What is Ethereum? – The Ethereum Ecosystem Explained
Ethereum is widely regarded as the second strongest cryptocurrency (just behind Bitcoin), but in order to be able to understand Ethereum, you must first have a good understanding of the Internet.
In today’s world, we often find that our financial information, data, and passwords are stored on other people’s laptops and desktop computers.
More precisely they are stored on servers and cloud infrastructure which is owned by companies such as Google, Facebook, and Amazon. Even this article explaining what Ethereum is, is stored on a server that is controlled by a company that currently charges to hold the data, should it ever be called upon.
This setup is actually very convenient, as these companies employ teams of specialist workers to aid in the storage and security of this data, and to remove the costs that are wrapped up in hosting and maintaining uptime.
However, together with this convenience comes vulnerability. As we are already aware, a government or a hacker could potentially gain access to your files without you becoming aware of it. They do this by attacking or influencing a third-part service – meaning they can change, leak, or steal important information.
The creator of Apache Web Server, Brian Behlendorf, went as far as to say that this centralized design is actually the original sin of the World Wide Web.
Some people, like Behlendorf argue that the internet was never meant to be centralized.
Indeed, a splintered movement has recently sprung up that uses new tools such as blockchain technology to achieve the goal of decentralization of the Internet.
One of the freshest faces you will see that has joined this movement is Ethereum.
What is Ethereum? – A move away from Centralized web infrastructure and services
While the aim of bitcoin is to disrupt online banking and digital payment incumbents such as PayPal, the goal of Ethereum is to use a blockchain in order to replace third parties used by the internet.
These are 3rd parties that transfer mortgages, store data, and keep track of the most complex of financial instruments.
What is Ethereum? – The “World Computer”
Put into simple terms, the aim of Ethereum is to become a “World Computer” that will decentralize and, according to some, democratize the existing model of “client-server”.
With Ethereum, clouds and servers no longer exist and are replaced by thousands of “nodes” that are run across the globe by a band of volunteers (hence the name “World Computer”).
The vision for Etheruem is that it will enable the exact same functionality to people, regardless of where there are in the world. This will allow Ethereum developers and businesses to compete in the offering of services that are found at the top of this infrastructure.
If you were to scroll through a typical app store, you would see a large variety of brightly colored squares that represent everything from business apps to dating and fitness. All such apps rely on the company or on the 3rd party service provider to store your personal data, purchasing history, and credit card details. These details are generally stored on the 3rd party server used by the app.
Third parties also govern your choice of apps. This is most visible on the App Stores where Google and Apple maintain and curate the apps that are made available for you to download. In some cases, Apple and Google also censor the apps available to you.
What is Ethereum? – Taking back control
Let’s take an example like Google Docs or Evernote, both online document services.
If all goes as it should and according to plan, Ethereum would return control of data to its owner in these types of services, and the creative rights to its author.
The idea here is that no one entity will have control over your Docs or notes, and that it would be impossible for anyone to suddenly ban the app. At present, if an app is banned, all of your data and notes are taken offline. The idea with an application built upon Ethereum, is that only the user will be able to make changes as opposed to any other entity.
In theory, it combines the ease of access to information which we have become accustomed to in the digital world, with the control people had over their personal data and information in the past. Each time you add or delete notes or save edits, every node that exists on the Ethereum network will alter their records to reflect and maintain the change.
It is however well-worth noting that the idea has been met with criticism and skepticism.
Although it is entirely possible for such apps to appear, it’s not clear which blockchain apps will actually prove to be useful, scalable, or secure. There is also much doubt as to whether these apps will ever be as convenient as the established options which we already use today.
What is Ethereum? – What is a Decentralized Application?
Users of the Internet don’t have sole control over what data which they share on websites today.
Ethereum is totally unique in that it is attempting to wield the blockchain as a means to correct what is believed by designers to be a problematic part of the Internet.
It’s similar to an app store that is decentralized and one where anyone can publish their own “dapps” (Distributed Apps) without the need for a middleman such as Gmail or Uber to function.
Today’s apps like Uber or Google need a middleman in order to manage a user’s information.
What is Ethereum? – Dapps would connect providers and users directly.
Let’s take a decentralized version of Twitter as an example; one that doesn’t have censorship. When you publish a message using blockchain, it cannot be removed, not even by the creator of the company or microblogging system.
As a dapp (Decentralized Application) is still a new concept, there still isn’t a recognised definition of one.
One or two of the major characteristics of dapps however, are that they don’t have a central point of failure and they are open source.
What is Ethereum? – 3 types of Decentralized Applications
Ethereum advocates may feel excited and even electrified by the thought of the future decentralizing of things, with this new tech being out in the wild. However, the different types of apps that users will be able to build with the platform are thought to be somewhat narrow.
The white paper produced by Ethereum splits dapps into 3 different categories:
- apps for managing money,
- apps where money is involved but also requires another additional piece, and
- apps in the other category that include governance systems and voting.
In the first mentioned type of app, a user may settle a contract with another user by exchanging Ether (more on that below).
This exchange would be carried out through use of the network’s distributed computer nodes as a way to allow for such distribution of data.
The 2nd type of app is one that mixes information with money from outside of the blockchain.
Let’s take the example of a crop insurance application that needs an outside weather feed in order to work. (Say a farmer purchases a derivate that pays out automatically if there is a drought that is significant enough to impact work).
To execute, these contracts are reliant on “oracles” that relay information about the outside world, and which are always up-to-date. It should be noted here that the skeptics believe that this cannot be carried out in a decentralized way.
If bitcoin can successfully get rid of financial authorities, can other organizations and companies follow suit?
One breed of dapp that is ambitious is that used by decentralized autonomous organizations. (For further information, refer to “What is a DAO?”).
The goal here is to form a company that is leaderless, with rules codified and programmed at the beginning about how to release funds and how members can vote and then – simply let it go and release it into the public domain for use.
What is Ethereum? – What is Ether?
As explored earlier in the section “What is Ethereum?” – Ethereum aims to function both as an App Store for decentralized apps (dapps), as well as a kind of decentralized internet upon which to support those “dapps”.
But, to-date so far, no one person owns Ethereum and the ecosystem which supports its functionality isn’t free.
In order for the Ethereum network to run, it needs “Ether”.
Ether is a unique piece of code – one which can be used to pay for the resources needed in order to run a program or application, or pay for a transaction.
Ether is like Bitcoin in the sense that it is a digital bearer asset (like a bond or similar to a security, issued in a form that is physical). Like using cash, Ether doesn’t need a 3rd party middleman in order to approve or process a transaction.
However, Ether will not operate like a digital payment or currency. Instead, Ether is treated as the fuel needed by the dapps (decentralized apps) which run on the network.
This may sound a little complex, but can you think of an example that’s more concrete of how tokens can be used to power the experience of the user.
What is Ethereum? – Ether explained with an example
Let’s use the example of an online notebook that is decentralized again.
In order to modify a note, delete it, or post it, you have to pay a transaction fee. The fee is paid in Ether and is needed in order to get the Ethereum network to process the requested change.
For this reason, Ether has often been referred to as digital oil.
Going a step further with the same analogy, transaction fees for Ethereum are calculated on the amount of gas that is required in order to complete the action on the network.
The amount of gas that is needed in order to complete a transaction is based on the amount of computational power required as well as on how long it takes to run. Whatever the cost in gas for the transaction, it is payable in Ether.
In terms of an economic system, the rules are a bit open-ended for Ether’s economy. Ether at present doesn’t have a limit, unlike bitcoin that has a hard cap of twenty one million Bitcoins.
What is Ethereum? – How much Ether exists?
Of the Ether that currently exists in circulation, 60 million units were bought in 2014 through participation in a crowdfunding campaign.
A Further 12 million Ether wet to a group of developers and researchers at the Ethereum Foundation who were working on underlying technology. Then, every twelve seconds, five new Ethers are minted and allotted to miners on the network.
These miners maintain Ethereum nodes and provide the computational resources and effort to verify transactions and update the Ethereum blockchain.
At most, 18 million Ethers are mined (minted) each year. Every twelve seconds, a miner ‘discovers’ a bundle of transactions or a block and five new Ethers are created as their reward.
As it stands, the exact total number of Ether is still unknown. The pace for creation of new Ether become less clear post-2017 as Ethereum moved to a new consensus algorithm that is based upon the proof-of-stake model.
*Update: in 2022, the Eteherum network successfully moved to a Proof of Stake model which has vastly reduced its energy consumption.
Over time, this shift will also most likely lead to a change in the rules surrounding new Ether creation, and the mining subsidy (reward) is set for a gradual decease over time.