What actually is Ethereum? Why is it the second-biggest name in the cryptocurrency space after bitcoin and what exactly does Ethereum stand for? These are the questions I hope to answer in this article.
Today I’m going to cover the Ethereum network, the technology behind it, why people are so excited about all the implications and all the future uses for this technology and then I’ll touch on Ether which is actually the coins that you may want to invest in.
So what actually is Ethereum? Is it just a clone of bitcoin? Well, some people say if bitcoin is gold, then Ethereum may well be silver that doesn’t actually make any sense. Ethereum, even though it’s built on the blockchain, is actually a completely different system, whereas bitcoin is specifically decentralised money.
Ethereum isn’t that. Although there is a monetary unit of Ethereum called Ether that can be traded and held just like bitcoin. If you have ever gone to a currency exchange like Binance or Kraken, you will see Ethereum right up there as the number two currency, so you’ll see ETH on the platform and you can actually trade that just like bitcoin.
Ethereum, just like all cryptocurrencies, relies on a decentralised network of computers around the world running its code. The code that runs Ethereum is called Solidity, just like with bitcoin, the Ethereum blockchain exists to keep the code running at all times and also keep it decentralised. No one person or government owns it. Whereas bitcoin is just simply code that represents money, Ethereum uses the blockchain and decentralised networks to create contracts.
Most of everything we do as human beings relies on contracts and so people can use the code in Ethereum to agree with somebody else without the use of someone in the middle. There’s way more to their technology, but let’s just keep it simple for now.
DeFi & Smart Contracts
So, on a very basic level, two people could enter any type of contract together. I could bet you it will snow on Christmas day and you could bet me it wouldn’t. You and I don’t need to know each other, we don’t need to be friends and importantly there need not even be any trust between us because the network is decentralised it’s almost impossible for one person to influence how it runs and try to somehow influence how the payment is made.
This means even though there isn’t trust between us, there doesn’t need to be. We can trust the network to execute the contract and then send the payment to the correct place based on the rules of the contract. This, of course, leads further to something called DeFi or decentralised finance, which has a lot of hype at the moment.
Using Ethereum contracts, people can enter into many types of agreements directly with other people and trust that the contract will be fulfilled without fail as long as that proof of work exists. I could lend you money and expect a return, earn more from your ethereum.
Ethereum can even be used as a voting system where each person can use their biometrics to vote one time and the voting count has literally zero possibility of being tampered with. More complex contracts can be made with Ethereum, though, for example, options and futures. In the financial world. These are very large contracts that people use to essentially take a price now for something in the future.
So you can agree with someone else, pay them a little bit of money and have an option to buy some oil or some wheat in the future at a given price and a lot of farmers and other industries do this. Well, at the moment you have to go through a middleman or an options exchange but with DeFi and Ethereum contracts you can essentially have a direct contract with someone else and this has massive implications because we’re talking about billions if not trillions of pounds worth of trade.
Dapps (Decentralised Applications)
Another use of the Ethereum network is called dapps or decentralised applications, so these are programs that no single person owns, not even the person who created the program. The coding language of Ethereum and the thousands of computers that run it worldwide are the foundation on which dapps are made.
Right now, the internet is run by a few mega-companies that run all the databases and keep all of our data. You know, Facebook, Amazon, Twitter, Google, these places are actually centralised databases and networks for all the information that flows around the internet.
Well, with dapps, that just doesn’t happen. There’s a company called Theta, and this is a completely decentralised video streaming platform that runs on the Ethereum network. Rather than YouTube owning all the videos and taking 60% of the advertising revenue, people using Theta could actually have a much fairer system of earning revenue, which is obviously huge for the media industry.
The potential though is absolutely massive you could create a dapp that links restaurants with customers and delivery drivers directly so you wouldn’t have to pay uber eats or Deliveroo. That would make business cheaper and that is a big thing. You could sell your custom-made items on a dapp that would replace paying Amazon or eBay a 10% or 15% fee for every item you sell.
So now that we know that Ethereum is actually a blockchain network of computers running code that is decentralised with no specific owners, what is Ether? And why are people getting excited about Ethereum and actually buying into this coin?
Ethereum is run on thousands of computers worldwide and until now they’ve competed to be the next in line to add to the blockchain this takes a lot of computing resources and energy and for that, they are rewarded with coins. Also, if you want to use Ethereum and need some network resources, you need Ethereum to pay for that as well.
Ethereum then has incredible potential, which is why so many people are really excited about the future because contracts between people without a middleman make it super incentivised to do so and it’s cheap and effective.
There are obviously some downsides. Firstly, for now, even though contracts on the Ethereum network are called smart contracts, they’re really not that smart. They only follow the code absolutely how it’s written and can’t make any subjective opinion about it, which means the more complex transactions that have other types of clauses or subjective outcomes really aren’t suitable for this.
Once a contract is made, the only way to change it is to get the entire Ethereum network to agree upon that change, which is pretty much impossible. It’s also possible to create incredibly complex contracts with Ethereum, which means in theory you could get some enormous problems with a contract that is entered into and it could have outcomes that neither of the parties could envisage.
Also, another problem with Ethereum right now is that it’s not very scalable because it takes so much computer power to run the system that’s called proof-of-work. This is why Ethereum is actually changing to a different system called proof-of-stake, where people can put up their coins and hopefully gain a return.
Buying into Ethereum coins is essentially a way of investing in the future success of Ethereum as a network for dapps and decentralised finance, among other things it’s certainly going to be an interesting road ahead!