Proactive Computer Engineer Blockchain Enthusiast & Crypto Learner

What is Ethereum?

What is Ethereum?

Ethereum is an open-source decentralized blockchain-based platform that allows individuals to conduct transactions and draw up contracts.

It has its own cryptocurrency, called Ether, and its own programming language, called Solidity.

As a blockchain network, Ethereum is a decentralized public ledger for verifying and recording transactions. The network’s users can create, publish, monetize, and use applications on the platform.

The most fascinating aspect of Ethereum is that the code published on its blockchain cannot be changed, modified, or hacked.

It is a decentralized programmable blockchain-based software platform, not simply a blockchain.

Ethereum was established in the summer of 2015 with the goal of broadening the spectrum of blockchain and cryptocurrency applications beyond Bitcoin’s initial scope, including permissionless financial services, crowdfunding, and new organizational structures.

Origin

Ethereum was initially described in a white paper by Vitalik Buterin, a programmer, in late 2013 with a goal of building decentralized applications.

Buterin argued to the bitcoin core developers that Bitcoin and blockchain technology could benefit from applications other than money, and that a more robust language for application development was needed, which could lead to the blockchain being used to store real-world assets like stocks and property. He recommended the construction of a new platform with a more sophisticated programming language, which would later become Ethereum, after failing to reach agreement on how the project should proceed.

Formal development of the software began in early 2014 through a Swiss company. The basic idea of putting executable smart contracts in the blockchain needed to be specified before the software could be implemented.

Several codenamed prototypes of Ethereum were developed over 18 months in 2014 and 2015 by the Ethereum Foundation as part of their proof-of-concept series.

In July 2015, “Frontier” marked the official launch of the Ethereum platform as Ethereum created its “genesis block.”

Since the initial launch, Ethereum has undergone several planned protocol upgrades, which are important changes affecting the underlying functionality and/or incentive structures of the platform.

After the Constantinople upgrade on 28 February 2019, there were two network upgrades made within a month late in the year: Istanbul on 8 December 2019 and Muir Glacier on 2 January 2020.

There have been two network upgrades in 2021. The first was the Berlin upgrade, implemented on 14 April 2021. The second was London, which took effect on 5 August. The London upgrade included Ethereum Improvement Proposal (“EIP”) 1559, which introduced a mechanism for reducing transaction fee volatility. The mechanism causes a portion of the Ether paid in transaction fees each block to be destroyed rather than given to the miner, reducing the inflation rate of Ether and potentially resulting in periods of deflation.

How does Ethereum work?

You might have heard that the Bitcoin blockchain is a lot like a bank’s ledger, or even a checkbook. It’s a running tally of every transaction made on the network going back to the very beginning — and all the computers on the network contribute their computing power towards the work of ensuring that the tally is accurate and secure.

The Ethereum blockchain, on the other hand, is more like a computer: while it also does the work of documenting and securing transactions, it’s much more flexible than the Bitcoin blockchain. Developers can use the Ethereum blockchain to build a huge variety of tools — everything from logistics management software to games to the entire universe of decentralized applications (which span lending, borrowing, trading, and more).

Ethereum uses a virtual machine to achieve all this, which is like a giant, global computer made up of many individual computers running the Ethereum software. Keeping all of those computers running involves investment in both hardware and electricity by participants. To cover those costs, the network uses its own cryptocurrency, Ether (or, more commonly, ETH).

ETH keeps the whole thing running. You interact with the Ethereum network by using ETH to pay the network to execute smart contracts. As a result, the fees paid in ETH are called “gas”.

Use cases

  • Decentralized finance (DeFi): An open and global financial system built for the internet age — an alternative to a system that’s opaque, tightly controlled, and held together by decades-old infrastructure and processes. It gives you control and visibility over your money. It gives you exposure to global markets and alternatives to your local currency or banking options. DeFi products open up financial services to anyone with an internet connection and they’re largely owned and maintained by their users. So far tens of billions of dollars worth of crypto has flowed through DeFi applications and it’s growing every day.
  • Non-fungible tokens (NFTs): Tokens that we can use to represent ownership of unique items. They let us tokenise things like art, collectibles, even real estate. They can only have one official owner at a time and they’re secured by the Ethereum blockchain — no one can modify the record of ownership or copy/paste a new NFT into existence. NFTs and Ethereum solve some of the problems that exist in the internet today. As everything becomes more digital, there’s a need to replicate the properties of physical items like scarcity, uniqueness, and proof of ownership. Not to mention that digital items often only work in the context of their product.
  • Decentralized autonomous organisations (DAOs): Think of them like an internet-native business that’s collectively owned and managed by its members. They have built-in treasuries that no one has the authority to access without the approval of the group. Decisions are governed by proposals and voting to ensure everyone in the organization has a voice. There’s no CEO who can authorize spending based on their own whims and no chance of a dodgy CFO manipulating the books. Everything is out in the open and the rules around spending are baked into the DAO via its code.

Advantages of Ethereum

Aside from decentralization and anonymity, Ethereum also has various other benefits, such as a lack of censorship. For example, if someone tweets something offensive, Twitter can choose to take it down and punish that user. However, on an Ethereum-based social media platform, that can only happen if the community votes to do it. That way, users with different viewpoints can discuss as they see fit, and the people can decide what should and shouldn’t be said.

Community requirements also prevent bad actors from taking over. Someone with ill intentions would need to control 51% of the network to make a change, which is nearly impossible in most cases. It’s much safer than a simple server that can be broken into.

It’s also getting easier than ever before to acquire Ether. Companies like PayPal and its Venmo subsidiary support purchasing crypto with fiat currency right within the application. Considering the millions of customers on each platform, they’re bound to get involved sooner rather than later.

Disadvantages of Ethereum

While it sounds like the perfect platform, Ethereum has a few key issues that need to be worked out.

The first is scalability. Buterin envisioned Ethereum the way the web is now, with millions of users interacting at once. Due to the PoW consensus algorithm, however, such interaction is limited by block validation times and gas fees. Furthermore, decentralization is a hindrance. A central entity, like Visa, manages everything and has perfected the transaction process.

Second, there is accessibility. As of the time of writing, Ethereum is expensive to develop on and challenging to interact with for users unfamiliar with its technology. Some platforms require specific wallets, which means that one must move ETH from their current wallet to the required wallet. That’s an unnecessary step for users ingrained in our current financial ecosystem and not beginner-friendly in the slightest.

Sure, PayPal is adding crypto support, but users can’t do much aside from holding it there. The platform needs to integrate with DeFi and DApps to increase accessibility in a meaningful way.

The platform does have some well-written documentation on the matter — another key way to bring in more users. But the act of actually using Ethereum needs streamlining. Learning about blockchain is very different from using it.

What is Bitcoin?

What is Bitcoin?

Bitcoin is a decentralized digital currency created in January 2009. It promises reduced transaction costs than standard online payment channels and, unlike government-issued currencies, is controlled by a decentralized authority.

Bitcoin employs peer-to-peer technology to function without a central authority or banks; the network manages transactions and issues bitcoins collectively.

Bitcoin is open-source, it means that its design is available to the public, no one owns or controls it, and everyone may participate.

In practice, bitcoin is a type of digital money that exists independently of any government, state, or financial institution, can be transmitted internationally without the need for a centralized intermediary, and has a known monetary policy that is arguably unchangeable.

There are no physical bitcoins; rather balances are recorded on a public ledger that everyone can see, although each record is encrypted.

A large amount of computational power is used to verify all bitcoin transactions, this process is known as mining. Bitcoin is neither issued or guaranteed by any banks or governments, nor is it worth anything as a commodity.

The bitcoin system is comprised on a network of computers (also known as nodes) that all execute bitcoin’s code and store its blockchain. A blockchain may be seen metaphorically as a collection of blocks, each block contains a set of transactions. No one can trick the system since all the machines running the blockchain have the same list of blocks and transactions and can observe these new blocks as they’re filled with fresh bitcoin transactions.

Bitcoin token balances are maintained using public and private “keys”, which are lengthy strings of numbers and characters connected by the mathematical encryption method that generates them.

The public key (like a bank account number) acts as the address that is made public and to which others may transfer bitcoin.

The private key (similar to an ATM PIN) is designed to be kept private and is only used to approve bitcoin transactions.

Bitcoin keys are not to be confused with a bitcoin wallet, which is a physical or digital device that facilitates bitcoin trade and allows users to track coin ownership. Because bitcoin is decentralized, it is never held “in” a wallet, but rather distributed on a blockchain.

Origin

Bitcoin is based on the ideas laid out in a 2008 whitepaper titled Bitcoin: A Peer-to-Peer Electronic Cash System.

The article described how to “allowing any two willing parties to deal directly with each other without the necessity for a trusted third party”.

The technology used solved the “double spend” problem, allowing for the first time in the digital world scarcity.

The bitcoin network’s initial growth was mostly driven by its usability as a revolutionary mechanism of exchanging value in the digital realm. Early supporters were mostly “cypherpunks”, or those who supported the employment of strong encryption and privacy-enhancing technology as a means of effecting social and political change.

However, speculation over bitcoin’s future worth quickly became a big motivator of adoption.

Mining

Mining is the process of releasing bitcoin into circulation. In general, entails solving computationally complex riddles to discover a new block, which is then added to the blockchain. Bitcoin mining adds and validates transaction records throughout the network.

Miners are rewarded with bitcoins, which is half every 210,000 blocks. In 2009, the block reward was set at 50 new bitcoins. On May 11, 2020, the third halving happened, reducing the reward for each block discovery to 6.25 bitcoins.

To mine bitcoin, a variety of hardware may be utilized. Some, however, provide greater benefits than others. Certain computer chips, known as application-specific integrated circuits (ASICs), as well as more complex processing units, such as graphic processing units (GPUs), can reap more benefits. These complex mining processors are referred to as “mining rigs.”

One bitcoin may be divided to eight decimal places (100 millionths of a bitcoin), and the lowest unit is known as a Satoshi.

How Many Bitcoins Are There?

The maximum amount of bitcoins that will ever be generated is 21 million, with the final bitcoin mined around the year 2140. More than 18.85 million (almost 90%) of the bitcoins had been mined as of November 2021. Furthermore, analysts believe that up to 20% of those bitcoins were “lost” as a result of someone forgetting their private key, dying without leaving access instructions, or transmitting bitcoins to invalid addresses.

Basic features

  • Decentralized: The bitcoin network is not controlled or owned by anyone, and there is no CEO. Instead, the network is made up of consenting individuals who follow the rules of a protocol (which takes the form of an open-source software client). Changes to the protocol must be approved by the protocol’s users, and there is a diverse range of contributing voices, including nodes, end users, developers, and adjacent industry participants such as exchanges, wallet providers, and custodians. As a result, Bitcoin is a quasi-political system.
  • Transparent: According to the protocol’s principles, the addition of new transactions to the blockchain record and the status of the Bitcoin network at any given moment is reached by agreement and in a transparent way.
  • Distributed: All Bitcoin transactions are recorded on a public ledger known as the “blockchain”. The network is based on volunteers keeping copies of the ledger and operating the bitcoin protocol software. These nodes help to ensure that transactions are correctly propagated over the network by adhering to the protocol rules as established by the software client.
  • Peer-to-peer (P2P): Although nodes maintain and disseminate the network’s state (the “truth”), payments are made directly from one person or organization to another. This eliminates the requirement for a “trusted third party” to operate as an intermediary.
  • Censorship resistant: Because all bitcoin transactions that adhere to the protocol’s rules are legitimate, transactions are pseudo-anonymous, and users own the ‘key’ to their bitcoin holdings, it is impossible for authorities to prohibit individuals from using it or take their assets. This has significant consequences for economic freedom and may potentially operate as a worldwide counterforce to dictatorship.
  • Permissionless: Anyone may use bitcoin; there are no gatekeepers, and no ‘Bitcoin account’ is required. The network will confirm all transactions that adhere to the protocol’s requirements using the established consensus procedures.
  • Fixed supply: One of the major characteristics is that the supply would gradually increase to a total of 21 million coins. This fixed and known total quantity, it is said, qualifies bitcoin as a ‘hard asset,’ one of numerous features that have led to its perceived value as an investment.

What is digital money?

What is digital money?

Any form of money or payment that exists entirely in electronic form is referred to as digital money or digital currency. Digital money, unlike a dollar bill or a coin, is not physically palpable. Online systems are used to account for and transfer it. Digital currencies have qualities comparable to traditional currencies, but unlike printed banknotes or minted coins, they do not have a physical form. The lack of a tangible form allows for near-instantaneous transactions over the internet and eliminates the cost of distributing notes and coins.

Nowadays, a type of digital money is already present in the form of currency held in online bank accounts. This cash can be sent to others or received from them. It can also be used for online transactions.

The origins of digital money may be traced back to the development of the internet. In the beginning, it was difficult to persuade individuals to use digital money; but, as people get more familiar with technology, and the technology itself becomes more safe and secure, more people are now eager to use digital currencies. PayPal is widely regarded as one of the first successful firms to popularize the concept of simple digital financial transactions.

Digital money is comparable to cash in concept and use in that it may be used as a unit of account and a medium for daily transactions. However, it is not money. Dollars in your online bank account, for example, are not digital money since they have physical form when you withdraw them from an ATM.

Digital money streamlines the monetary transaction process. For example, as compared to traditional money, the technical rails of digital money can make monetary transactions across borders easier and faster. Such transactions are expensive and time-consuming because they involve the use of disparate processing systems.

One of the goals of digital money is to eliminate the time lag and operational costs associated with such transactions by utilizing distributed ledger technology (DLT). To execute transactions in a DLT system, nodes or shared ledgers link to establish a common network. This network may easily be extended to other jurisdictions, reducing transactions processing time. It improves the robustness of a financial network by reducing the need for a centralized database of records, providing transparency to regulators and stakeholders.

As a result of these benefits, digital money has become a priority for various governments around the world. According to a poll by the International Monetary Fund (IMF) a February 2021, around 111 countries from its 159 member nations are investigating or preparing to use digital money soon.

Advantages of digital money

  • It does away with the need for physical storage and safekeeping which is a common in cash-intensive systems. You do not need to invest in a wallet or bank vaults to ensure that your money is not stolen.
  • Through technology, it streamlines transaction accounting and record-keeping. As a result, there is no need for manual accounting or separate entity-specific ledgers to keep track of transactions.
  • Digital money eliminates middlemen in monetary policy execution and allows previously excluded individuals to participate in the economy. Unbanked people, for example, can still participate in the economy by utilizing digital money in their online wallets or on their mobile phones.

Disadvantages of digital money

  • Digital money is susceptible to hacking. Even though digital money eliminates the need for physical storage, its technological roots make it a target for hackers who can steal from digital wallets
  • The usage of digital money may jeopardize user privacy. Cash is untraceable and tracking and tracing its users is practically difficult. Digital money, on the other hand, can be tracked.

Summary

Digital money is a significant advancement in financial technology.It solves cash’s shortcomings and makes payment systems faster and cheaper.
However, it comes with the accompanying technological issues, since digital money may be hijacked and can undermine privacy.
While digital money is still in its early stages, it will play an essential role in the future of finance.

Patricio Aguirre
Proactive Computer Engineer - Blockchain Enthusiast & Crypto Learner