Thanks to its ability to run smart contracts, the Ethereum network also supports the development of Ethereum-based decentralized applications (dapps) and the creation of new crypto tokens. As a result, Ethereum has become a widely adopted platform for launching so-called initial coin offerings, or ICOs.
Ethereum is the brainchild of blockchain researcher Vitalik Buterin, who first proposed his blockchain idea in a whitepaper that he published in 2013. Vitalik’s vision attracted a number of similarly-minded individuals who publicly announced the project in January 2014. The project was successfully crowdfunded the same year.
ETHEREUM ESSENTIALS
- Ethereum was developed by Vitalik Buterin and his team and launched in 2015.
- It is a blockchain-based, decentralized software platform.
- It is also the ledger for ether (ETH), its native cryptocurrency.
- It supports the storage and execution of smart contracts.
- Ethereum’s advanced smart contract capability also makes it possible to develop decentralized applications (dapps).
- Developers often launch dapps in combination with new tokens, which are distributed in initial coin offerings (ICOs).
Smart contracts on Ethereum
The term smart contract can be confusing, especially since smart contracts are much more than just traditional contracts. Smart contracts can indeed be agreements between two parties that are recorded on the blockchain, but they can also be used to decentralize databases of medical information, establish online notaries, or entire virtual worlds, to give but a few examples.
A smart contract is a piece of code that can only be executed once certain conditions are met. For instance, a smart contract can be executed once a particular Ethereum account has been funded by a predetermined amount of ether. As smart contracts are run on a decentralized system of nodes rather than a central server, no single computer runs the code. The job is shared instead by thousands of participants.
As long as the code is solid, smart contracts cannot be tampered with without first gaining consensus in the Ethereum network. This benefit is a result of smart contracts’ decentralized nature, meaning that there is no need to place trust in a single third party in order to enforce the terms of the contract once its conditions are met.
Traditionally, a notary would be needed to verify that a contract can be trusted. While global legislation has not yet reached the point where users could forego a notary, blockchain could effectively eliminate the need for such a middleman in the future. But for this to happen, smart contracts would have to become binding agreements, enforceable outside the Ethereum blockchain. For now, though, smart contracts are only indisputably valid (often referred to as “trustless”) within the domain of the Ethereum blockchain.
Dapps and ICOs
Ethereum smart contracts are bits of software code that are used to build Ethereum decentralized applications (dapps). These are apps that don’t rely on a central authority to function and manage user data. Think Gmail without Google or Windows without Microsoft.
The Ethereum Foundation itself does not create dapps. Instead, the Foundation provides a platform on which others can base their creations, and, sure enough, many start-ups choose to develop their products using the Ethereum blockchain. Many of these projects have also created a new crypto token to go with their dapps.
These new tokens, which can easily be created on Ethereum, can be used to launch an initial coin offering (ICO). ICOs have become a popular way for start-ups to raise capital – Ethereum itself was funded through its ICO of ether. As a result, many new tokens are created on the Ethereum blockchain.
New tokens can have extra functionalities built into them. They can represent a diverse range of assets, including things in the real world. You can design a token to represent your car, for example, and then exchange it for its worth in ETH when selling it. To ensure that the development follows common guidelines, tokens built on the Ethereum platform have to follow certain standards. This makes it easier to fit tokens into categories: some are used as currency, others represent real-world assets, some are there just to help run a smart contract, and so on. The most widely-adopted of these standards is the ERC-20 standard.
What is ether? (ETH)
Ether is a crypto coin that sees quite a bit of trade. As far as speculative traders are concerned, it functions like bitcoin in that it has a certain price that is determined by supply and demand.
This makes ether an investable asset. But functioning as digital currency is not the coin’s main purpose; while ether shares many properties with other cryptocurrencies, its distinctive feature is that it serves as the internal payment method for the Ethereum network. Ether directly compensates crypto miners for incorporating data into the blockchain. The amount of processing power you require from the network (to upload data, for instance) directly corresponds to the price you need to pay for the service.
Thus, ether functions as fuel that powers the Ethereum network. Nothing moves without it. The more code you want to execute on the network, the more ether you have to pay. But there’s a catch: since ether’s price can skyrocket in a matter of moments, uploading data could soon become very expensive if denominated in ether, at which point only the wealthiest could afford to pay for it.
To combat this issue, transaction fees are not calculated directly in ether. Rather, they use an internal system called gas. The price of gas is not tied to the price of ether, so if ether gets more expensive, transactions in the network remain at the same fiat price. Gas is always paid for in ether, meaning that Ethereum’s native cryptocurrency is still required for any action in the network.
Unlike bitcoin, which has a maximum supply of 21 million BTC, ether does not have a set max supply. Even though setting an upper limit has been the subject of debate, the community of developers has not yet made a final decision. However, since Ethereum switched to proof of stake during the Ethereum Merge, the amount of ether created on a daily basis decreases.
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