bitcoin but is open to developers adding more decentralised applications. In addition Ethereum provides for Smart contracts which are codes to establish business rules in a programmable language onto the blockchain and are enforced by the participants of the network. For example, the code can be established to directly interact with how money flows. Whereas a normal transaction will allows you to send money from A to B, a smart contracts can set the criteria that you can only send money from A to B, on the condition that C occurs. This improves the trust and security of any contract. The consensus rules follow these smart contracts so transactions can be performed with parties that do not necessarily trust each other. The terms of the contract are incorporated into each smart contract and once the terms are completed, the transaction is then completed.
Moreover, the system also provides its users with the Ethereum Virtual Machine (EVM), which essentially serves as a runtime environment for smart contracts based on Ethereum. It provides users with security to execute an untrusted code while ensuring that the programs don’t interfere with each other. EVM is completely isolated from the main Ethereum network, which makes it a perfect sandbox-tool for testing and improving smart contracts. The platform also provides a cryptocurrency token called ‘Ether.’
Ethereum vs Bitcoin
Although Ethereum is based on the Bitcoin Blockchain protocol it is different, some may say more ‘advanced.’ Ethereum is a cryptocurrency of course and the currency is actually an ‘ether’ which is a digital bearer asset so does not require a third party to process a payment for its completion. Ether also acts a ‘fuel’ for decentralised apps within the network. Changing something within or in one of the apps requires a transaction fee and this allows the network to process the change. The transaction fee is based on the ‘gas’ or amount of work required to effect the transaction.
Whereas Bitcoin is established as a stable currency, Ethereum is more a multipurpose platform with the Ether being a component part of smart contract applications. Another difference is that where Bitcoin is capped at 21 million coins, Ether really has no limits. Bitcoin’s average block time is usually in minutes whereas Ethereum is in in seconds. An important difference is that Ethereum is Turing complete (The ability of a computer to perform calculations that any other computer is likewise capable of) so everything can be calculated provided there is sufficient computing power, something Bitcoin does not have. The Bitcoin blockchain is used to record Bitcoin transactions. The Ethereum block chain can be used to record transactions not necessarily only of Ethereum.
The Advantages of Ethereum
The blockchain of Ethereum has been ‘tweaked’ so that applications or apps over and above money systems can be supported. As well as storing entire transactions the Ethereum blockchain also downloads the most recent status of each smart contract including the user’s balance and where it is stored. It has been described as a transaction-based state machine.
Developers are able to create and utilise or offer for use unlimited decentralised apps for the Ethereum platform. This opens the door to an improved transactional system where third parties are not required, where goods can be traced to their origin (such as in diamonds for example) and more trust between parties can be developed. Costs of transactions and verification can be considerably reduce with the use of smart contracts and the Ethereum blockchain. All prior transactions are there online and can never be removed so are available for any disputes or verification and the entire system is well protected by virtue of its structure against fraud and hacking.
Disadvantages of Ethereum
The weakness, as always, is human error such as incorrectly written code allowing exploitation. Allowing others to ‘see’ code written or private keys exposed. For example, in 2016 an error in a written code was discovered and exploited resulting in the loss of 3.6 Million Ether tokens. The attacker exploited a ‘recursive call bug’ in the code, essentially just draining the funds. So it is important when coding to ensure the code is ‘water tight’ and full security is employed with regard to private keys of accounts.
This article is for information purposes only and is not to be construed as financial information for any purposes such as investment or speculation and it is the responsibility of the reader to perform proper due diligence before acting upon any of the information provided. We recommend that you consult with a licensed, qualified investment advisor and certified accountant before making any investment decisions.