What is Ethereum?
Ethereum is the second largest public blockchain in terms of valuation, and the first in terms of usage. Like Bitcoin, Ethereum operates on what is known as a public blockchain: a global distributed network that is uncensored, open to all and without any central authority.
The fundamental difference with Bitcoin is the ability to create applications on Ethereum, which run and are stored on the blockchain itself, which is the origin of decentralized finance (DeFi) in particular.
- 1. The birth of Ethereum.
- 2. Do not confuse the Ethereum network and its native asset: the ether (ETH).
- 3. Ethereum and the fundamental concept of ”smart contracts.
- 4. What are smart contracts and how do they work?
- 5. Understand the concept of ”gas”: the fuel of the Ethereum network.
- 6. Ethereum: understanding tokenization.
- 7. A look back at 2017 and the ICOs craze.
- 8. Decentralized applications and their first use: decentralized finance (DeFi).
- 9. The new uses in vogue: non-fungible tokens (NFT).
- 10. What is the future potential for Ethereum?
1. The birth of Ethereum.
Ethereum was introduced in 2013 in the form of a document, the ”White Paper”, proposing an evolution of the Bitcoin protocol. It was written by Vitalik Buterin, a young programmer who was part of the Bitcoin teams and co-founder of Bitcoin Magazine. Quickly, the concept attracted the interest of other cryptocurrency enthusiasts at the time, who joined the project. To name a few: Anthony Di Iorio, Charles Hoskinson, Joseph Lubin or even Gavin Wood. These people are now considered the co-founders of Ethereum. The Bitcoin development team does not adopt the proposal, so the founders decide to create their own blockchain.
To make his project a reality, Vitalik Buterin is launching a participatory funding campaign. A Bitcoin fundraiser takes place from September 2, 2014 in order to finance the developments needed to launch the network. He manages to raise $18.3 million. Stirred by the project’s goals, programmers get involved and the first version of Ethereum is released in 2015 under the name ”Frontier”.
2. Do not confuse the Ethereum network and its native asset: the ether (ETH).
The ether, represented by the symbol ETH, is the currency of exchange on the Ethereum network. Ethers are traded on marketplaces and the price is set by supply and demand.
The ether has several specific characteristics. If you had to remember only one: its annual monetary issuance is fixed and relatively low.
This means that very few new ethers are created each year. Therefore, it is a rare asset, but unlike Bitcoin with its 21 million units, there is no absolute maximum limit.
Investing in ether means betting on the development of the Ethereum ecosystem, which is already the second-largest market capitalization, and the source of the creation of many projects and applications built on its network.
3. Ethereum and the fundamental concept of
The fundamental difference between Ethereum and Bitcoin is that Ethereum can execute so-called “conditional transactions”. For example, it is possible to create a payment transaction that will only be executed if another transaction has taken place, or if the price of an asset has exceeded a certain threshold.
These conditional transaction mechanisms are usually grouped under the term “smart contracts”.
4. What are “smart contracts” and how do they work?
The literal translation from English, which gives the term “smart contracts”, is not the most adapted to understand what it is about. These ”smart contracts” are programs that aim to automate one or more actions when certain pre-requisites, defined by the creator of the program, are met.
For example, we can consider an auction system. We can create a smart contract that will receive the bids for a particular object to be sold, will be able to determine the highest bid, will return the lower bids at the end of a determined period, and so on.
Of course, this kind of program can be created on a conventional computer, through a website such as eBay for example. However, smart contracts have a number of advantageous features:
- They are autonomous: no need to host them on a computer, they are stored directly on the blockchain itself.
- They can store funds in ether, but also any kind of data.
- They are immutable, cannot be hacked and are available 24 hours a day.
- They are transparent: anyone can check their operation.
- They are interoperable: any smart contract can easily interact with any other.
But smart contracts also have a number of drawbacks:
- Like any software, they can have bugs, which attackers can exploit.
- Once stored on the blockchain, they cannot be changed.
- Any interaction with a smart contract requires paying a commission, which in the long run can be very expensive.
5. Understanding the concept of ”Gas”: the fuel
of the Ethereum network
On the Bitcoin network, the cost of a transaction depends on two factors: the saturation of the network at a given moment, and the size in number of characters of the transaction.
On Ethereum, the cost of each transaction also depends on the saturation of the network but introduces a new factor: the computational complexity required to execute the transaction. A simple transaction of sending ethers from one user to another will have a low cost. A call to a smart contract that triggers complex calculations will have a significant cost.
This cost, which is called the gas, must be paid by the issuer of each transaction, in ethers.
One must keep in mind that each call to each smart contract is recalculated on each machine that makes up the Ethereum blockchain, and therefore has an impact on the entire network. It is therefore not conceivable to make intensive calculations of video games or artificial intelligence on Ethereum, at least not before a few years.
6. Ethereum: understanding tokenization.
The possibilities for developers on the Ethereum network are vast. Anyone can develop applications on Ethereum. The only prerequisite: knowing how to code in ”Solidity,” the network’s programming language.
One of the first functions that has been used is ”tokenization”, i.e. the creation of new cryptocurrencies. They are called ”tokens”, which can be translated as ”digital tokens”, issued through the Ethereum blockchain and hosted on it. Tokens can be held, quantified, and exchanged digitally between two people.
Prior to the development of Ethereum, creating a new crypto asset was extremely complicated: you had to create a blockchain, a mining network, wallets, economic management of the system, and most importantly, you had to successfully create demand and adoption.
With Ethereum, creating a new crypto asset is as simple as generating a smart contract and publishing it, which can take just a few minutes.
Instantly, the new asset is exchangeable, secured by the network, interoperable with the entire Ethereum ecosystem. Creators simplify their lives and use the existing infrastructure more or less for free.
The importance of the ERC-20 token
Creating a new token on the Ethereum blockchain is done by respecting certain “standards” imposed by the network. The most popular of these standards is called “ERC20”. Each ERC20 token is managed by a smart contract that presents a list of minimal functions: how to create new units, divide them into fractions, destroy them, transfer them to another wallet, etc.
There are several standards for tokens. We go into more detail in this article. While many tokens only represent their own value, some can now represent traditional financial products or even real-world objects.
7. Looking back on 2017 and the ICOs madness.
The tokens we’ve discussed are related to the deployment of a new service or application within the Ethereum blockchain.
The token in question can have a use as a currency, but can also represent a share in a project similar to a stock. In the latter case, it can even give the right to decision-making in the form of a vote.
What is an ICO – Initial Coin Offering?
The primary use of tokens has been to launch fundraising for various projects: this is known in English as an ICO, for Initial Coin Offering. It is the counterpart of an IPO in the cryptocurrency world.
Thanks to Ethereum’s smart contracts, almost every cryptocurrency project that was looking for funding in 2017 conducted an ICO, setting specific conditions such as the minimum amount of funds to be raised, the maximum amount of funds that could be raised, etc. Once the process was complete, the tokens were sent to investors.
Example: Augur, a predictive markets platform, was the first project designed on the Ethereum blockchain to raise funds via an ICO, in 2015. This allowed them to raise $5 million in ethers by selling each of their tokens for $0.6.
This ICO craze has now largely faded, with a number of projects failing to deliver on their initial promises.
8. Decentralized applications and their first use: decentralized finance (DeFi)
Interacting with a smart contract is relatively complicated, as you have to write computer code to do so. But if we create a web interface to interact with the services it offers, anyone can now have access to it. This is the concept of ”dapp”, for decentralized application.
One of the use cases that are emerging at a rapid pace are decentralized financial applications. This field now has a name: DeFi, for decentralized finance. In short, these applications allow, for example, to take out a loan, to lend money or to trade without going through a centralized intermediary, and all this with a few clicks.
Some projects have already established themselves well in their field, such as MakerDAO to obtain pawn loans in ethers, or Aave to lend one’s cryptocurrencies and obtain a return in exchange.
Several tokens in the DeFi sector today represent fairly successful products, most of which offer an interesting return on investment, financed by the use of the platform itself.
9. The new uses in vogue: non-fungible tokens (NFT).
As we have seen, the Ethereum blockchain makes it possible to issue several token standards. One of these standards will be adopted more quickly in 2021: the ERC721 standard for non-fungible tokens (NFT).
The particularity of these tokens consists in their uniqueness (or at least their strictly limited and numbered nature). They are impossible to counterfeit and open up new possibilities, especially in terms of proof of authenticity of a music or a digital work thanks to the blockchain.
10. What is the future potential for Ethereum?
In the market, Ethereum’s value is represented by the ether price, which is set, as with Bitcoin, by supply and demand. The ether is also listed on many exchange platforms. Its price is influenced by the news around its ecosystem but also by speculation, as for any financial asset.
Ethereum has become a fundamental platform in the cryptocurrency ecosystem. New projects are created almost every day on its blockchain. Although in 2021, the network is not free of all reproach, especially around transaction fees, developments are numerous, improvements are underway and the price of ether should reflect this evolution sooner or later.
But beware, if investing in ether in the medium or long term can be a wise choice, one should not neglect its high volatility: its value can rise or fall sharply in the space of a few days only.
For example, at the beginning of 2018, the ether price was setting a record at 1100 euros before suffering a sharp decline of almost 90%. By December 2018, the price was only worth 75 euros. Since the summer of 2020, a strong uptrend has returned, with the price gaining about 1200% over a year to be around 1500 euros.
Ethereum therefore goes further than Bitcoin and allows for alternatives that are also of growing interest to the business world, with flexible and adapted value propositions. Around the project also revolves the whole framework of decentralized finance applications (DeFi) and non-fungible tokens (NFT).
Today, there is an alliance of Ethereum companies, which includes names such as Microsoft, Samsung or Intel, and which seeks to test and develop the technology: the Ethereum ecosystem remains in full effervescence and the IT developments are very numerous. For us, this is a must-have project in the world of digital assets.
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