Contrary to popular misconception, Bitcoin isn’t the only application of blockchain technology. One would also have thought that with all the furore going on about blockchains, it would be something only accessible to experts with resources and knowledge in computer coding, mathematics, and cryptography.
For a while, that was true. For a while.
Ever since its inception in 2015, Ethereum has been providing a gateway to the masses to harness the power and potential of blockchain technology. Consequently, it has become a rising star in the crypto-sphere and has been placed second after Bitcoin in terms of market capitalization.
Before Ethereum, developers were restricted with the cryptocurrency functionality and operations of blockchains. This is where whiz-kid Vitalik Buterin put together a new and grander approach to the solution (and that too, at the tender age of 19!): Instead of having to build entirely new blockchains for different purposes and usages, why not build one platform to cater to all?
Expanding on the capabilities of Bitcoin, Ethereum is an open-source software that runs on a custom-built blockchain.
Just like Bitcoin, the Ethereum ecosystem is composed of thousands of nodes. Miners validate information across blocks to earn Ether, a native cryptocurrency that fuels the network. Ether is created at a rate of 5 Ether per mined block.
And, similar to Bitcoin, miners also follow the ‘Proof-of-Work’ consensus methodology to verify and secure the information on the blockchain. (There are rumors out and about that Ethereum might switch to a different mining process: ‘Proof-of-Stake.’ This would require miners to put their own ‘coins’ at stake. Validating of a fraudulent block which would result in them losing their holdings.)
However, Ethash is the hashing algorithm employed in the Ethereum network (this requires GPU power/ greater memory in order to prevent an Application Specific Integrated Circuit (ASIC) monopoly). Miners find a block in about 12 seconds; the less or more time it takes to do so, the algorithm automatically readjusts the difficultly levels accordingly. In addition, Ethereum has an unlimited supply as opposed to Bitcoin’s limited supply of 21 million coins. Conveniently, Ethereum offers an Ethereum Wallet service to secure Ether and other crypto-assets.
The best part about Ethereum is that it enables developers to build their own decentralized applications(DAPPs/ Dapps). Ethereum supplies developers with the tools that combines control, flexibility, and ease to power projects through blockchains.
A decentralized application (DAPP), as the name suggests, is an open-source application not owned by a single entity, has an inbuilt consensus mechanism, and incentivizes the validators of the blockchain. In a nutshell, a DAPP eliminates the need for a middle-man and commission fees, by allowing for a more direct communication.
The underlying technology behind the success of DAPPs is the use of ‘smart contracts.’ The idea traces its roots back to 1996 and to Nick Szabo, a computer scientist and cryptographer. Smart contracts are simply scripts of self-operating codes that run exactly as programmed. These are used to automatically facilitate the exchange of value (be it money, property, shares, assets or content) when specific conditions are met or ‘triggered.’
Simply put, smart contracts execute “if/then” statements. For instance, funding a project can employ a smart contract. If the project fails, then the money is refunded to all the investors. Ethereum uses this example to also aid a trustless crowdsale without requiring a central arbitrator to take care of the funds.
Smart contracts are written in a special language called Solidity. Since these contracts are held on the blockchain they are by their very essence distributed and tamper-proof. Thus, the implementation of smart contracts delivers superior security and low transaction costs, as compared to traditional contracts. Without the hassles or risks of downtime, fraud, censorship, or interfering third-parties, smart contracts makes execution of tasks exceptionally fluid.
But, while decentralized applications seems a pretty neat idea, it’s the conception of a Decentralized/ Democratic Autonomous Organization (DAO) that takes the potential of Ethereum to a new level. Through the Ethereum blockchain network, DAOs are run on a computer code that employs a collection of smart contracts. These replaces the structure of traditional organization structures to bring a transparent and decentralized control. A DAO is owned by anyone who purchases a token, which gives the person voting rights.
Now, here’s where things get more interesting.
Back in 2016, an idea for a startup project aptly titled ‘The DAO’ aimed to create a human-less capital firm using smart contracts. The DAO was funded through a token sale, and successfully raised around $150 million dollars. However, like the unsinkable Titanic, the unthinkable happened. A hacker found a loophole in the smart contract, and working within the confines of the code itself, was able to siphon a massive chunk of the money away! This wasn’t just a loss for The DAO, but as a consequence, the users’ trust in Ethereum also suffered. After much debate, it was agreed to executing a fork to bring back the funds (and, subsequently confidence in Ethereum). However, the decision was rather controversial and set Ethereum down on dangerous paths. This was because rewriting the code went against the core principles of blockchains: Immutability. As a result, Ethereum split into two- Those who agreed with the fork followed Ethereum, and those who didn’t, followed Ethereum Classic.
This also highlights the drawbacks of smart contracts. The code is only as good as the people who write them. Mere oversights or bugs can cause the entire infrastructure to tumble down. Ether too, is prone to fluctuations in stock market value.
While Ether works as a tradable cryptocurrency, it also forms a payment method for services and resources offered by Ethereum; each action costs a certain amount of gas based upon how much computational power and time it will take to run the action. One can also create tradable tokens with/ without a fixed supply that can represent a digital assets, a share, or a proof of membership. To make the tokens compatible with wallets supporting Ether, and to ensure functionality on the network, Ethereum also came up with a list of guidelines and rules called as the ERC-20.
The backbone of the Ethereum blockchain network is the ‘Ethereum Virtual Machine’ which is operated with the Turing Complete software. This enables users to efficiently and securely build, as well as test, blockchain applications regardless of the programming language used.
The future does seem bright for Ethereum. From healthcare to academic, to insurance and governance- the possibilities are unimaginable and endless. The platform has garnered attention from industrial giants and corporations, while others also see it as a tool to decentralize the Internet- The way it was meant to be. Still some, predict its impending doom. All in all, Ethereum has been rightly called as the ‘world computer.’