Contributor, Benzinga
February 16, 2022

n the world of cryptocurrencies, Ethereum has proven to be a true game-changer. Its team of eight co-founders, led by the visionary Vitalik Buterin, has made significant strides in its development. Unlike Bitcoin, which was abandoned by its creator(s), Ethereum remains a highly dynamic and constantly evolving platform. While it's tempting to compare Ethereum and Bitcoin, it's a simplistic analogy. While Bitcoin is viewed as a store of value like digital gold, Ethereum, when combined with Solidity, becomes a versatile tool for developing decentralized applications that go beyond a mere store of value.

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Ethereum Explained

Ethereum is a decentralized platform with its own programming language, Solidity, and cryptocurrency, Ether. If that sounds like gibberish, here’s a quick recap of some frequently used blockchain terminology:

  • Blockchain: An umbrella term for a variety of technologies that distribute control across a large network of individual actors, called “miners,” for security purposes.
  • Decentralized: Anything not controlled by a single central entity or group. 
  • Cryptocurrency: A digital currency secured with cryptography, often decentralized using blockchain technology. 
  • Platform: A structure for creating applications. 

If the platform for a painter is a canvas, think of the blockchain as Ethereum’s canvas and Solidity as the paint — a special kind of paint that you can only purchase with Ether. The final product is not a painting, but a smart contract.

Many altcoins on the market today, such as 0x and Maker, are actually just Ethereum smart contracts. 

Ethereum is supported by the nonprofit Ethereum Foundation and the Ethereum community at large. Developers across the world contribute to improving the product and making the platform more accessible for creators and end users. 

Ethereum is a Platform

Imagine Ethereum as a bustling city with its own language and currency. Solidity is like the language spoken in this city, enabling developers to build unique and innovative applications within the Ethereum community. Ether serves as the currency that fuels this bustling city, allowing for transactions to take place and for developers to operate within this vibrant ecosystem. Just like in a city, the cost for services and goods is paid in the city's currency, in this case, Ethereum's token, Ether.

Ethereum is Decentralized, Kind of

The Ethereum blockchain is maintained by a decentralized group of miners, similar to Bitcoin. 

However, unlike Bitcoin, Ethereum has a known creator and a thriving development community. This confers a significant advantage on Ethereum, as it enables the system to rectify bugs and upgrade the software over time. Nonetheless, some people contend that having a centralized development team contradicts the fundamental tenets of decentralization.

Smart Contracts

Smart contracts are the digital glue that hold together the Ethereum blockchain. They are self-executing agreements written in code, allowing for trustless transactions between parties. If traditional contracts are the building blocks of legal agreements, then smart contracts are the digital blocks of decentralized agreements.

Smart contracts have many advantages over traditional contracts:

  • Smart contracts can execute complicated tasks automatically.
  • Developers can easily reuse and repurpose well-written smart contracts for an extremely low cost (especially when compared to legal fees).
  • Smart contracts are enforced using collateral instead of the judicial system, making them ideal for low-cost, high-frequency transactions.

What is Ethereum Gas?

To execute your smart contract on Ethereum’s blockchain, you must pay the miners according to the complexity of your contract. This way, accidental or malicious infinite loops coded within smart contracts cannot freely dominate computational power on the blockchain. 

Gas is a processing fee that is paid in Ether, the cryptocurrency of the Ethereum network. The price of gas varies depending on how many people are using the network at a given time. If you need your smart contract executed more quickly, you can choose to pay a higher gas price. When making a transaction, you have the option to select the gas price you are willing to pay. However, if the gas price you choose is significantly lower than the going rate, your transaction may be rejected.

Data Sharding: Faster Transactions and More Security

Data sharding is the process of splitting large chunks of data into smaller shards, and the shards are easier to share around the network. 

Currently, in Ethereum 1.0, each miner (a person who dedicates computer power to authenticating the Ethereum network) must validate every transaction that comes across the network. This means miners duplicate work for security purposes and suck up a lot of energy in the process.  

By sharding the data, each miner shrinks his work load down to a few randomized transactions moving across the network at a time. 

Proof of Stake: Going Green

In the cryptocurrency development and mining community there is an ongoing debate between two verification methods. The verification method determines how the operations on the network are legitimized. There are 2 camps in this debate: proof of work (PoW) and proof of stake (PoS).

Proof of work uses computational puzzles to verify the legitimacy of incoming transactions. This means that the miners will buy expensive, dedicated computer hardware in order to be the fastest at solving these puzzles. Bitcoin and Ethereum both currently use PoW. The downside of this approach is the massive energy consumption required for miners to constantly solve these puzzles. 

Proof of stake drastically reduces the need for energy and expensive computing hardware by eliminating the “puzzle.” Instead of competing to solve the puzzle, miners lock up, or “stake” their Ether for the chance to validate a portion of the transactions. Stakers are compensated for the transactions they authenticate and are rewarded with additional Ether. At the end of the staking period, the owner gets the staked Ether plus the rewards back. Think of this like a bank certificate of deposit that earns interest. 

Interested in trying it yourself? Jump to How to Stake Ethereum.

PoS 51% attack

In order to hijack a proof of stake network, you would need to own the majority stake on the network. A hacker would have to purchase billions of dollars of Ether, just to destroy its value in the end. This is a beautiful example of utilizing game theory tactics for security.

Decentralized Applications: Ethereum in Action

A decentralized application (DApp) is any product or service that runs on a distributed computing system, most often the Ethereum blockchain. The blockchain provides applications with the added security and trust. One of the most popular DApps is called Uniswap, which allows users to swap between Ethereum-based cryptocurrency tokens. 

Another type of DApp is a decentralized autonomous organization (DAO). Just as the name suggests, a DAO uses smart contracts instead of employees to operate autonomously. A DAO is owned and run entirely by its shareholders, who propose smart contracts to make things happen. 

DAO Example: The Power of Smart Contracts

Imagine you want to create an investment fund with your 10 closest friends. Each week, you and your friends meet to propose new investments. Each person has the opportunity to propose as many investment ideas as she would like and a vote will determine whether or not a proposal is accepted. Once a proposal has won a majority vote, your group plans to execute the trade in 24 hours, giving anyone who disagrees the opportunity to leave the fund and pull her money out. 

Now, imagine letting 100 complete strangers join the fund. Problems arise immediately due to a lack of trust. Who gets to control the primary account with everyone's money? What happens if someone goes rogue? What if half the team never shows up to vote? What if 1 member is not who he says he is? Without trust, the fund would likely fall apart. 

Ethereum Smart Contracts

Using a DAO powered by smart contracts on Ethereum’s blockchain to facilitate trust, the investment fund with strangers has a great chance of success. In fact, many of these funds already exist. One of the most successful is the Moloch DAO, with over $5.5 million invested.

Shareholders receive voting rights equivalent to their stake in the DAO and any DAO member can submit a proposal which goes through an automated voting process and grace period before automatically executing. 

The concept of a DAO is incredibly powerful and hundreds of applications remain undiscovered. One thing is certain — all will be powered by Ethereum.

Want to dive deeper? Read the Ethereum White Paper.

Disclosure: ²Sum of median estimated savings and rewards earned, per user in 2021 across multiple Coinbase programs (excluding sweepstakes). This amount includes fee waivers from Coinbase One (excluding the subscription cost), rewards from Coinbase Card, and staking rewards. ³Crypto rewards is an optional Coinbase offer. Upon purchase of USDC, you will be automatically opted in to rewards. If you’d like to opt out or learn more about rewards, you can click here. The rewards rate is subject to change and can vary by region. Customers will be able to see the latest applicable rates directly within their accounts

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