Know About Bitcoin but Nothing About Ethereum? This Article is for You..
If you’re wondering what is Ethereum, this post should help. Following my last article in the ‘What is a Bitcoin’ series, I’m now going to explain some of the main facts you need to know about Ethereum before you start investing in cryptocurrencies.
As a short headline overview, similar to Bitcoin, Ethereum has a currency called ether, however it is far more than purely a cryptocurrency. Where Ethereum sets itself apart is the technology that supports it.
I’ve written this post with the non-techie in mind so I’m going to assume you know nothing about blockchain technology. Before we look at Ethereum, we need to take a look at blockchain.
By the way, I encourage you to check out the Smart Bitcoin Buyer Glossary of Crypto Terms. This is a glossary which will help the non-tech reader with terms they don’t understand. The glossary is there for anything you don’t understand alternatively, leave a comment and I’ll respond.
So onto Blockchain. This is the technology that is behind everything you’re hearing about in the news at the moment concerning digital money. It’s behind the cryptocurrencies including Bitcoin and also new platforms such as Ethereum which have recently arrived on the scene.
The first three of the facts below look at blockchain and the remaining tell you what you need to know about Ethereum.
1) The Old Way – Centralization
The traditional technology that blockchain impacts uses servers on which applications run. For example, an office worker might have Microsoft Office on their work computer. However, the server of their company is really running everything in terms of the communication between individual computers, the licensing of the software, security etc.
Another example would be the apps you have on your cellphone. Think of an app like Youtube, or Facebook or may be a news app like the BBC. Your phone needs to connect with the Youtube or Facebook or BBC servers.
Although news or music is shown on your phone, it originates on these organization’s servers. You type into Youtube the video you want to watch and the servers then display the video on your phone.
Furthermore, your Facebook details are not actually stored on your phone, they’re stored on Facebook servers which can be located anywhere in the world.
Hundreds of thousands of user’s phones are connected to these servers. Consequently, there is a lot of information stored centrally by Facebook or Youtube etc. They’re doing this securely but also in a way which minimizes costs for them. This allows us, the users to access Facebook or Youtube for free.
2) The Downside to Centralization
Many people believe this centralization is really of form of control of the public by private organizations. Some even believe this is government interfering with our freedom.
The design of this infrastructure around individual servers where each server runs its own code, in isolation to other servers could be seen as the opposite to what many believe the internet is about. In the event that a server goes off-line all the applications on the server also go off-line. Alternatively if the server is hacked or compromized, the users and applications are impacted.
3) The New Way – Blockchain and Decentralization
This is where blockchain comes in. Anyone can download the necessary software thereby becoming a ‘node’. Each node is connected to all the other nodes that run the same software. Together these nodes become a network and the network runs the code that forms the blockchain.
One node can go off-line and the blockchain still work. It is completely decentralized and secure. Ownership and value can be transferred all over the world with only the interaction of the two parties doing the transfer.
4) Enter Ethereum and the Ethereum Foundation
So where does Ethereum fit in? Back in 2014 the concept of Ethereum was presented to the world by its creators, the Ethereum Foundation. This is a not-for-profit organization based in Switzerland. Using blockchain technology, Ethereum provides a platform on which applications can run and do so exactly as programmed by the developer.
5) Ethereum: Blockchain 2.0
With blockchain technology, the foundation are able to maintain a decentralized design. This eliminates the risk of any one server going off-line. Without the blockchain this is always a risk for developers.
Furthermore, the creators believe this structure also eliminates the risk of censorship, fraud or what they call ‘third-party interference’. I interpret third-party to mean governments or private organizations. Also, Ethereum provides users with what the foundation calls ‘smart contracts’ and in this way it is considered as a development to the original blockchain from which Bitcoin emerged.
6) Ethereum and Smart Contracts
The Ethereum technology is primarily known for its smart contract. By using a blockchain, Ethereum is able to store within the contract itself, the applications which are required by the contract negotiations. Therefore, the blockchain can be used to verify and enforce the terms of the contract. Furthermore, this verification takes place completely decentralized and without influence from the parties to the contract.
As a result of this, smart contracts are capable of eliminating counterparty risk. To explain what this means consider a financial based contract such as the payment of an interest rate, mortgage rate or even exchange rate.
The agreement could be to pay X amount in 6 months time. The signatories to the contract can use the Ethereum platform to have the agreement verified and enforced through the blockchain. The risk that the other party will not pay that X amount is removed. That obligation is embedded within the smart contract.
7) Ether – The Currency of Ethereum
As well as smart contracts, Ethereum has a cryptocurrency called ether. This is a payment to people who’s computers contribute to the network’s resources. Application developers who use the Ethereum platform are incentivized to write quality applications that use the minimum amount of the platform’s resources.
If the developer writes unnecessary code, his software will require more resources from the platform to run. The applications which run the most unnecessary code will cost the most. The computers which are part of the network are therefore paid more. By maintaining a ‘healthy’ efficient network the more widespread its use will become.
For developers, one interesting feature of Ethereum is that they have a method of raising funds for their projects. The developer can set up a contract and secure pledges of money made by the community. Any money which is raised can be held until the developer’s funding goal is reached (or finish date met).
If the developer fails to meet his funding goal, the funds he has raised will be returned to the pledgers. However, if the developer does reach his goal, the pledges will be used to fund the project.
Developers would interested in this method of raising funds since it takes away the third part and any fees or commissions they might charge. For new projects these fees might take up as much as 10% of the project’s budget.
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