What is Ethereum?
Ethereum is a very ambitious blockchain platform that seeks to decentralize products, services, contracts, and relationships. Bitcoin’s short term use case is to be Gold 2.0 (with layers of projects built on top) while Ethereum is frequently compared to oil that fuels the network and powers all the applications built on it. The “oil”, or currency, that powers Ethereum is called Ether.
Essentially, Ethereum catalogues changes (transactions confirmed on the blockchain) as well as potential future changes. This is a significant differentiator that defines its vision. These multi-step, future computing functions are called smart contracts. The combining of many large smart contracts creates a decentralized application (dApp).
dApps and smart contracts allow Ethereum to offer peer-to-peer financial services (contracts, lending, borrowing, trading, asset tokenization, etc…), and Ether (ETH) is the currency to interact with this network.
Ethereum isn’t the only smart contract enabled blockchain or network, but is one of the most developed even though this concept still in its infancy.
Who Created Ethereum?
Ethereum was the brainchild of Vitalik Buterin with assistance from Gavin Wood, Jeff Wilke, Joseph Lubin, and Vlad Zamfir.
When was Ethereum created?
Vitalik Buterin received a Thiel Fellowship to pursue Ethereum full time in 2013, and worked to create a non-profit to help launch the project. The Ethereum Foundation sold 72 million ETH in 2014 in a pre-sale before its 2015 launch.
How Does Ethereum Work?
Ethereum Blockchain – Proof of Work
Ethereum currently uses the same Proof of Work mining as Bitcoin to power its blockchain.
Developers write dApps (smart contracts) in the project’s native programming languages (Solidity or Vyper), and then enable this code on Ethereum’s blockchain.
Nodes record and maintain a working copy of the Ethereum Virtual Machine (EVM), which is a compiler that translates all smart contracts and executes any changes in transactions on the blockchain.
Ethereum Blockchain – What is Proof of Stake?
Proof-of-Stake (PoS) is part of the Ethereum 2.0 upgrade and will signal the end of Proof of Work on the Ethereum blockchain. In a Proof-of-Stake system, any user who owns at least 32 ETH could deposit (lock) those funds in a smart contract and earn dividends for solving computations needed to add new blocks to the blockchain.
This is similar to owning equity in a company. Your Ether (ETH) is fueling the network that powers the dApps built on top of the Ethereum network. Its almost like re-useable gasoline that can be used for eternity. If you own this gasoline you can lend (stake) it to anyone who needs to transport a good (in Ethereum’s case, information) anywhere in the world.
Ether provides the liquidity to process transactions.
Is Ethereum Valuable? What is being built on Ethereum?
A great example of traction private blockchains have made on the Ethereum network is when major banks and corporations created the Enterprise Ethereum Alliance. This is a non-profit whose purpose in 2017 was to connect the many private bank blockchains with the main Ethereum blockchain.
This means that many proprietary corporate blockchains could not connect or speak to each other, but were able to be connected through the open source Ethereum network. This provides the companies involved many efficiencies and removes the need for trust since there is an open sourced and decentralized connection network.
Some organizations that didn’t copy Ethereum’s code were inspired by the concept – including the Linux Foundation’s Hyperledger and R3’s Corda. These projects copied parts of Ethereum’s design and architecture, but decided that they did not need to create their own currency.
Initial Coin Offerings (ICOs)
In 2017 entrepreneurs saw the potential to build new tokens, without starting from scratch, on top of the Ethereum network. The idea was that its platform could be leveraged for fundraising by creating completely new cryptocurrencies and selling them to interested investors or customers in what was eventually called “initial coin offerings” (ICOs).
Many Initial Coin Offerings (ICOs) use the Ethereum network, and its native languages (Solidity or Vyper) , to create new crypto assets on top of its blockchain, using token standards without have to create a new codebase from the ground up.
Decentralized Finance (DeFi)
Decentralized Finance (DeFi) is a collection of decentralized applications built on top of Ethereum that mimic traditional financial services, namely: borrowing and lending, stable coins, exchanges, and tokenize physical assets for buying, selling, or trading.
Below are some of the most popular DeFi projects:
Maker is a decentralized lending application that uses DAI (a stable coin pegged to the US dollar). Users can use Maker to open a vault, deposit collateral such as ETH, and generate DAI as debt against that collateral.
DAI holders can lock their DAI into Maker’s Dai Savings Rate (DSR) contract and earn interest in DAI – produced from stability fees.
Compound is a decentralized money market protocol on the Ethereum blockchain that allows digital asset holders to lend and borrow crypto against their deposited collateral.
Aave is another decentralized, non-custodial liquidity market protocol where you can act as a borrower or lender. Lenders provide liquidity to the market while borrowers can obtain overcollateralized and undercollateralized loans.
Uniswap is a decentralized exchange that allows users to trade between ETH and ERC20 tokens on-chain or earn fees by providing liquidity.
Curve Finance is a decentralized exchange liquidity pool focused on efficient stable coin trading. Coins held by liquidity pools are supplied to the Compound protocol and generate income for anyone who provides them liquidity.
Synthetix tokenizes physical (dollars, gold, stocks, etc…) and digital assets (BTC) and allows for peer-to-peer trading of these tokenized assets.
Non-Fungible Tokens (NFTs) – What is an NFT?
EVERYONE has been talking about NFTs recently, but very few people actually know what they are! Let’s dive in. Non-Fungible Tokens (NFTs for short)
Non-fungible means that this digital asset is unique and usually limited in quantity. Gasoline is fungible (can’t be differentiated from a different gallon of gasoline). NFTs try to make digital assets unique and special. Memes, GIFs, music, and other digital artwork is a growing industry, but until recently this artwork was stolen, copied, or downloaded with no credit or money going to the creator.
Now creators of online artwork can create an NFT for their artwork and sell it to anyone who wants to own a legitimate piece of internet art. Can someone take a screenshot of it? Sure! They now own a copy of the artwork and maybe that is all they want. An NFT is really more like a piece of internet artwork SIGNED by the creator or artist.
Still interested in reading about Cryptocurrency? We recommend you start with our What is Bitcoin series below:
What is Bitcoin? Part 1 – Origins
What is Bitcoin? Part 2 – Technology
What is Bitcoin? Part 3 – Principles of Money