What Is Ethereum?

Intruction

Ethereum is a decentralized computing platform. Through Ethereum, a centralized server will be replaced by nodes run by thousands of volunteers around the world, which is fully decentralized. It is an open-source, public platform based on blockchain technology, which allows users to build and deploys decentralized applications on the platform using smart contracts. Through its proprietary cryptocurrency, Ether, the Ethereum network provides decentralized virtual machines (Ethereum Virtual Machine) to handle peer-to-peer contracts.

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. Inspired by Bitcoin, Vitalik Buterin proposed to build a "next-generation cryptocurrency and decentralized application platform" and developed it through Initial Coin Offering. He aims to find out whether blockchain technology has other effective uses beyond Bitcoin's design limitations.

In fact, Ethereum uses the core idea of Bitcoin to adopt a decentralized P2P network as the underlying infrastructure and expand the application scope of blockchain technology. It is often referred to as the second-generation blockchain, while Bitcoin is the first generation. Therefore, in order to better understand Ethereum, we must have a general understanding of Bitcoin. Bitcoin is a decentralized form of currency that individuals can trade directly without intermediaries, and each transaction is validated and confirmed by the entire Bitcoin network. By having each participant run a program on their computer, Bitcoin made it possible for users to agree upon the state of a financial database in a trustless, decentralized environment. The emergence of Bitcoin has inspired people, if money can be decentralized, what about other functions and applications? However, Bitcoin kept intentionally inflexible to prioritize security at its base layer. Thus, it is written in a simple programming language known as the "turning incomplete" language, which cannot support the construction of complex applications. If people want to create a more complex system, they need a different programming language.

As a result, Ethereum came out with a flexible programming language called Solidity, which allows developers to create Decentralized Applications (Dapp) of varying complexity to suit their needs. Ethereum serves as a platform and infrastructure for creating and running Dapps worldwide, and it is fully decentralized. In short, Ethereum is blockchain technology plus smart contracts. The core of Ethereum is Smart Contract and Consensus Mechanism.

Smart Contract

The coding language of Ethereum, Solidity, is used to write smart contracts that are the logic that runs Dapps. In real life, a contract is a set of conditions and cations. For instance, if I pay the landlord $1500 on the first of the month, then I can use the apartment. Simultaneously, Ethereum developers write the conditions for their program of Dapps, and then the Ethereum network executes them if certain conditions are met. Typically, they work as a digital agreement that is enforced by a specific set of rules. These rules are predefined by computer code, which is replicated and executed by all network nodes.

As programmable code, smart contracts are highly customizable and can be designed in many different ways, offering many kinds of services and solutions. For instance, the creation of tokenized assets, voting systems, crypto wallets, decentralized exchanges, games, and mobile applications. As decentralized and self-executing programs, smart contracts may provide increased transparency and reduced operational costs. Depending on the implementation, they can also increase efficiency and reduce bureaucratic expenses.

However, smart contracts are made of computer code written by humans, which brings numerous risks as the code is subject to vulnerabilities and bugs. Ideally, they should be written and deployed by experienced programmers especially when involving sensitive information or a large number of funds. In addition, smart contracts are not legal contracts, nor smart. They are just a piece of code running on a distributed system. Thus, smart contracts are actually uncompromisingly lettered strict and cannot take any secondary considerations or the spirit of the law into account. Once a smart contract is deployed on the Ethereum network, it cannot be edited or corrected, even by its original author. Being immutable can be great in some situations, but very bad in others. For example, when a Decentralized Autonomous Organization (DAO) called "The DAO" got hacked in 2016, millions of ether (ETH) were stolen due to flaws in their smart contract code. Since their smart contract was immutable, developers were unable to fix the code. This eventually led to a hard fork, giving birth to a second Ethereum chain.

Consensus Mechanism

When it comes to blockchains like Ethereum, which are in essence distributed databases, the nodes of the network must be able to reach an agreement on the current state of the system. This is achieved using consensus mechanisms. Consensus mechanisms allow distributed systems (networks of computers) to work together and stay secure. The following are two major types of consensus mechanisms:

	Proof-of-work (PoW)	Proof-of-stake (PoS)
Block Creation	PoW is done by miners, who compete to create new blocks full of processed transactions. The winner shares the new block with the rest of the network and earns some freshly minted ETH. The race is won by the node that solves a math puzzle fastest. Solving this puzzle is the work in "proof of work".	PoS is done by validators who have staked ETH to participate in the system. A validator is chosen at random to create new blocks, share them with the network and earn rewards. Instead of needing to do intense computational work, you simply need to have staked your ETH in the network. This is what incentivizes healthy network behavior.
Security	High, the network is kept secure by the fact that you'd need 51% of the network's computing power to defraud the chain. This would require such huge investments in equipment and energy.	Relatively low, the recording power increases with the amount of Ether owned
Hardware Requirement	High functional computing equipment	No equipment is required and only a certain number of tokens are pledged
Transaction processing speed	Relatively slow	High, its processing speed in the future is expected to be comparable to traditional trading platforms such as Paypal
Energy consumption	Extremely High	As low as negligible

Ethereum is moving to a consensus mechanism called proof-of-stake (PoS) from proof-of-work (PoW). For Ethereum, users will need to stake 32 ETH to become a validator. Validators are chosen at random to create blocks and are responsible for checking and confirming blocks they don't create. Unlike proof-of-work, validators don't need to use significant amounts of computational power because they're selected at random and aren't competing.

Proof-of-stake comes with a number of improvements to the proof-of-work system:

• Better energy efficiency as you don't need to use lots of energy mining blocks
• Lower barriers to entry by reducing hardware requirements 
• Stronger decentralization allows for increased participation

Ether

Ether is the cryptocurrency that powers the Ethereum platform. Ethereum is basically a group of computers that work together to execute the code of Dapps, and its operation is expensive. Therefore, as a currency, Ethereum encourages people to run the Ethereum protocol on their own computers, which is similar to the way Bitcoin miners who maintain the blockchain get paid. In Ethereum, the cryptocurrency Ether is paid to authors who provide smart contracts to the platform. Therefore, people will write optimized and efficient code and will not waste the computing power of the Ethereum network on unnecessary tasks.