Ethereum was launched in August 2014 as a decentralized platform for smart contracts. The sheer range of possibilities offered by Ethereum has sparked a high level of global interest. That versatility includes the ability to decentralize services such as real estate or other types of asset property title registries, insurance records, voter registration lists, and regulatory compliance of all types.
Ethereum applies the principle of a decentralized network to virtual machines. Computer programs can be run on location-independent systems, and companies such as Microsoft and Google offer the service of being able to run programs on their cluster of machines. Ethereum takes the concept of a decentralized blockchain-secured network pioneered by Bitcoin and applies it to a computer cluster. Instead of the computer cluster being administered centrally by an organization, the computer cluster comprises a decentralized network of machines (or nodes) which execute the programmed smart contracts for its users.
The History of Ethereum
In contrast to the pseudonymous and as yet unknown inventor of Bitcoin, Satoshi Nakamoto, Ethereum’s inventor, the Russian-born Canadian citizen Vitalik Buterin, is comfortable making his identity known to the public. Moving from Moscow to Canada at age 6, Buterin considers himself to be a child of the internet. Buterin was a very young mathematical genius who transferred his attention to electronic games and at age 17, to a curiosity about Bitcoin and cryptocurrency.
Buterin’s outsider viewpoint and outright eccentricity allowed him to progress from an inquisitive tech-obsessed teenager to becoming the head writer and co-founder of Bitcoin Magazine in 2011. His gift for writing articles that explained the intricacies of blockchain-based cryptocurrencies made him an instant star. Due to what he considered to be a limited instruction set on the Bitcoin blockchain, Buterin determined a need for an extension of bitcoin, with a blockchain with a Turing-complete instruction set that allows for more programming possibilities on the blockchain.. He wrote the Ethereum white paper in 2013, and the product was launched in 2014.
Buterin and his partner, Canadian entrepreneur Joseph Lubin, co-founded the company Ethereum Switzerland in 2014. (Telegraph, November 2017) The robustness of the programming attracted immediate attention and investment. Developers around the world have embraced Ethereum as the foundation of their own applications. An example is the Brooklyn, New York company Consensys whose aim is to stamp out financial corruption. They have successfully launched a triple-entry bookkeeping application called Balanc3 to fulfill that goal. (Wired, June 2016) Another example is the DAO, which was an attempt to set up an organization in 2016 on the Ethereum network to collect and disburse investment in startup companies and other organizations. Funds were transferred by participants for this purpose to the DAO. However, programming flaws in the DAO were exploited by a hacker who used the incorrectly coded refund function to withdraw funds. The community resolved this by hard forking Ethereum, with the original state becoming Ethereum classic, and a network that reverted the hack continuing as Ethereum.
Ethereum vs. Bitcoin Blockchain
The differences between Bitcoin and Ethereum can be distilled to two key points. Bitcoin is only meant to conduct financial transactions, transform currency into a digital format, and move the currency from place to place or account to account. In contrast, Ethereum has layers of adaptability and a variety of uses since its decentralized platform can be used to run a variety of applications including the movement of currency and, more importantly, other more complicated types of transactions.
Ethereum also aims to reduce or remove offline time, government or other official attempts to censor the site, illegal or fraudulent use of the site, hacking, and any other sort of interference. Stated goals also include the use of their site-specific blockchain to enable and encourage new markets to emerge and thrive, to create a means whereby contracts such as wills that were dated in the past could be honored, and to record specific debts or financial funds. (Ethereum Foundation, n.d.)
The Smart Contract
Ethereum extends the principles developed by bitcoin to smart contracts. For example, just as a cryptocurrency transaction is irrevocable, smart programs running on a decentralized platform cannot be modified, thus guaranteeing all parties that the agreed program will be executed with no possibility for future manipulation or fraud.
Various high-level languages like Solidity can be compiled into native Ethereum instruction code.
A smart contract is more than just an agreement between 2 or more parties of mutual acceptance of defined terms. It also enforces and carries out the terms of the contract. Putting a smart contract into a blockchain ensures that the contract cannot be changed and that if the conditions in the contract are met, the agreed action is guaranteed to happen. (Blockgeeks, 2017) For example, 2 parties can agree that one bitcoin is sent from one party to the other on 1 January 2020, if the bitcoin price on that date is above $10,000. A smart contract can monitor the price and automatically fulfill the contract if that condition is met.
Smart contracts on a blockchain open up a huge number of possibilities., many of which deal with the elimination of the middle man. Wills can be written, transparent to all on the blockchain, and the inheritance automatically and instantaneously disbursed to the beneficiaries. Title deeds for property can be exchanged on the blockchain, with the exchange of deeds being subject to the buyer paying the agreed sum by a transaction with cryptocurrency on a blockchain. Also, organizations where participants can vote on proposals, such that the votes are collected and counted automatically, and the winning proposals automatically enacted by the smart contract can be founded.
Smart contracts are encoded in the Ethereum instruction set, which is then executed on the Ethereum Virtual Machine by being included in the Ethereum block chain. The Ethereum block size is determined by the miners deciding by simple majority how many computations can be included in a block. At present, the full ethereum blockchain has a size of around 400Gb, in comparison with Bitcoin’s much older blockchain being 160Gb. The instruction set is Turing complete, meaning any possible computer algorithm can be programmed with it, allowing great flexibility in the possibilities available to the user.
Another important aspect of the Ethereum blockchain is its own cryptocurrency known as ether. For users to run their smart contracts on the Ethereum blockchain, the users have to pay the Ethereum node operators with ether to run their programs. This cost forces users to write code that is as efficient and correct as possible. 5 ether is awarded for each generated block, with each block taking 15 seconds to generate. Thus, the rate of ether generation is constant. However, it is planned that the methodology for block confirmation will be changed to an as yet undefined proof of stake algorithm. Aside from being a reward for node operators, ether can also be acquired on cryptocurrency exchanges.
As with many other cryptocurrencies, the value of ether rose rapidly in 2017, by about 8750%. It is estimated that there are now well over 5 million digital wallets holding this form of cryptocurrency.