/What is Ethereum?

What is Ethereum?

This article presumes you have at least heard of the term ‘Ethereum’ or ‘Eth’ and perhaps even ‘Smart Contract’. At very least, we hope you’ve heard of Bitcoin. If not though, the internet? If so, let’s start there as it sets us up for a quick Ethereum 101 class.

As the internet is today, people can store all sorts of information on different servers. In fact, highly personal data from passwords to financial information are actually in the hands of strangers’ computers. Of course most of these are highly protected with digital security, but essentially you’re putting your trust in a central place for your data. This is what we call ‘centralisation’.

Now, of course a lot of these central locations are run by highly respectable organisations that if something should happen to the data there would be an immediate backlash and effect on the company’s profits, but of course there is a large amount of vulnerability still at play – hackers or even government entities could still possibly access your data, or human error, lack of backup and regulation, or simply a company just implodes.

Enter blockchain – a place where data isn’t stored on one entity’s computer but spread around so many people’s computers that it remains literally impossible to delete or access without your permission (technically called a signature). Now, Bitcoin was the first major digital currency that took advantage of this. OK, officially it wasn’t but let’s go with it for sake of understanding as it’s certainly the most prominent. Try and see it as a decentralised version of PayPal. Instead of payments being processed through PayPal’s server, relying on their central business model and code to process the payment accordingly, payments are made across a decentralised network, which involves trusting no central entity, hence the term ‘trustless’ in the world of blockchain. However, for this to be feasible, the technical mechanics behind it would have to be flawless and operate independently from human intervention. Another way to put it, is that there has to be something contractually binding to ensure one Bitcoin goes from one address to another successfully. And this exists, and is coined as a ‘smart contract’.

The term was actually originally used by Nick Szabo in the early 1990s. He used a very simple example of putting money into a vending machine in order to receive a drink. Here, the contract is ‘you pay $X to this machine and you will receive Y goods’. And it’s ‘smart’ because this contract is integrated into the software and hardware of the machine, not needing any human interaction. So pretty simple so far.

So back to Bitcoin, the transaction between one peer and another peer is another small version of a Smart Contract: ‘This transaction gets confirmed X times on the blockchain and it will go through’. However, that’s where the contracts pretty much end for Bitcoin. On Ethereum though, we enter a whole new level of smart contracts.

Before that though, let’s outline what exactly the vision of Ethereum is. If we see Bitcoin as aiming to disrupt the centralised practices of online banking, then we can see Ethereum as the fighter against all internet third parties – you know, those that store data, transfer your mortgage and basically keep track of everything you do on the internet centrally. In a nutshell, Ethereum has aimed ‘to be the world’s decentralised computer’, and its advocates go so far as to say it could eventually democratize or even replace the traditional user-private server model.

Quite simply, the vision is, as servers and clouds are replaced by thousands of ‘nodes’ i.e. different people, it would provide the same functions to absolutely anyone in the world without having to depend on any one centralised entity. To do so though, we’d have to have the ability to create many different types of applications on it, and we do – those smart contracts!

Vitalik Buterin was the co-founder and inventor of Ethereum and first talked about it in a white paper in 2013. His argument was that as powerful as Bitcoin was, there needed to be a scripting language in order to produce more applications using blockchain. This wasn’t accepted easily by peers, so instead he decided to create his own platform and language – Ethereum.

Ethereum allows anyone to build smart contracts on the blockchain, and these contracts can of course have a certain value and as with standard contracts, certain things can only be unlocked if certain conditions are met.

As Ethereum is open-source and public i.e. anyone can access it, and as it’s a blockchain, then it’s opening up a world where anyone can create a smart contract that has no middle-man or centralised entity governing it. Essentially, a smart contract is nothing but a bit of code put on the blockchain but it’s guaranteed that it will work exactly the same for anyone who runs it. In fact, to make or use an Ethereum smart contract, all you really need is an internet connection. Can you imagine how this could threaten (or as we say ‘disrupt’) giant financial systems that depend on many centralised entities to govern and ensure things are done their way?

Now, as this ability to code smart contracts is now available, the possibilities are simply endless, limited only by a developer’s creativity or skill. Smart contracts have been used to build a monumental amount of decentralised applications (called dApps), and these can include games, digital collectibles, voting-systems, and recently decentralised finance products including loans and interest capabilities.

So where does the price of Ethereum come in? Well, using Ethereum isn’t free. You have to purchase ‘gas’ in order to use it, otherwise known as Ether. So with the simple theory of supply and demand, the more applications running on Ethereum, the more the demand. And this seems to be exponential.

Even today, in 2020, there is a rise in demand of developers for Ether. Conglomerates and big businesses such as Microsoft or JP Morgan are turning to Ethereum to create customised blockchain models, and many new blockchains have bloomed from the technology behind it. And the price has indeed followed.

The price of Ethereum is now around $200, which is a surge of 2400% from conception, reaching an all-time high of $1800 in 2018. It’s market cap now stands at $18.5 billion. Will the price and adoption continue?

This remains to be seen. Eth 2.0 is due to be released, and while we won’t explore it in detail here, it’s said to be more scalable, more flexible and will indeed more accessible. However, as with all successful ideas, there are many competitors springing up across the board, which ironically have used the technology and vision of Ethereum but could in the end perhaps outpace it as they target specific niches with bigger teams. Whatever the state of play will be though, no-one can deny how Ethereum has shaken up and taken digital currency possibilities to new levels, and we are still so very, very early on!