What is Ethereum? A Beginner's Explanation in Plain English

Summary

Ethereum, often misunderstood, is a decentralized platform for applications that run smart contracts, offering a new way to decentralize various societal functions beyond currency. Unlike Bitcoin, which is a digital currency, Ethereum is a platform that uses a cryptocurrency called Ether to incentivize network participation. Ether is used to pay for the computational services needed to run decentralized applications (DApps). The platform was created to address the limitations of Bitcoin's scripting language and has since become a hub for innovation in decentralized finance and smart contract applications. Ethereum's smart contracts are programmable agreements that execute automatically when predefined conditions are met, although they are not without their challenges, as seen with the DAO incident. The Ethereum network operates on a global scale, with thousands of computers working together, aiming to disrupt the centralized model of the internet.

Takeaways

• 🚀 **Ethereum as a Platform**: Ethereum is a decentralized platform for applications (DApps), not just a cryptocurrency like Bitcoin.
• 💡 **Decentralization Concept**: Ethereum builds on Bitcoin's decentralized money concept, aiming to apply it to other societal functions.
• 🌐 **Internet Decentralization**: Ethereum's goal is to decentralize the internet, reducing the control of tech giants and eliminating intermediaries.
• 🔗 **Blockchain Technology**: Blockchain, a by-product of Bitcoin, is the technology that enables decentralized systems like Ethereum.
• 📝 **Smart Contracts**: Ethereum uses smart contracts, which are programmable agreements with conditions and actions, to run DApps.
• 💻 **Solidity Programming Language**: Developers use Solidity to write smart contracts for deployment on the Ethereum network.
• 💰 **Ether as Incentive**: Ether is the cryptocurrency used to incentivize network participants to run the Ethereum protocol.
• 🛠️ **Complexity and Security**: Complex smart contracts can be hard to secure, leading to potential vulnerabilities and exploits.
• 📉 **DAO Incident**: The DAO hack led to a hard fork in the Ethereum blockchain, resulting in the creation of Ethereum Classic.
• 💼 **Ether's Value**: Ether's price reflects the cost of running the Ethereum network and has grown significantly since its ICO in 2014.
• ⚖️ **Code is Law**: Initially, Ethereum followed the principle that code is unchangeable law, but this was challenged by the DAO event.

Q & A

What is Ethereum and how does it differ from Bitcoin?

Ethereum is a decentralized platform that runs smart contracts, which are applications that run exactly as programmed without any possibility of downtime, censorship, fraud, or third-party interference. Unlike Bitcoin, which is primarily a digital currency, Ethereum is a platform that can facilitate peer-to-peer contracts for virtually anything of value.

What are smart contracts and how do they work on the Ethereum network?

Smart contracts are programs that automatically execute the terms of a contract when certain conditions are met. They operate on the Ethereum network by encoding the contract's terms into code, which is then run on the Ethereum Virtual Machine. When the conditions specified in the contract are met, the appropriate actions are taken.

How does Ethereum aim to decentralize the Internet?

Ethereum aims to decentralize the Internet by providing a platform where applications can run without control from a central authority. This allows for the creation of decentralized applications (DApps) that can operate directly between users, eliminating the need for intermediaries like banks, social media platforms, or other centralized services.

What is the role of Ether in the Ethereum ecosystem?

Ether is the cryptocurrency used to incentivize the network's participants to contribute their resources to the operation of the Ethereum platform. It is used to pay for the computational services needed to run decentralized applications and to deploy and execute smart contracts on the Ethereum blockchain.

What was the DAO and why was it significant in Ethereum's history?

The DAO (Decentralized Autonomous Organization) was a venture capital fund that raised $150M in Ether, aiming to allow its members to make investment decisions based on proposals submitted to the fund. It was significant because it was the first major use of Ethereum's smart contract capabilities. However, it was exploited due to a vulnerability in its smart contract, leading to a loss of a large amount of Ether. This incident resulted in a controversial hard fork in the Ethereum blockchain to recover the lost funds.

What is the difference between Ethereum and Ethereum Classic?

Ethereum Classic is a continuation of the original Ethereum blockchain before a hard fork was implemented to reverse the DAO hack. The majority of the community agreed to the hard fork, which created a new version of Ethereum with the stolen funds returned to their original owners. Those who disagreed with altering the blockchain to reverse the hack continued on the original chain, which became known as Ethereum Classic.

Why is Ethereum considered more programmable than Bitcoin?

Ethereum is considered more programmable than Bitcoin because it was designed with a Turing-complete scripting language, allowing for the creation of complex smart contracts and decentralized applications. Bitcoin's scripting language is 'Turing incomplete,' meaning it is limited to simpler transactions and does not support the execution of arbitrary code.

How does the consensus mechanism work in Ethereum?

Ethereum uses a consensus mechanism called 'Proof of Work' (PoW), where the network participants, known as miners, compete to solve complex mathematical puzzles to validate transactions and add new blocks to the blockchain. This process requires significant computational power and is rewarded with Ether.

What are the potential downsides of smart contracts?

Smart contracts can have downsides such as a lack of flexibility and the potential for unintended consequences if the contract's logic is not thoroughly tested. Once deployed, smart contracts are immutable and cannot be altered, even if a flaw is discovered. This can lead to significant risks if the contract does not operate as intended.

How does the cost of running a decentralized application on Ethereum compare to traditional centralized alternatives?

Running a decentralized application (DApp) on Ethereum can be more cost-effective in the long run as it eliminates the need for intermediaries, which often charge fees for their services. However, the initial costs of deploying and maintaining a DApp can be high, as it requires Ether to pay for the computational resources used by the smart contracts.

What is the significance of the Ethereum Virtual Machine (EVM)?

The Ethereum Virtual Machine is a Turing-complete virtual machine that allows anyone to run distributed applications (DApps) within an Ethereum client on a blockchain. It is significant because it enables the execution of smart contracts and facilitates the operation of the decentralized applications built on the Ethereum platform.

How does the Ethereum network ensure the security of smart contracts?

The Ethereum network ensures the security of smart contracts through its decentralized nature and consensus mechanism. Since the network is distributed across many nodes, it is difficult for any single entity to compromise the system. Additionally, the use of cryptographic techniques ensures that transactions and contract executions are secure and verifiable.

Outlines

00:00

🤔 Understanding Ethereum: The Decentralized Platform

The first paragraph introduces Ethereum as a frequently mentioned cryptocurrency and second-largest by market cap. It poses questions about its revolutionary nature and potential to change the world, promising a clear explanation without technical jargon. The paragraph begins with a brief recap of Bitcoin, emphasizing its decentralized nature and how it operates without intermediaries. It then explores the concept of decentralization beyond currency, touching on voting, real estate, and social networks. The script introduces the blockchain as a by-product of Bitcoin, combining cryptography, proof of work, and decentralized network architecture. It notes the excitement around blockchain's potential for decentralizing other societal functions and the need for a different programming language and network for more complex systems. Ethereum is presented as the solution to these challenges, proposed by Vitalik Buterin in 2013 and launched in 2014. It is described as a platform for decentralized applications (Dapps), using the programming language Solidity. The paragraph concludes by emphasizing Ethereum's goal of decentralizing the internet and eliminating the need for central authorities or intermediaries.

05:02

💡 Ethereum's Functionality and Smart Contracts

The second paragraph delves into how Ethereum functions, focusing on its ability to connect people directly without central authorities. It illustrates potential decentralized applications, such as peer-to-peer file storage and ride-sharing, without the need for intermediaries like Dropbox or Uber. Ethereum's coding language, Solidity, is used to write 'Smart Contracts,' which are self-executing contracts based on predefined conditions. The paragraph explains that smart contracts handle enforcement, management, performance, and payment, but they are strictly rule-bound and do not account for extenuating circumstances. It also discusses the immutability of smart contracts once deployed on the Ethereum network. The narrative takes a cautionary turn with the DAO (Decentralized Autonomous Organization) incident, where poor code security led to funds being drained. This event led to a hard fork in the Ethereum blockchain, resulting in the creation of Ethereum Classic. The paragraph ends by discussing Ethereum as a currency and the costs associated with running the network, setting the stage for further discussion on Ether and mining in subsequent content.

10:03

💰 The Role of Ether in the Ethereum Ecosystem

The third paragraph explains the invention of Ether, the cryptocurrency used to incentivize participation in the Ethereum network. It draws parallels with Bitcoin mining, where Ether rewards individuals for running the protocol on their computers. The paragraph details the necessity of Ether for deploying smart contracts on the Ethereum platform, emphasizing the importance of writing efficient code to avoid wasting network resources. Ether's initial distribution during Ethereum's 2014 ICO is mentioned, highlighting its growth in value from 40 cents to hundreds of dollars as the network's use expanded. The script concludes with an invitation for viewers to ask questions in the comments and to subscribe for updates, summarizing Ethereum as a network replacing the centralized model of internet programs and companies.

Keywords

💡Ethereum

Ethereum is an open-source, blockchain-based, decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud, or third-party interference. In the context of the video, Ethereum is presented as a revolutionary platform that can potentially change the world by enabling decentralized applications (DApps), which are applications that run on the Ethereum network without a central authority.

💡Bitcoin

Bitcoin is a decentralized digital currency that enables peer-to-peer transactions without the need for a central authority. It is the first and most well-known cryptocurrency and serves as the basis from which Ethereum was conceptualized. In the video, Bitcoin is used as a comparison point to explain the evolution to Ethereum, highlighting the shift from a decentralized currency to a platform for decentralized applications.

💡Decentralization

Decentralization refers to the distribution of functions or powers away from a central location or authority. In the video, decentralization is a core theme, emphasizing the shift from centralized systems, like banks and social media platforms, to decentralized ones that can be achieved through technologies like Ethereum and Bitcoin. The script discusses how Ethereum can decentralize various societal functions, such as voting and property registration.

💡Blockchain

Blockchain technology is a distributed ledger that records transactions across multiple computers so that any involved record cannot be altered retroactively, without the alteration of all subsequent blocks. It is the underlying technology behind cryptocurrencies like Bitcoin and Ethereum. The video explains that blockchain technology was a by-product of Bitcoin's invention and is foundational to Ethereum's operation, allowing for decentralized decision-making.

💡Smart Contracts

Smart contracts are self-executing contracts with the terms of the agreement written directly into lines of code. They automatically execute transactions when predefined conditions in the contract are met. In the video, smart contracts are a central concept, illustrating how they operate on the Ethereum network to run DApps. They are described as sets of 'Ifs' and 'Thens,' automating the enforcement, management, and payment of contracts.

💡Solidity

Solidity is an object-oriented programming language for writing smart contracts on the Ethereum platform. It is influenced by C++, JavaScript, and Python. In the video, Solidity is mentioned as the Ethereum programming language that developers use to write smart contracts, which are then deployed on the Ethereum network to create decentralized applications.

💡Ether

Ether, also known as ETH, is the native cryptocurrency of the Ethereum platform. It is used to compensate the network for the computational services required to run DApps and smart contracts. The video explains that Ether is used to incentivize the network participants to run the Ethereum protocol on their computers, similar to how Bitcoin miners are rewarded for maintaining the Bitcoin blockchain.

💡Decentralized Apps (DApps)

DApps are applications that run on a decentralized network, such as the Ethereum blockchain, instead of a centralized server. They are designed to operate autonomously, without the control of a single entity. In the video, DApps are presented as the applications that can be built on the Ethereum platform, which can potentially decentralize various services and industries.

💡DAO (Decentralized Autonomous Organization)

A DAO is an organization represented by rules encoded as a computer program that is transparent, controlled by the organization members, and not influenced by a central government. The video discusses the DAO event as a significant moment in Ethereum's history, where a DAO raised funds and then faced a security issue that led to a controversial decision to alter the Ethereum blockchain to reverse the theft.

💡Ethereum Classic

Ethereum Classic is a continuation of the original Ethereum blockchain, created after a hard fork due to disagreements over how to handle the DAO hack. Those who did not agree with the alteration of the blockchain to reverse the DAO hack continued on the original chain, forming Ethereum Classic. The video briefly mentions Ethereum Classic as a result of the DAO event and the community's decision to change the Ethereum protocol.

💡Initial Coin Offering (ICO)

An ICO is a fundraising mechanism where new projects sell their underlying crypto tokens to investors in a crowdfunding event. The video mentions the ICO as the method through which Ether was first distributed, highlighting the growth in Ether's value from its initial offering price to its much higher value due to the increased use of the Ethereum network.

Highlights

Ethereum is the second largest cryptocurrency and aims to decentralize various societal functions beyond just money.

Bitcoin, as a decentralized currency, paved the way for Ethereum to explore further decentralization of digital assets.

Ethereum was born from the idea of using blockchain technology to decentralize more than just currency.

Blockchain technology is a fusion of cryptography, proof of work, and decentralized network architecture.

Ethereum allows for the creation of decentralized applications (DApps) using its programming language, Solidity.

Vitalik Buterin, co-founder of Bitcoin Magazine, proposed Ethereum in 2013 and brought it to life in 2014.

Ethereum operates on a network of thousands of independent computers, ensuring full decentralization.

The Ethereum platform's goal is to decentralize the Internet, reducing the control of intermediaries like Amazon and Google.

Smart contracts on Ethereum are self-executing contracts with the terms directly written into code.

Smart contracts enforce, manage, perform, and handle payment, but lack the nuance and flexibility of human judgement.

The DAO incident in Ethereum led to a hard fork in the blockchain, resulting in the creation of Ethereum Classic.

Ether, the currency of Ethereum, is used to incentivize the network and maintain the blockchain.

The cost to deploy a smart contract on Ethereum is paid in Ether, encouraging developers to write efficient code.

Ether's value has significantly increased since its initial offering in 2014 due to the growing use of the Ethereum network.

Ethereum's network and Ether represent a new model for decentralized computing and application development.

The Ethereum Whiteboard Tuesday series aims to simplify complex concepts around Ethereum for a broader audience.

Transcripts

What on earth is Ethereum?

I mean, I keep hearing about it all the time,

I’ve seen it’s the second largest cryptocurrency around

but I just can’t seem to wrap my head around it.

Is it as revolutionary as Bitcoin?

Can it actually change the world as we know it?

If you want to have a better understanding of Ethereum,

but are tired of explanations that sound like complete technical gibberish, stick around…

Here on Bitcoin Whiteboard Tuesday,

or should I say Ethereum Whiteboard Tuesday

we’ll answer these questions and more.

Before we get into Ethereum

we need to do a quick recap about Bitcoin,

since it’s the basis from which Ethereum was born.

By now you probably know that Bitcoin is a form of decentralized money,

and if you still have some questions about what that means or how it works,

then you might consider revisiting our original video,

“what is Bitcoin”.

Before Bitcoin was invented,

the only way to use money digitally

was through an intermediary like a bank, or Paypal.

Even then, the money used was still a government issued and controlled currency.

However, Bitcoin changed all that by creating a decentralized form of currency

that individuals could trade directly without the need for an intermediary.

Each Bitcoin transaction is validated and confirmed by

the entire Bitcoin network.

There’s no single point of failure

so the system is virtually impossible to shut down, manipulate or control.

Pretty neat huh?

Well, now that we know that money can be decentralized,

what other functions of society that are centralized today

would be better served on a decentralized system?

What about voting?

Voting requires a central authority to count and validate votes.

Real estate transfer records

currently use centralized property registration authorities.

Social networks like Facebook are based on centralized servers

that control all of the data we upload to them.

What if we could use the technology behind Bitcoin,

more commonly known as Blockchain,

to decentralize other things as well?

The interesting thing about Blockchain technology

is that it’s actually the by-product of the Bitcoin invention.

Blockchain technology was created by fusing already existing technologies like

cryptography, proof of work

and decentralized network architecture together

in order to create a system that can reach decisions

without a central authority.

There was no such thing as “blockchain technology”

before Bitcoin was invented.

But once Bitcoin became a reality,

people started noticing how and why it works

and named this “thing” blockchain technology.

Blockchain is to Bitcoin what the Internet is to email;

a system on top of which you can build applications and programs.

A currency like Bitcoin is just one of the options.

So this got people very excited,

and they began to explore what else can we decentralize.

However, in order for a system to be truly decentralized

it needs a large network of computers to run it.

Back then the only network that existed was Bitcoin

and it was pretty limited.

Bitcoin is written in what is known as a “turing incomplete” language

which makes it understand only a small set of orders,

like who sent how much money to whom.

If you want to create a more complex system,

you’ll need a different programming language,

which means a different network of computers.

Imagine for a second you wanted to build your own decentralized program,

just like Bitcoin, at home.

You’d need to understand how Bitcoin’s decentralization works,

write code that mimics the same behaviour,

get a huge network of computers to run this code and so on….

And that is a lot of work.

Enter Ethereum.

Ethereum was first proposed in late 2013

and then brought to life in 2014 by Vitalik Buterin

who at the time was the co-founder of Bitcoin Magazine.

Ethereum is the Do It Yourself platform for decentralized programs

also known as Dapps - decentralized apps.

If you want to create a decentralized program

that no single person controls,

not even you even though you wrote it,

all you have to do is learn the Ethereum programming language

called Solidity and begin coding.

The Ethereum platform has thousands of independent computers running it

meaning it’s fully decentralized.

Once a program is deployed to the Ethereum network

these computers, also known as nodes, will make sure it executes as written.

Ethereum is the infrastructure for running Dapps worldwide.

It’s not a currency, it’s a platform.

The currency used to incentivize the network is called Ether

but more on that later.

Ethereum’s goal is to truly decentralize the Internet.

Wait?

The internet is centralized?

I thought the Internet already was decentralized

and that anyone can start their own site.

While in theory that might be true,

in practice Amazon, Google, Facebook, Netflix and other giants

control most of the world wide web as we know it.

There’s almost no activity on the web

that happens without some sort of intermediary or 3rd party.

But once the concept of digital decentralization

was demonstrated by Bitcoin,

a whole new array of opportunities became available.

We can finally start to imagine and design

an Internet that connects users directly without the need for a centralized 3rd party.

People can “rent” hard drive space directly to other people

and make Dropbox obsolete.

Drivers can offer their services directly to passengers

and remove “Uber” as the middleman.

People can buy cryptocurrencies directly from one another

without the need for an exchange that can get hacked or steal your money.

Ethereum allows people to connect directly with each other

without a central authority to take care of things.

It’s a network of computers that together

combine into one powerful, decentralized supercomputer.

Ok, So now you know what Ethereum does

but we haven’t touched upon HOW it does it.

Ethereum’s coding language, Solidity,

is used to write “Smart Contracts” that are the logic that runs Dapps.

Let me explain...

In real life, all a contract is, is a sets of “Ifs” and “Thens”.

Meaning a set of conditions and actions.

For example, if I pay my landlord $1500 on the 1st of the month

then he lets me use my apartment.

That’s exactly how smart contracts work on Ethereum.

Ethereum developers write the conditions for their program or Dapp

and then the ethereum network executes it.

They are called smart contracts

because they deal with all of the aspects of the contract -

enforcement, management, performance, and payment.

For example, if I have a smart contract that is used for paying rent,

the landlord doesn’t need to actively collect the money.

The contract itself “knows” if the money has been sent.

If I indeed sent the money,

then I will be able to open my apartment door.

If I missed my payment, I will be locked out.

However smart contracts also have their downsides.

Going back to my previous example,

instead of having to kick out a renter that isn’t paying,

a “smart” contract would lock the non-paying renter

out of their apartment.

A truly intelligent contract on the other hand,

would take into account other factors as well,

such as extenuating circumstances,

the spirit with which the contract was written

and it would also be able to make exceptions if warranted.

In other words, it would act like a really good judge.

Instead, a “smart contract” in the context of Ethereum

is not intelligent at all.

It’s actually uncompromisingly letter strict.

It follows the rules down to a T

and can’t take any secondary considerations or the “spirit” of the law into account

like what commonly happens with real world contracts.

Once a smart contract is deployed on the Ethereum network,

it cannot be edited or corrected,

even by its original author.

It’s immutable.

The only way to change this contract

would be to convince the entire Ethereum network

that a change should be made and that’s virtually impossible.

This creates a very serious problem since unlike Bitcoin,

Ethereum was built with the ability to create

really complex contracts,

and complex contracts are very difficult to secure.

With any contract,

the more complicated it is, the harder it is to enforce

as more room is left for interpretations,

or more clauses must be written to deal with contingencies.

With smart contracts,

security means handling with perfect accuracy

every possible way in which a contract could be executed

in order to make sure that the contract does only what the author intended.

Ethereum launched with the idea that “code is law”.

That is, a contract on Ethereum is the ultimate authority

and nobody could overrule the contract.

Well, that all came to a crashing halt when the DAO event happened.

“Dow” or DAO stands for “Decentralized Autonomous Organization”

which allowed users to deposit money

and get returns based on the investments that the DAO made.

The decisions themselves would be crowd-sourced and decentralized.

The DAO raised $150M in Ethereum currency, ether,

when ether was trading around $20.

While this all sounded very good,

the code wasn’t secured very well

and resulted in someone figuring out a way to drain the DAO out of money.

Now you could say that the person who drained the DAO was a “hacker”.

But some would argue that this was just someone

who was taking advantage of the loopholes he found in the DAO’s smart contract.

This isn’t very different

than a creative lawyer figuring out a loophole in the current law

to effect a positive result for his client.

What happened next is that

the Ethereum community decided that code no longer is law

and changed the Ethereum rules

in order to revert all the money that went into the DAO.

In other words,

the contract writers and investors did something stupid

and the Ethereum developers decided to bail them out.

The small minority that didn’t agree with this move

stuck to the original Ethereum Blockchain before its protocol was altered

and that’s how Ethereum Classic was born,

which is actually the original Ethereum.

We’ve covered a lot up until now

and the last thing I want to talk about is Ethereum as a currency.

We’ve already established that

Ethereum is basically a large bunch of computers

working together like one super computer to execute code that powers Dapps.

However this costs money -

Money to get the machines, to power them up, store them and cool them if needed.

That’s why Ether was invented.

When people talk about the price of Ethereum

they actually are referring to Ether -

the currency that incentivizes people to run the Ethereum protocol on their computer.

This is very similar to the way Bitcoin miners get paid

for maintaining the Bitcoin blockchain.

In order to deploy a smart contract to the Ethereum platform,

its author must pay to do so.

That payment is made in the form of ether.

This is done so that people will write optimized and efficient code

and won’t waste the Ethereum network computing power on unnecessary tasks.

Ether was first distributed in Ethereum’s original Initial Coin Offering

back in 2014.

Back then it cost around 40 cents to buy one Ether.

Today, one Ether is valued in hundreds of dollars

since the use of the Ethereum network has grown immensely

due to the ICO hype that started in 2017.

Still Confused?

Don’t worry;

we’ll get more into Ether and mining in a later video.

Ethereum’s network and Ether are a whole new rabbit hole that we’ll cover

but I think this will do for now as an intro to Ethereum.

This concludes this week’s episode of Ethereum Whiteboard Tuesday.

Hopefully by now you have a better understanding of what Ethereum is -

A network of computers working together to replace

the centralized model of programs and companies which run the Internet today.

You may still have some questions.

If so, just leave them in the comment section below.

And if you’re watching this video on YouTube, and enjoy what you’ve seen,

don’t forget to hit the like button.

Then make sure to subscribe for notifications about new episodes.

Thanks for joining me here at the Whiteboard.

For 99bitcoins.com, I’m Nate Martin,

and I’ll see you… in a bit.