Ethereum is a decentralized blockchain platform that, in addition to peer-to-peer transactions, is also a platform for application development. The idea for Ethereum came from the Bitcoin white paper. Also with Ethereum, there is no central authority that stores and processes data – the blockchain uses the collective power of thousands of computers scattered around the world.
One of the important functions of Ethereum is that it allows the creation of decentralized, independent applications on its blockchain. In this way, new cryptocurrencies and companies can take advantage of the power of the Ethereum network, while they can largely set up their product independently. The Ethereum network has its own cryptocurrency called Ether – also known by its abbreviation ETH. ETH can be used to complete transactions and is also one of the most traded cryptocurrencies.
Who is the creator of Ethereum?
Ethereum was created by a Russian-Canadian developer named Vitalik Buterin . As an author for a blog about Bitcoin, he learned a lot about the technical side of blockchain. He was already interested in Bitcoin in 2011 , and saw that certain aspects of the code could be improved. For example, he felt that the Bitcoin code did not offer enough options for developing standalone apps on the network.
In 2013, Buterin, who lives in Toronto, distributed a document describing Ethereum. He forwarded the setup to a group of people with a shared interest in Bitcoin and blockchain – claiming to receive feedback and tips about weaknesses in its setup. However, those suggestions were not forthcoming. Several other programmers were added to the team to further develop the concept. The group went in search of investment partners to make the project a reality.
Initially, Anthony Di Iorio was the financial backer behind the project. Not much later, Buterin came into contact with banker and entrepreneur Joe Lubin , who also lived in Toronto. Lubin became the main investor, while Buterin became the main responsible for technical development. The Russian Canadian is still closely involved in the development of the Ethereum network.
Transactions with Ethereum
The Ethereum code makes it possible for all participating parties, also known as ‘nodes’, to communicate and collaborate effectively. This eliminates the need for an overseeing party to control data: instead, each computer stores a copy of the most recent information. As mentioned, this basic concept (blockchain technology) is borrowed from Bitcoin. Transactions can only go through if every node has the same information. In other words, the nodes must match. To achieve that, the Ethereum network uses a process called mining, which is also inspired by the Bitcoin network.
In this process, the nodes use their computing power to solve a computer equation. The node that finds the solution first then creates a new block and adds it to the chain of blocks – the blockchain. A block is a collection of transactions and mutations that have taken place on the blockchain.
When a miner has solved the equation, the transactions within the block are approved and the nodes receive an updated version of the information. As a reward for that work, the miner receives a number of Ether (ETH) tokens for each block. That principle is much the same as with Bitcoin (BTC). However, in the near future, the developers want to adapt this mining process within the Ethereum network to a so-called Proof-of-Stake (PoS) mechanism.
From PoW to PoS
With Proof-of-Stake , there is no longer a race between computers to be the first to solve an equation. Instead, the size of one’s “investment” determines how much influence that node gets within the network.
In simpler terms, the larger one’s share (the more ETH in possession), the more say the respective node gets in the validation of transactions. The rationale behind this is that those with the largest share in the network also have the greatest interest in a fair and effective system. They will therefore have reason to complete transactions as quickly and properly as possible. Malicious users such as hackers will not be able to gain enough share in the network to allow bad transactions to continue. This leaves those nodes with a dilemma: either they have to invest more in the network to gain more say, or their fraudulent transactions are repeatedly rejected by those with the highest stakes.
In addition, network nodes in this mechanism work with each other (instead of against each other) to validate transactions. Mining is by definition a competition between multiple computers all trying to solve the same equation. Every attempt is largely a failure – except for the miner who created the new block. The other miners have invested the same amount of energy but have not received any reward for it. In effect, their energy is wasted. This is one of the reasons why the Bitcoin network consumes so much electricity and why transactions take a minimum of 10 minutes to send.
With PoS mechanisms, the process is much faster and requires a fraction of the energy. As it were, all the ‘votes’ of the nodes are added together until a high enough share of the validators approves a block. Thus, it is no longer a race and nodes do not have to invest a large amount of electricity. Each node receives some sort of interest payment on the deposit. This provides the motivation to hold ETH tokens for network nodes.
What are smart contracts?
A smart contract is actually a list of conditions that must be met before a transaction can take place. The main difference between smart contracts and other types of contracts is that an action takes place automatically when a smart contract is fulfilled. Therefore, smart contracts are very useful on blockchain platforms, where no one can change information and/or conditions on their own. In this way, smart contracts can be used for countless actions without a person having to make a decision about it. In this way, very reliable systems can be created that act quickly and virtually error-free. For that reason, the Ethereum network also offers the possibility to set up smart contracts.
dApps on the Ethereum blockchain
Since the launch of Ethereum, hundreds of decentralized applications (dApps) have been built on the Ethereum blockchain. The possibilities for these kinds of apps are in fact endless: the code gives application makers complete freedom. One of the successful Ethereum dApps is 0x, a decentralized exchange for tokens on the Ethereum blockchain.
Other examples include Augur (REP), a software that can provide accurate market predictions, and Basic Attention Token (BAT) , which is used within Internet browser Brave to compensate users for advertisements. The browser has a built-in BAT wallet that allows users to build credit by viewing selected advertisements.
Maker (MKR) is one of the largest projects on the Ethereum blockchain. Maker allows users to complete international payments with peer-to-peer transactions, among other things. All of these examples are very standalone products and services that do not require users to own ETH tokens. Nevertheless, they are backed by the Ethereum blockchain, which is more powerful and secure than a small, standalone chain.
From the hundreds of dApps that have been developed for Ethereum, it appears that Buterin was right: Bitcoin is a great concept, but developers want as much freedom as possible when creating a new product. Ethereum makes that possible, while the security of the network does not suffer. Partly because of this, Ethereum quickly grew into a leading player in the crypto market, and has been the largest altcoin by market capitalization for a year and a half.
How do I get ETH?
There are now countless exchanges and brokers where you can buy ETH tokens. In recent years, many providers have introduced increasingly customer-friendly payment methods and interfaces. In the Netherlands, for example, there is Bitvavo , where customers can easily purchase their cryptocurrencies with iDEAL and credit card. Also, Bitvavo offers a wallet service for account holders where they can keep their crypto currencies.