What is Ethereum? A Beginner’s Explanation in Plain English

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What on earth is Ethereum? I mean, I keep hearing about it all the time, I’ve seen it’s the second largest
cryptocurrency around but I just can’t seem to
wrap my head around it. Is it as revolutionary as Bitcoin? Can it actually change the world
as we know it? If you want to have
a better understanding of Ethereum, but are tired of explanations that sound like
complete technical gibberish, stick around… Here on Bitcoin Whiteboard Tuesday, or should I say Ethereum Whiteboard Tuesday we’ll answer these questions and more. Before we get into Ethereum we need to do a quick recap about Bitcoin, since it’s the basis from which
Ethereum was born.

By now you probably know that
Bitcoin is a form of decentralized money, and if you still have some questions about
what that means or how it works, then you might consider revisiting
our original video, “what is Bitcoin”. Before Bitcoin was invented, the only way to use money digitally was through an intermediary
like a bank, or Paypal. Even then, the money used was still
a government issued and controlled currency. However, Bitcoin changed all that by creating
a decentralized form of currency that individuals could trade directly
without the need for an intermediary. Each Bitcoin transaction is
validated and confirmed by the entire Bitcoin network. There’s no single point of failure so the system is virtually impossible to
shut down, manipulate or control. Pretty neat huh? Well, now that we know that
money can be decentralized, what other functions of society
that are centralized today would be better served on
a decentralized system? What about voting? Voting requires a central authority to
count and validate votes.

Real estate transfer records currently use centralized
property registration authorities. Social networks like Facebook
are based on centralized servers that control all of the data
we upload to them. What if we could use
the technology behind Bitcoin, more commonly known as Blockchain, to decentralize other things as well? The interesting thing about
Blockchain technology is that it’s actually the by-product of
the Bitcoin invention. Blockchain technology was created by
fusing already existing technologies like cryptography, proof of work and decentralized
network architecture together in order to create a system
that can reach decisions without a central authority.

There was no such thing as
“blockchain technology” before Bitcoin was invented. But once Bitcoin became a reality, people started noticing
how and why it works and named this “thing” blockchain technology. Blockchain is to Bitcoin
what the Internet is to email; a system on top of which you can build
applications and programs. A currency like Bitcoin
is just one of the options. So this got people very excited, and they began to explore
what else can we decentralize. However, in order for a system to be
truly decentralized it needs a large
network of computers to run it. Back then the only network
that existed was Bitcoin and it was pretty limited.

Bitcoin is written in what is known as
a “turing incomplete” language which makes it understand
only a small set of orders, like who sent how much money to whom. If you want to create
a more complex system, you’ll need a different
programming language, which means a different
network of computers. Imagine for a second you wanted to
build your own decentralized program, just like Bitcoin, at home. You’d need to understand
how Bitcoin’s decentralization works, write code that mimics the same behaviour, get a huge network of computers
to run this code and so on….

And that is a lot of work. Enter Ethereum. Ethereum was first proposed in late 2013 and then brought to life in 2014
by Vitalik Buterin who at the time was
the co-founder of Bitcoin Magazine. Ethereum is the Do It Yourself platform
for decentralized programs also known as Dapps – decentralized apps. If you want to create
a decentralized program that no single person controls, not even you even though you wrote it, all you have to do is learn
the Ethereum programming language called Solidity and begin coding. The Ethereum platform has thousands of
independent computers running it meaning it’s fully decentralized.

Once a program is deployed
to the Ethereum network these computers, also known as nodes,
will make sure it executes as written. Ethereum is the infrastructure
for running Dapps worldwide. It’s not a currency, it’s a platform. The currency used to incentivize
the network is called Ether but more on that later. Ethereum’s goal is to truly
decentralize the Internet. Wait? The internet is centralized? I thought the Internet already
was decentralized and that anyone can start their own site. While in theory that might be true, in practice Amazon, Google,
Facebook, Netflix and other giants control most of the world wide web
as we know it.

There’s almost no activity on the web that happens without some sort of
intermediary or 3rd party. But once the concept of
digital decentralization was demonstrated by Bitcoin, a whole new array of opportunities
became available. We can finally start to imagine and design an Internet that connects users directly
without the need for a centralized 3rd party. People can “rent” hard drive space
directly to other people and make Dropbox obsolete. Drivers can offer their services
directly to passengers and remove “Uber” as the middleman. People can buy cryptocurrencies
directly from one another without the need for an exchange
that can get hacked or steal your money. Ethereum allows people to connect
directly with each other without a central authority
to take care of things. It’s a network of computers that together combine into one powerful,
decentralized supercomputer. Ok, So now you know what Ethereum does but we haven’t touched upon HOW it does it.

Ethereum’s coding language, Solidity, is used to write “Smart Contracts”
that are the logic that runs Dapps. Let me explain… In real life, all a contract is,
is a sets of “Ifs” and “Thens”. Meaning a set of conditions and actions. For example, if I pay my landlord
$1500 on the 1st of the month then he lets me use my apartment. That’s exactly how
smart contracts work on Ethereum. Ethereum developers write
the conditions for their program or Dapp and then the ethereum network executes it. They are called smart contracts because they deal with
all of the aspects of the contract – enforcement, management,
performance, and payment.

pexels photo 5022810

For example, if I have a smart contract
that is used for paying rent, the landlord doesn’t need to
actively collect the money. The contract itself “knows”
if the money has been sent. If I indeed sent the money, then I will be able to open
my apartment door. If I missed my payment,
I will be locked out. However smart contracts
also have their downsides. Going back to my previous example, instead of having to kick out a renter
that isn’t paying, a “smart” contract would lock
the non-paying renter out of their apartment. A truly intelligent contract
on the other hand, would take into account
other factors as well, such as extenuating circumstances, the spirit with which
the contract was written and it would also be able to
make exceptions if warranted.

In other words, it would act like
a really good judge. Instead, a “smart contract”
in the context of Ethereum is not intelligent at all. It’s actually uncompromisingly letter strict. It follows the rules down to a T and can’t take any secondary considerations
or the “spirit” of the law into account like what commonly happens with
real world contracts.

Once a smart contract is deployed
on the Ethereum network, it cannot be edited or corrected, even by its original author. It’s immutable. The only way to change this contract would be to convince
the entire Ethereum network that a change should be made
and that’s virtually impossible. This creates a very serious problem
since unlike Bitcoin, Ethereum was built with
the ability to create really complex contracts, and complex contracts
are very difficult to secure.

With any contract, the more complicated it is,
the harder it is to enforce as more room is left for interpretations, or more clauses must be written
to deal with contingencies. With smart contracts, security means handling with perfect accuracy every possible way in which
a contract could be executed in order to make sure that the contract
does only what the author intended. Ethereum launched with the idea that
“code is law”. That is, a contract on Ethereum
is the ultimate authority and nobody could overrule the contract. Well, that all came to a crashing halt
when the DAO event happened. “Dow” or DAO stands for
“Decentralized Autonomous Organization” which allowed users to deposit money and get returns based on
the investments that the DAO made. The decisions themselves
would be crowd-sourced and decentralized.

The DAO raised $150M
in Ethereum currency, ether, when ether was trading around $20. While this all sounded very good, the code wasn’t secured very well and resulted in someone figuring out
a way to drain the DAO out of money. Now you could say that the person
who drained the DAO was a “hacker”. But some would argue that
this was just someone who was taking advantage of the loopholes
he found in the DAO’s smart contract.

This isn’t very different than a creative lawyer figuring out
a loophole in the current law to effect a positive result for his client. What happened next is that the Ethereum community decided that
code no longer is law and changed the Ethereum rules in order to revert all the money
that went into the DAO. In other words, the contract writers and investors
did something stupid and the Ethereum developers
decided to bail them out.

The small minority that didn’t
agree with this move stuck to the original Ethereum Blockchain
before its protocol was altered and that’s how Ethereum Classic was born, which is actually the original Ethereum. We’ve covered a lot up until now and the last thing I want to
talk about is Ethereum as a currency. We’ve already established that Ethereum is basically
a large bunch of computers working together like one super computer
to execute code that powers Dapps. However this costs money – Money to get the machines, to power them up,
store them and cool them if needed. That’s why Ether was invented. When people talk about the price of Ethereum they actually are referring to Ether – the currency that incentivizes people to run
the Ethereum protocol on their computer.

This is very similar to
the way Bitcoin miners get paid for maintaining the Bitcoin blockchain. In order to deploy a smart contract
to the Ethereum platform, its author must pay to do so. That payment is made in the form of ether. This is done so that people will write
optimized and efficient code and won’t waste the Ethereum network
computing power on unnecessary tasks. Ether was first distributed in Ethereum’s
original Initial Coin Offering back in 2014. Back then it cost around
40 cents to buy one Ether. Today, one Ether is valued in
hundreds of dollars since the use of the Ethereum network
has grown immensely due to the ICO hype that started in 2017. Still Confused? Don’t worry; we’ll get more into
Ether and mining in a later video. Ethereum’s network and Ether are a whole
new rabbit hole that we’ll cover but I think this will do for now
as an intro to Ethereum.

This concludes this week’s episode of
Ethereum Whiteboard Tuesday. Hopefully by now you have
a better understanding of what Ethereum is – A network of computers
working together to replace the centralized model of programs
and companies which run the Internet today. You may still have some questions. If so, just leave them
in the comment section below. And if you’re watching this video on YouTube,
and enjoy what you’ve seen, don’t forget to hit the like button. Then make sure to subscribe
for notifications about new episodes. Thanks for joining me here at the Whiteboard. For 99bitcoins.com, I’m Nate Martin, and I’ll see you… in a bit..

As found on YouTube

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