What is Ethereum? A Step-by-Step Beginners Guide
If you want to know what Ethereum is, how it works, and what it can be used for, without going deep into the technical abyss, this guide is perfect for you.
Important Note: This guide assumes a basic understanding of blockchain technology. If you’re unfamiliar with blockchain, check out this step by step introduction for beginners.
What is Ethereum? A Guide
Beyond Bitcoin & first generation decentralized applications
Although commonly associated with Bitcoin, blockchain technology has many other applications that go way beyond digital currencies. In fact, Bitcoin is only one of several hundred applications that use blockchain technology today.
“[Blockchain] is to Bitcoin, what the internet is to email. A big electronic system, on top of which you can build applications. Currency is just one.” Sally Davies, FT Technology Reporter
Until relatively recently, building blockchain applications has required a complex background in coding, cryptography, mathematics as well as significant resources. But times have changed. Previously unimagined applications, from electronic voting & digitally recorded property assets to regulatory compliance & trading are now actively being developed and deployed faster than ever before. By providing developers with the tools to build decentralized applications, Ethereum is making all of this possible.
What is Ethereum for beginners?
At its simplest, Ethereum is an open software platform based on blockchain technology that enables developers to build and deploy decentralized applications. (Buy Ethereum)
Is Ethereum similar to Bitcoin? Well, sort of, but not really.
Like Bitcoin, Ethereum is a distributed public blockchain network. Although there are some significant technical differences between the two, the most important distinction to note is that Bitcoin and Ethereum differ substantially in purpose and capability. Bitcoin offers one particular application of blockchain technology, a peer to peer electronic cash system that enables online Bitcoin payments. While the Bitcoin blockchain is used to track ownership of digital currency (bitcoins), the Ethereum blockchain focuses on running the programming code of any decentralized application.
In the Ethereum blockchain, instead of mining for bitcoin, miners work to earn Ether, a type of crypto token that fuels the network. Beyond a tradeable cryptocurrency, Ether is also used by application developers to pay for transaction fees and services on the Ethereum network.
There is a second type of token that is used to pay miners fees for including transactions in their block, it is called gas, and every smart contract execution requires a certain amount of gas to be sent along with it to entice miners to put it in the blockchain.
“Bitcoin is first and foremost a currency; this is one particular application of a blockchain. However, it is far from the only application. To take a past example of a similar situation, e-mail is one particular use of the internet, and for sure helped popularise it, but there are many others.” Dr Gavin Wood, Ethereum Co-Founder
What is a smart contract?
Smart contract is just a phrase used to describe computer code that can facilitate the exchange of money, content, property, shares, or anything of value. When running on the blockchain a smart contract becomes like a self-operating computer program that automatically executes when specific conditions are met. Because smart contracts run on the blockchain, they run exactly as programmed without any possibility of censorship, downtime, fraud or third party interference.
While all blockchains have the ability to process code, most are severely limited. Ethereum is different. Rather than giving a set of limited operations, Ethereum allows developers to create whatever operations they want. This means developers can build thousands of different applications that go way beyond anything we have seen before.
“ [Ethereum] blockchain has some extraordinary capabilities. One of them is that you can build smart contracts. It’s kind of what it sounds like. It’s a contract that self-executes, and the contract handles the enforcement, the management, performance, and payment” Don Tapscott
The Ethereum Virtual Machine
Before the creation of Ethereum, blockchain applications were designed to do a very limited set of operations. Bitcoin and other cryptocurrencies, for example, were developed exclusively to operate as peer-to-peer digital currencies.
Developers faced a problem. Either expand the set of functions offered by Bitcoin and other types of applications, which is very complicated and time-consuming, or develop a new blockchain application and an entirely new platform as well. Recognizing this predicament, Ethereum’s creator, Vitalik Buterin developed a new approach.
“I thought [those in the Bitcoin community] weren’t approaching the problem in the right way. I thought they were going after individual applications; they were trying to kind of explicitly support each [use case] in a sort of Swiss Army knife protocol.” Vitalik Buterin, inventor of Ethereum
Ethereum’s core innovation, the Ethereum Virtual Machine (EVM) is a Turing complete software that runs on the Ethereum network. It enables anyone to run any program, regardless of the programming language given enough time and memory. The Ethereum Virtual Machine makes the process of creating blockchain applications much easier and efficient than ever before. Instead of having to build an entirely original blockchain for each new application, Ethereum enables the development of potentially thousands of different applications all on one platform.
What can Ethereum be used for?
Ethereum enables developers to build and deploy decentralized applications. A decentralized application or Dapp serve some particular purpose to its users. Bitcoin, for example, is a Dapp that provides its users with a peer to peer electronic cash system that enables online Bitcoin payments. Because decentralized applications are made up of code that runs on a blockchain network, they are not controlled by any individual or central entity.
Any services that are centralized can be decentralized using Ethereum. Think about all the intermediary services that exist across hundreds of different industries. From obvious services like loans provided by banks to intermediary services rarely thought about by most people like title registries, voting systems, regulatory compliance and much more.
Ethereum can also be used to build Decentralized Autonomous Organizations (DAO). A DAO is fully autonomous, decentralized organization with no single leader. DAO’s are run by programming code, on a collection of smart contracts written on the Ethereum blockchain. The code is designed to replace the rules and structure of a traditional organization, eliminating the need for people and centralized control. A DAO is owned by everyone who purchases tokens, but instead of each token equating to equity shares & ownership, tokens act as contributions that give people voting rights.
“A DAO consists of one or more contracts and could be funded by a group of like-minded individuals. A DAO operates completely transparently and completely independently of any human intervention, including its original creators. A DAO will stay on the network as long as it covers its survival costs and provide a useful service to its customer base” Stephen Tual, Slock.it Founder, former CCO Ethereum.
Ethereum is also being used as a platform to launch other cryptocurrencies. Because of the ERC20 token standard defined by the Ethereum Foundation, other developers can issue their own versions of this token and raise funds with an initial coin offering (ICO). In this fundraising strategy, the issuers of the token set an amount they want to raise, offer it in a crowdsale, and receive Ether in exchange. Billions of dollars have been raised by ICOs on the Ethereum platform in the last two years, and one of the most valuable cryptocurrencies in the world, EOS, is an ERC20 token.
Ethereum has recently created a new standard called the ERC721 token for tracking unique digital assets. One of the biggest use cases currently for such tokens are digital collectibles, as the infrastructure allows for people to prove ownership of scarce digital goods. Many games are currently being built using this technology, such as the overnight hit CryptoKitties, a game where you can collect and breed digital cats.
What are the benefits of Ethereum decentralized Platform?
Because decentralized applications run on the blockchain, they benefit from all of its properties.
- Immutability – A third party cannot make any changes to data.
- Corruption & tamper proof – Apps are based on a network formed around the principle of consensus, making censorship impossible.
- Secure – With no central point of failure and secured using cryptography, applications are well protected against hacking attacks and fraudulent activities.
- Zero downtime – Apps never go down and can never be switched off.
What’s the downside of decentralized applications?
Despite bringing a number of benefits, decentralized applications aren’t faultless. Because smart contract code is written by humans, smart contracts are only as good as the people who write them. Code bugs or oversights can lead to unintended adverse actions being taken. If a mistake in the code gets exploited, there is no efficient way in which an attack or exploitation can be stopped other than obtaining a network consensus and rewriting the underlying code. This goes against the essence of the blockchain which is meant to be immutable. Also, any action taken by a central party raises serious questions about the decentralized nature of an application.
I want to develop an app. How do I access Ethereum?
There are many ways you can plug into the Ethereum network, one of the easiest ways is to use its native Mist browser. Mist provides a user-friendly interface & digital wallet for users to trade & store Ether as well as write, manage, deploy and use smart contracts. Like web browsers give access and help people navigate the internet, Mist provides a portal into the world of decentralized blockchain applications.
There is also the MetaMask browser extension, which turns Google Chrome into an Ethereum browser. MetaMask allows anyone to easily run or develop decentralized applications from their browser. Although initially built as a Chrome plugin, MetaMask supports Firefox and the Brave Browser as well.
While it’s still early days, Mist, MetaMask and a variety of other browsers look set to make blockchain-based applications accessible to more people than ever before. Even people without a technical background can now potentially build blockchain apps. This is a revolutionary leap for blockchain technology that could bring decentralized applications into the mainstream.
Blockchain / Ethereum Courses: Filling the Gap
The job market is struggling to keep up with the sudden demand for blockchain developers. Some universities and private companies have responded by offering a range of blockchain related courses in an attempt to meet the needs of industry.
According to Bitcoin pioneer Jered Kenna, experienced blockchain professionals can net over $200,000 USD in annual income.
“The supply of people that have extensive blockchain experiences is pretty low,” Kenna explained. “And the demand is quickly increasing. Sometimes they get five job offers a day.”
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What apps are currently being developed on Ethereum?
The Ethereum platform is being used to create applications across a broad range of services and industries. But developers are in unchartered territory, so it’s hard to know which apps will succeed and which ones will fail. Here are a few exciting projects.
Weifund provides an open platform for crowdfunding campaigns that leverages smart contracts. It enables contributions to be turned into contractually backed digital assets that can be used, traded or sold within the Ethereum ecosystem.
Uport provides users with a secure and convenient way to take complete control of their identity and personal information. Instead of relying on government institutions and surrendering their identities to third parties, users control who can access and use their data and personal information.
BlockApps is looking to provide the easiest way for enterprises to build, manage and deploy blockchain applications. From the proof of concept to full production systems and integration with legacy systems, Blockapps provides all the tools necessary to create private, semi-private and public industry-specific blockchain applications.
Provenance is using Ethereum to make opaque supply chains more transparent. By tracing the origins and histories of products, the project aims to build an open & accessible framework of information so consumers can make informed decisions when they buy products.
Augur is an open-source prediction & forecasting market platform that allows anyone to forecast events and get rewarded for predicting them correctly. Predictions on future real world events, like who will win the next US election, are carried out by trading virtual shares. If a person buys shares in a winning prediction, they receive monetary rewards.
To view other projects currently in development on Ethereum, click here.
“Ethereum is a spectacular public experiment that is showing the value of smart contracts on a public blockchain. It is the result of and the source of disruptive innovation of the likes that we haven’t seen since the early days of the Internet.” – Caleb Chen London Trust Media
The DAO hack that threatened everything
Remember how Ethereum can be used to build Decentralized Autonomous Organizations? Well in 2016, something bad happened. A startup working on one particular DOA project, aptly named ‘The DAO’ got hacked.
The DAO was a project developed and programmed by a team behind another startup called Slock.it. Their aim was to build a humanless venture capital firm that would allow investors to make decisions through smart contracts. The DAO was funded through a token sale and ended up raising around $150 million dollars from thousands of different people.
Shortly after the funds were raised, The DAO was hacked by an unknown attacker who stole Ether worth around $50 million dollars at the time. While the attack was made possible by a technical flaw in The DAO software, not the Ethereum platform itself, the developers and founders of Ethereum were forced to deal with the mess.
An Ethereum fork in the road
After much debate, the Ethereum community voted and decided to retrieve the stolen funds by executing what’s known as a hard fork or a change in code. The hard fork moved the stolen funds to a new smart contract designed to let the original owners withdraw their tokens. But this is where things get complicated. The implications of this decision are controversial and the topic of intense debate.
Here’s why. Ethereum is based on blockchain technology where all transactions are meant to be irreversible and unchangeable. By executing a hard fork and rewriting the rules by which the blockchain executes, Ethereum set a dangerous precedent that goes against the very essence of blockchain. If the blockchain is changed every time a large enough amount of money is involved, or enough people get negatively impacted, the blockchain will lose its main value proposition – secure, anonymous, tamper proof & unchangeable.
While another less aggressive soft fork solution was put forth, the Ethereum community and its founders were placed in a perilous position. If they didn’t retrieve the stolen investor money, confidence in Ethereum could be lost. On the other hand, recovering investor money required actions that went against the core ideals of decentralization and set a dangerous precedent.
The aftermath – Ethereum splits
In the end, the majority of the Ethereum community voted to perform a hard fork, and retrieve The DAO investors money. But not everyone agreed with this course of action. This resulted in a split where two parallel blockchains now exist. For those members who strongly disagree with any changes to the blockchain even when hacking occurs there is Ethereum classic. For the majority who agreed to rewrite a small part of the blockchain and return the stolen money to their owners, there is Ethereum.
Both blockchains have the same features and are identical in every way up to a certain block where the hard-fork was implemented. This means that everything that happened on Ethereum up until the hard-fork is still valid on the Ethereum Classic Blockchain. From the block where the hard fork or change in code was executed onwards, the two blockchains act individually.
A future of unimagined possibilities for Ethereum
Despite the fallout from The DAO hack, Ethereum is moving forward and looking to a bright future. By providing a user-friendly platform that enables people to harness the power of blockchain technology, Ethereum is speeding up the decentralization of the world economy. Decentralized applications have the potential to profoundly disrupt hundreds of industries including finance, real estate, academia, insurance, healthcare and the public sector amongst many others.
“If you think the internet has affected your life, Ethereum will have that same pervasive influence on our communications, on our entire information infrastructure. It’s going to impact all aspects of our existence
Building the public Ethereum ecosystem: As scalability and configurable privacy/confidentiality grow on public Ethereum over the next two years, consumers will use their blockchain identity and access point (uPort) to interact with a variety of interesting early stage offerings.
Including crowdfunding platforms (Weifund), group governance tools (Boardroom), music/film/art content registration and utilization platforms (ujo), wisdom markets (Gnosis), and gaming apps (Virtue Poker)”
Joseph Lubin, CEO of Consensys
Most significant companies will run business processes on their private blockchains.
- Private blockchains: Within two years, major companies will conduct several business processes on their own private, permissioned corporate blockchains. Employees, customers, vendors, and service providers at each company will be able to securely access that company’s private blockchain via strong cryptographically authenticated transactions.
- Consortia blockchains: In two years, many companies will have started to build bottom-up consortia blockchains with a small number of counterparties in their ecosystem collaborating on a small number of use cases to share trusted source-of-truth infrastructure, supply or value chains.
- Business use of public blockchains: Some companies will employ public Ethereum with their use cases that employ the same stack of blockchain components that they have purchased or built for their private Ethereum-based implementations.
The Ethereum platform is also helping to shift the way we use the Internet. Decentralized applications are pushing a fundamental change from an Internet of information where we can instantly view, exchange and communicate information to the Internet of value where people can exchange immediate value without any intermediaries.
As the industry continues to investigate blockchain platforms, it’s apparent that Ethereum is becoming a de facto leader. For example, a few days ago JPMorgan publicly open-sourced its Quorum platform, architected and developed around the Go Ethereum client by Jeff Wilcke and his team. Several other major banks are using Ethereum, and Microsoft is anchoring its Bletchley platform on it as the foundational blockchain element. Industry, both publicly and confidentially, continues to contribute to Ethereum and work with us and others to help our promising, toddler-age codebase reach maturity. Stay tuned for news on this front.
It takes a (global) village to raise a blockchain. The live network and the community of open source developers contribute significantly to this effort. They continuously refine and harden the Ethereum platform, helping it get faster at responding to industry demands for the value propositions it offers. These investments of time and resources speak to their faith in Ethereum governance and the value that businesses and developers see in its capabilities. – Joseph Lubin, CEO of Consensys
While it’s still early days, and there will no doubt be more hurdles to overcome, Ethereum looks to be a truly transformational platform. With many of the most exciting applications yet to be developed, we can only begin to wonder about the unimagined possibilities that await.