What is Ethereum?

If Bitcoin is decentralized, trustless money, then Ethereum is decentralized, trustless computation. It is a platform built with and expanding upon the principles that Bitcoin revolutionized: a decentralized ledger maintained by mining nodes and algorithmic proof of work to reach consensus between them. It is considered “Turing-complete,” so it can theoretically perform any possible computation. To store data or perform computations on the Ethereum blockchain, it costs “gas” or “Ether”, Ethereum’s cryptocurrency. Ethereum has since become a platform for other decentralized applications as well as derivative tokens under the ERC20 standard.

Differences from Bitcoin

  • No monetary supply cap as opposed to Bitcoin’s 21 million bitcoins by the year 2160. This will likely lead to Ethereum becoming more inflationary and Bitcoin eventually becoming deflationary.
  • 15 second block time instead of 10 minutes
  • Variable block size instead of 1 megabyte limit, so Ethereum is more scalable
  • Miners get rewarded for orphaned blocks called “uncles”
  • Ethereum has a modified Dagger-Hashimoto algorithm that deters ASICs so it is primarily mined with graphics cards (GPUs) instead of custom-manufactured hardware. Since ASICs require low cost electricity, Bitcoin’s mining has become concentrated in China.
  • Ethereum is a Turing-complete scripting language whereas Bitcoin’s scripting language is built to only perform transactions

Bitcoin is a better store of value because of the eventual market supply cap and because the versatility of Ethereum’s scripting language leaves more areas for security weaknesses. On the other hand, Ethereum is a better platform for developing smart contracts and decentralized applications due to its scripting language, and this has caused many tokens to develop on its platform and hence increase its value.

History

Bitcoin programmer, Vitalik Buterin, wrote the Ethereum whitepaper in late 2013 with the goal of building decentralized applications.

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Gavin Wood joined in early 2014 and created Ethereum’s Solidity language and published the first mathematically formal blockchain protocol specification called the Yellow Paper. They founded EthSuisse and the Ethereum Foundation in Zug, Switzerland and began developing the software. Development was funded by a “crowdsale” where investors submitted bitcoins in exchange for the first “Ether” tokens. The cryptocurrency finally went live on 30 July 2015 with 13{3f24fd6a6f3cb1f39a83c764682d0ee6abe11682a32b284207f40c9cb7e6897b} of the coins already mined to give to crowdsale participants.

“The” DAO

Ethereum held another crowdsale in 2016 and raised $150 million using an entity called a “decentralized autonomous organization” that relied on self-enforcing, programmed “smart contracts.” Because The DAO was open-source, a security weakness was found and exploited by an anonymous hacker who stole $50 million from the fund on 17 June 2016. But since it was written under a self-executing smart contract, the security weakness could not be quickly patched. This caused the price of Ether stock to fall by more than 60{3f24fd6a6f3cb1f39a83c764682d0ee6abe11682a32b284207f40c9cb7e6897b}.

ETH vs. ETC

A contentious debate formed in the community over whether to follow the DAO’s protocol and chock the missing money up to a learning experience or create a “hard fork” and return the stolen funds. This debate eventually caused Ethereum to fork into two versions: ETC (Ethereum Classic) and ETH (Ethereum Official), respectively. The two blockchains have identical histories up to the point of the fork and then continue on as if living out two parallel universes – one where the hack occurred and one where it didn’t.

ETH has become the dominant version and is officially supported by the Ethereum Foundation; it represents conflict resolution and decentralized decision making. Ethereum Classic remains a minority of blockchain purists who believe that a blockchain should never be forked and that smart contracts are law and should be followed regardless of the unexpected outcomes.

Proof of Stake Consensus

Ethereum is currently on its third version called “Homestead” which uses proof of work to determine which mining nodes have printed the official blocks and therefore earn the fees and new coins. When it rolls out the fifth version, “Serenity,” (the date has not yet been announced) it will move to a “proof of stake” algorithm called “Casper.” 

The downside of proof of work mining is that it is unnecessarily resource intensive. Custom hardware called ASICs have been developed just to mine bitcoins and it takes so much electricity to run the network that bitcoin may consume as much electricity as Denmark by 2020!

Vlad Zemfir is developing the specifications for Casper. Instead of node operators “mining” for new coins by performing increasingly difficult hashing operations, nodes (called “validators” or “forgers”) will post Ether as a bond or security deposit and the one with the largest stake will win the fees. However, if the node produces anything invalid, called “Slashing Conditions,” its bond will be forfeited and it will lose its ability to participate in consensus of determining the blockchain.

A criticism of Proof of Stake consensus is that it makes the “rich get richer.” Bitcoin has this effect de facto, where the rich can invest in better hardware to mine blocks faster and thus earn more coins, Proof of Stake has the effect de jure – it is hardcoded in – so that those with the largest investment will earn the new block fees.

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