Cryptocurrencies are divided into categories. While Bitcoin is used to make payments, Ethereum works as an infrastructure to cement new projects within its blockchain. In other words, it opens up the possibilities for other developers to build without the need to create a new blockchain.
Ethereum: a bit of history
Vitalik Buterin created Ethereum in 2013, after what he perceived as limitations in the functionality of the Bitcoin programming language, namely Turing’s lack of integrity. He published the first whitepaper at the end of that year, describing a distributed computing platform for running smart contracts and creating decentralized applications (dApps).
A year later, Buterin and a few other early contributors created a nonprofit called the Ethereum Foundation, an organization dedicated to researching this cryptocurrency, developing core protocols, and growing the ecosystem. The foundation’s first task was to host the Ethereum crowd sale, which raised 31,529 BTC ($ 18 million at the time) in exchange for roughly 60 million ether and use the proceeds to fund the network’s initial development.
The mainnet launched in July 2015, with the first live release called Frontier. Soon after, Augur (REP) held the first Initial Coin Offering (ICO), in which the startup sold its Ethereum-based REP tokens (created through the ERC-20 standard) to help fund the project.
The ability to develop and sell a newly generated token to help raise capital became an attractive fundraising method because the projects could circumvent traditional companies’ legal policies and costs. Ethereum-centric startups created thousands of new tokens since Augur’s ICO, raising billions of dollars in the process.
What was DAO?
In April 2016, a decentralized hedge fund known as DAO hosted an ICO, raising $ 150 million in ETH in the process. In July of the same year, an attacker exploited a bug in DAO’s smart contracts, allowing the guilty party to divert 3.6 million ETH. A significant part of the Ethereum community chose to reverse the chain to remove DAO and its subsequent hack from the network’s history.
The remaining stakeholders held the preservation of immutability in the highest regard and refused to agree to a ledger rewrite. The division in the community led to a complex and controversial fork a few weeks after the hack, causing a permanent division in the network. The legacy chain that did not reverse its transaction history is known as Ethereum Classic (ETC).
How Ethereum works
As mentioned above, Ethereum is based on the Bitcoin protocol and its Blockchain design, but it is tuned so that applications beyond money systems can be supported. The only similarity of the two blockchains is that they store complete transaction histories of their respective networks, but the Ethereum Blockchain does much more than that. In addition to transaction history, each node on the Ethereum network also needs to download the most current status, or current information, of each smart contract within the network, each user’s balance, and all intelligent contract code and where it is stored.
Essentially, the Ethereum Blockchain can be described as a transaction-based state machine. When it comes to computing, a state machine is defined as something capable of reading a series of inputs and transitioning to a new state based on those inputs. When the transactions are executed, the machine goes to another state.
Each Ethereum state consists of millions of transactions. These transactions are grouped to form “blocks”, with every block chained to its previous blocks. But before the transaction can be added to the ledger, it needs to be validated, which goes through mining.
Mining is a process in which a group of nodes apply their computing power to complete a “proof of work” challenge, essentially a mathematical puzzle. The more powerful your computer, the faster you can solve the puzzle. An answer to this puzzle is itself a proof of work and guarantees the validity of a block.
Many miners worldwide are competing with each other to create and validate a block, as each time a miner tests a block, new Ether tokens are generated and delivered to that miner. Miners are the backbone of the Ethereum network as they confirm and validate transactions and any other operation within the network and generate new tokens of the network currency.
First of all, Ethereum allows developers to create and implement decentralized applications. Also, any centralized service can be decentralized using the Ethereum platform. The potential of the Ethereum platform for building applications is not limited by anything other than the creators’ creativity.
Ethereum drawing a decentralized system
Decentralized applications have the potential to change the relationship between companies and their audiences completely. Today many services charge commissions for simply providing an escrow service and a platform for users to exchange goods and services. On the other hand, the Ethereum Blockchain can allow customers to trace the origin of the product they are buying while implementing intelligent contracts that ensure safe and fast trade for both parties without any intermediary.