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A Guide to Ethereum

What is Ethereum?

Ethereum is a decentralized computing platform. You can think of it as a laptop or PC, but it doesn't run on a single device. Instead, it simultaneously runs on thousands of machines around the world, meaning that it has no owner.

Ethereum, like Bitcoin and other cryptocurrencies, allows you to transfer digital money. However, it’s capable of a lot more – you can deploy your own code, and interact with applications created by other users. Because it’s so flexible, all sorts of sophisticated programs can be launched on Ethereum.

Simply put, the main idea behind Ethereum is that developers can create and launch code that runs across a distributed network instead of existing on a centralized server. This means that, in theory, these applications can’t be shut down or censored.

What’s the difference between Ethereum and ether (ETH)?

Ethereum is the protocol itself, but the currency that powers it is simply known as ether (or ETH).

What makes Ethereum valuable?

We touched on the idea that Ethereum can run code across a distributed system. As such, programs can’t be tampered with by external parties. They’re added to Ethereum’s database (i.e., the blockchain), and can be programmed so that the code can’t be edited. In addition, the database is visible to everyone, so users can audit code before interacting with it.

What this means is that anyone, anywhere, can launch applications that can’t be taken offline. More interestingly, because its native unit – ether – stores value, these applications can set conditions on how value is transferred. We call the programs that make up applications smart contracts. In most cases, they can be set to operate without human intervention.

Understandably, the idea of “programmable money” has captivated users, developers, and businesses around the globe.

Ethereum vs. Bitcoin – what’s the difference?

Bitcoin relies on blockchain technology and financial incentives to create a global digital cash system. It has introduced a few key innovations that allow the coordination of users around the globe without the need for a central party. By having each participant run a program on their computer, Bitcoin made it possible for users to agree upon the state of a financial database in a trustless, decentralized environment.

Bitcoin is often referred to as a first-generation blockchain. It wasn’t created as an overly complex system, and that’s a strength when it comes to security. It’s kept intentionally inflexible to prioritize security at its base layer. Indeed, the smart contract language in Bitcoin is extremely constrained, and it doesn’t accommodate applications outside of transactions very well.

The second generation of blockchains, by contrast, is capable of more. On top of financial transactions, these platforms enable a greater degree of programmability. Ethereum provides developers with much more freedom to experiment with their own code and create what we call Decentralized Applications (DApps).

Ethereum was the first of the second-generation wave of blockchains and remains the most prominent one to date. It bears similarities to Bitcoin and can perform many of the same functions. Under the hood, however, the two are very different, and each has its own advantages over the other.

What was The DAO and what is Ethereum Classic?

With Ethereum, entirely new ways of open collaboration over the Internet have become possible. Take, for instance, DAOs (decentralized autonomous organizations), which are entities governed by computer code, similar to a computer program.

One of the earliest and most ambitious attempts at such an organization was “The DAO”. It would have been made up of complex smart contracts running on top of Ethereum, functioning as an autonomous venture fund. DAO tokens were distributed in an ICO and gave an ownership stake, along with voting rights, to token holders.

Not long after its launch, however, malicious actors exploited a vulnerability and drained almost a third of the DAO’s funds. It’s worth bearing in mind that, at that time, 14% of the entire ether supply was locked up in the DAO. Needless to say, this was a devastating event for the still-fledgling Ethereum network.

After some deliberation, the chain was hard forked into two chains. In one, the malicious transactions were effectively “reversed” to restore the funds – this chain is what’s now known as the Ethereum blockchain. The original chain, where these transactions weren’t reversed, and immutability was maintained, is now known as Ethereum Classic.

The event served as a harsh reminder of the risks of this technology, and how entrusting autonomous code with large amounts of wealth can backfire. It’s also an interesting example of how making collective decisions in an open environment can pose significant challenges. Overlooking its security vulnerabilities, though, The DAO perfectly illustrated the potential of smart contracts in enabling trustless collaboration on a large scale over the Internet.

What is Ethereum 2.0?

For all of its potential, Ethereum currently does have considerable limitations. We have already discussed the issue of scalability. In short, if Ethereum aims to be the backbone of the new financial system, it needs to be able to process a lot more transactions per second. Given the distributed nature of the network, this is an immensely difficult problem to solve, and Ethereum developers have been thinking about it for years.

For one thing, to keep the network sufficiently decentralized, limits must be enforced. The higher the requirements to operate a node are, the fewer participants there will be, and the more centralized the network becomes. So, increasing the number of transactions that Ethereum can process could threaten the integrity of the system, as it would also increase the burden on the nodes.

Another criticism of Ethereum (and other Proof of Work cryptocurrencies) is that it’s incredibly resource-intensive. In order to successfully append a block to the blockchain, they must mine. To create a block in this manner, though, they must rapidly perform computations that consume huge amounts of electricity.

To address the above limitations, a major set of upgrades have been proposed, collectively known as Ethereum 2.0 (or ETH 2.0). Once fully rolled out, ETH 2.0 should greatly improve the network’s performance.

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