Apr 17, 2021
Understanding Ethereum
In this section of my blog, I will discuss cryptocurrencies. I strongly believe this is the future of finance. Cryptocurrencies are the next big thing. In fact, they have already started to grab headlines in the world of money. People are investing a significant portion of their portfolio in these cryptocurrencies besides stocks. In this article, we will try to get some understanding of the cryptocurrency Ethereum. Let us try to simplify what Ethereum exactly is.
Ethereum is the second-largest cryptocurrency in the world. We will find out how good it is compared to Bitcoin. We will also examine whether it has the potential to make cryptocurrencies more mainstream. Let’s get into the basics of how these cryptocurrencies came into existence. I think we all know Ethereum, like its counterparts (Bitcoin, ripple, etc), is decentralized money.
Now, what makes decentralized money different? Before cryptocurrencies like Bitcoin, Ethereum, Ripple, etc, came into existence, digital money could be used through a third party like a bank or Paypal. Even if the money is in digital form, it is still created and controlled by the government. Bitcoin brought about a revolution. It changed everything. With Bitcoin, people could trade directly without involving an intermediary. The Bitcoin network validates each transaction done. So, it is impossible to manipulate or control the system. The technology behind bitcoin and all other cryptocurrencies is Blockchain, which you all must have heard about.
Blockchain technology is actually a result of Bitcoin. Blockchain technology came into being by using network architecture and cryptography. This is a robust architecture that can take decisions without a central controlling authority. Blockchain is a system on which programs and applications can be built.
The people who were part of the network started to think about what else could they decentralize. Bitcoin had its limitations. Bitcoin is written in a language called the “Turing incomplete” language. It only understands a limited set of instructions like who sent how much money to whom. A more evolved decentralized system needs more complexity and hence a better programming language.
Ethereum was created by Vitalik Buterin, a Russian-Canadian programmer. Ethereum came into existence in 2014. Ethereum is a platform where you can create decentralized programs yourself. It is also known as Dapps — decentralized apps. If you wanted to create a program that is not controlled by anyone, including yourself, you will have to learn the programming language of Ethereum. This programming language is called Solidity. The Ethereum platform is completely decentralized with many independent computers. Once you put your program into the system of computers, the nodes (the computers) execute the program as it is. Let’s make one thing clear here. Ethereum is a platform, ether is the currency that runs the platform.
Bitcoin showed a way called decentralization of money. Ethereum and many other cryptocurrencies followed suit. People can buy cryptocurrencies directly from one another without any intermediary or exchanges that can control this transfer. No central authority needs to take care of things and the chances of corruption are close to null. Hence, Ethereum is a network of computers that forms a huge decentralized supercomputer.
How does Ethereum work?
Ethereum’s programming language is used to write “Smart Contracts”. Smart Contracts are logics that run Dapps. What exactly is a contract? In a general context, a contract is a series of ifs and thens. If a certain condition is satisfied, a certain event happens. For example, if I pay rent to my house owner at the end of each month, I am allowed to use the apartment. Ethereum “smart contracts” work in a similar fashion. Ethereum developers write these conditions in their programs, and these programs are executed in the network. The Ethereum network is completely responsible for the execution of these smart contracts. In the context of the house rent situation, if I do not pay my house rent at the end of the month, Ethereum will lock me out of my house.
This is exactly the downside of Ethereum smart contracts. The contracts are followed very strictly. In the context of the house rent situation, if Ethereum were my house owner, it would go by the books without being flexible at all. If I won’t pay my rent by the end of the month, it will lock me out without considering any other factors or the spirit in which the contract was made in the first place. It will be ruthless and have no human considerations at all. In other words, it will not be a good judge. This is the limitation of the Ethereum smart contracts.
Once a smart contract is deployed on an Ethereum network, it cannot be edited or corrected by anyone, not even by its original author. If you want to change a smart contract, you have to convince everyone in the network to accommodate your change, which is impossible as Ethereum is very complex in the first place. If the smart contract is very complex, it is very difficult to enforce and there are many interpretations. Many clauses need to be written to avoid and deal with unfavorable situations.
All possible permutations and combinations of the contract should be taken into consideration so that it performs only what is intended by the creator. The contract is the law. It is not flexible. No one can override the contract. But all this came to an end with DAO.
What is DAO?
DAO stands for Decentralized Autonomous Organization. DAO allows the Ethereum users to deposit money and get returns based on the investments made by the DAO. The investment decisions are also decentralized. The DAO raised $150 in the ether when ether was around $20. But that time the code wasn’t very well secured and some hackers used some loophole to drain DAO out of the money. After this, the Ethereum community decided that code is no longer law. It was made flexible. The rules were made to revert all the money that went into DAO. But a minority from the community did not agree with this and stuck to the original Ethereum. This situation, divided Ethereum into Ethereum classic (the original Ethereum) and Ethereum (the flexible one).
Ether as a Currency
As mentioned earlier, Ethereum is a huge network of computers to execute codes that powers Dapps. There is a cost associated to do this. The cost involves getting the machines, powering them, and storing them. Hence, ether came into existence. Ether encourages people to run the Ethereum protocol on their system. The author of the smart contract has to pay in the form of Ether in order to deploy his code into the Ethereum platform. This is essential to make sure that people will write efficient code that will use the computing power of the Ethereum network in an efficient way. In 2014, ether’s value was about 40 cents. While I am writing this article, the price of 1 Ether is 1587 USD. The use of the Ethereum network has grown immensely after the success of Bitcoin.
Conclusion
If you are young and want to retire early, investing in cryptocurrencies is the fastest way right now. The future is bright. You must read the news about Tesla buying $1.5 billion in bitcoin and planning to accept it as payments. Even billionaires attest to the fact that cryptocurrency is the new money. The ones leading the race are Bitcoin and Ethereum. The sooner you understand, the better it is for your future financial well-being.
