With a total market capitalization of 221 billion dollars, nearly three thousand cryptocurrencies exist today. Out of those three thousand, Ethereum happens to be in the top ten. You might be asking yourself what is Ethereum and why is it different than Bitcoin? How much is it trading at? Is it worth investing in? Are there miners actively mining it? In this blog post we will dive deeper into the details of Ethereum, why it exists and the problems it solves.
Before we get into Ethereum, we should have a basic understanding of what the Blockchain is. If the word Blockchain remains unclear to you, go ahead and check out our previous blog post on it here.
What is Ethereum?
To understand Ethereum it may help to examine what problems it’s trying to solve. With the advent of the internet there became a need to host websites, to store personally identifiable information, to record transaction history and just to basically keep track of things. Third party companies were created to solve the problem of storing sensitive and non sensitive data alike. Eventually cloud computing came into the mix which is essentially the ability to store information on someone else’s server. This would be things like iCloud for example where users can store pictures, back up their contacts, sync iMessages from their iPhones. While very convenient, cloud computing is vulnerable to prying eyes from the hosting company. So in other words if Apple or Google really wanted to have a look at your data, there is no doubt that they could. Even though they claim everything is encrypted, secure, tamper-proof etc. Although they probably won’t, they probably have better things to do then look at photos of you and your dog.
Ethereum’s textbook definition is that it’s an open source technology that runs on the Blockchain to create and run decentralized applications, but basically it solves the problem of having to utilize a third party to conduct business with someone. With Ethereum, users wouldn’t need a bank to conduct a transaction with one another. They wouldn’t need a lawyer to build the contract and see it through to completion. It is also totally feasible for two people to conduct business with one another even if they don’t speak the same language. This all works using something called smart contracts which are self executing under certain conditions on the Blockchain.
Smart contracts basically allow two parties to conduct a transaction together without the need for a middleman but how exactly does it work? So a smart contract is a program built by a programmer using code. Specifically on the Ethereum network, solidity which is a programming language is used to build the smart contract. Once the contract is built and agreed upon between the two parties, an asset with value is transferred into the program, this could be a cryptocurrency for example. The program then executes some code and checks various conditions. If all the conditions are met the contract is satisfied and the receiving party will receive payment, if it fails to meet the conditions then the payment simply goes back to the sending party. Easy right?
Let’s talk about a real world example. In the banking industry fees occur all the time. A typical banking fee might occur if you try to make a payment to someone and you didn’t have enough money in your checking account. The bank see’s this as an overdraft, pulls from your savings to make the payment, and then incurs a fee… which is whatever they want the fee to be. With smart contracts, you could simply add your payment to the contract. The contract would simply pass or fail depending on if the correct conditions were met and voila! No fees going back to the bank. The contract could even have agreed upon fees in the event that conditions were not met which would benefit both parties. The receiving end would get payed something regardless and the payee wouldn’t have to face such a steep fee. On top of this the fee wouldn’t end up going to the third party, it would go directly to the receiving party.
If you’d like to examine Ethereum and the Ethereum network a little further, Coindesk has a great introductory blog post. Chapter 03 talks about how Ethereum actually works on the Blockchain and is a great resource. You can check it out by clicking the link below.