The Rise of Ethereum
Originally published on The Voyage newsletter on January 20, 2022.
The Rise of Ethereum
Ethereum is a blockchain that opens up the technology beyond a decentralized currency. It was conceived in 2013 by Vitalik Buterin, who at the time was a co-founder of Bitcoin Magazine. And, by the way, he was only 19 years old.
Ethereum borrows a lot of its foundation from Bitcoin. It operates on a decentralized peer-to-peer (P2P) network. It uses the same Proof-of-Work system to secure and create consensus across the network. It even has its own native cryptocurrency called Ether, symbolized as ETH or Ξ.
Ethereum introduces the ability to create smart contracts. It does this through a computer programming language called Solidity. Once a contract is deployed on the network, all the nodes make sure it’s executed. This simple addition makes Ethereum a platform and not just a currency.
Ethereum creates the possibility of a decentralized internet.
But isn’t the internet already decentralized?
Not quite, the current internet is full of intermediaries and third parties that own most of the services and applications we use. Think of Google for web searches, Amazon Web Services for cloud storage, and Go Daddy or Domains.com to secure a web domain.
Smart contracts execute themselves. No lawyer needed.
Ethereum uses a programming language called Solidity to write smart contracts. These contracts power applications, called dApps or decentralized applications. DApps are executed by the nodes which power the Ethereum network.
Contracts are essentially a set of conditions and actions.
Think about the lease on your apartment. You agree to pay your landlord X amount of money on the 1st of every month and in return, you can continue living in your apartment.
Smart contracts manage the execution of the contract terms without the need of an intermediary.
So in other words, when you pay your rent through the smart contract, you maintain your apartment.
The downside of smart contracts
This is where we start to see the downside of smart contracts. They can’t take into account outside factors. They strictly follow the code as it’s written. If you can’t pay rent due to extenuating circumstances, too bad, you’re locked out of the apartment.
Once the smart contract is deployed, it basically cannot be edited because it would require agreement of a majority of the community to do so. And therefore, it’s essentially immutable.
As you would imagine, complex contracts become very difficult to manage.
In April 2016, an organization launched on the Ethereum network called The DAO (Decentralized Autonomous Organization). For clarity’s sake, I’m referencing a specific organization and not DAO as it’s often used today to represent a type of organization.
The DAO raised nearly $150 million of Ethereum through crowdfunding. The organization was created to make investments with the funds and the contributors would enjoy the benefits of those investments.
Someone managed to seize all the funds in the pool through exploiting a loophole in the smart contract. Because of the inflexible and immutable nature of the smart contract, even if the loophole was identified earlier, it would’ve been almost irreversible.
A majority within the Ethereum community, mainly the developers, decided to bailout The DAO and return the funds to the individual contributors and overwrote the code.
When this happened, there was a group that wanted to maintain the original code and split off a new network called Ethereum Classic (ETC).
New standards for coins and tokens
Since the Ethereum network is maintained by individual computers that requires time, energy, and money to maintain, the protocol incentivizes people to manage and update the network with a coin called Ether (ETH).
People will often use Ether and Ethereum interchangeably, but technically Ether is the coin and Ethereum is the network.
Additionally, the Ethereum network introduced a standard of coins and tokens.
It’s important to understand that coin on the network is different than a token. A coin is the native asset that powers the network, while a token is an asset created on the blockchain that can also be exchanged.
Why does this matter?
Well, many of you might remember the crypto craze in 2017 where cryptocurrencies were racking millions of dollars in value out of nowhere and eventually losing most of that value.
Most of these cryptocurrencies were tokens on the Ethereum network. Ethereum made it relatively easy to create a token on the network through a standard known as ERC-20. The purpose of these tokens were mainly to allow for the creation of tokens with specific rules that could be used in dApps.
Binance, a cryptocurrency exchange, allows users to exchange an Ethereum token known as Binance Coin (BNB) for discounts on transaction fees. Golem (GNT) allows users to loan out spare processing power for others to use.
The NFT is born
Another type of token that was created on the Ethereum network is the NFT (Non-fungible token). Non-fungible means it’s unique and cannot be exchanged directly for something else.
Any Ether can be exchanged for another Ether, they are the same. An NFT allows for unique value exchange on the network.
NFTs were created with the possibility of adding code to that unique token. That code could represent anything. In this past year, we saw NFTs that mainly represented artwork and digital collectibles, but we’re only scratching the surface of their potential.
You can learn more on NFTs in a previous newsletter where I went into some of the existing and possible use cases.
Since the launch of Ethereum
Since the Ethereum network went live, a new internet has become possible.
The blockchain space has grown rapidly and brilliant minds are at work taking us to new frontiers. Some developers are building solutions that operate at a layer on top of the Ethereum network to help it scale. These have to be known as Layer 2 blockchains.
Others are creating altogether alternate blockchains that try to build on the innovations of Ethereum by using different smart contract languages, governance systems, and consensus protocols.
In the 2017 crypto-craze everyone was looking for the ‘Ethereum KIller.’ Many saw the shortcomings and believed a competitor would rise and supplant it. That hasn’t happened.
Ethereum has also addressed many of those concerns on their own and Ethereum 2.0 is expected to go live sometime in 2022. There’s now a common sentiment that Ethereum and many of these other blockchains will co-exist in some form or another.
This post was created with Typeshare