Beginner
Lesson 23
5 min

What is Ethereum?

Ethereum is an operating system for Decentralised Applications and smart contracts. The cryptocurrency generated by the Ethereum blockchain is called Ether.

  • Ethereum is an operating system (world computer) for Decentralised Applications (DApps)
  • Ether is a decentralised and immutable cryptocurrency running on the Ethereum network
  • DApps are a tamper-proof and secure way to record contracts called smart contracts 
  • DApps are not controlled by an individual or a central entity
  • Tokens can be issued via Smart Contracts

In this lesson, you will learn the basics of Ethereum.

A second-generation blockchain

As you already know, Bitcoin was the first cryptocurrency to enable peer-to-peer payments without the need for a centralised authority.
Ethereum wants to create a decentralised and secure operating system for applications which normally require a centralised middleman.

Ethereum is a second-generation blockchain. In a way, Ethereum carried forward the ideas and concepts that were introduced by Bitcoin. The goal of Ethereum is to further advance use cases for blockchains and to allow for more than peer-to-peer payments. 

Ethereum was conceived by Vitalik Buterin, a co-founder of Bitcoin Magazine and programmer. He set out to create a new platform for decentralised applications after he suggested the implementation of a scripting language in Bitcoin.

Buterin outlined the concepts underlying Ethereum in a whitepaper under the title of “A Next-Generation Smart Contract and Decentralised Application Platform.” Development began in early 2014 and was funded by an ICO which took place from July to August 2014.

During this time, Vitalik Buterin became one of the most prominent figures in the cryptocurrency sphere.

In a way, Ethereum carried forward the ideas and concepts that were introduced by Bitcoin. The goal is to further advance use cases for blockchains and to allow more than peer-to-peer payments. 

What is the concept behind a “smart contract”?

The idea behind smart contracts was first described by computer scientist and cryptographer Nick Szabo in 1996. He wanted to provide a secure and trustworthy way for contracting between strangers on the Internet. His intention was to make traditional contracts less expensive and more secure at the same time. 

Technically speaking, almost all cryptocurrency agreements use smart contract technology. Following Szabo’s vision of secure and decentralised agreements, cryptocurrency systems are based on multilateral agreements of which all wallet-holders are parties.

A smart contract in its original context is a computer protocol that serves to digitally verify, enforce or to facilitate the performance and negotiation of a contract without third parties. 

However, computation mechanisms on blockchains such as Ethereum’s and DApps (decentralised applications) running on the Ethereum blockchain are commonly also referred to as “smart contracts”. 

Therefore, computers in the decentralised Ethereum network have two functions: to record transactions and to produce smart contracts. For implementing tokens on the Ethereum blockchain, the technical standard used for smart contracts is ERC-20.

Use Cases of Ethereum

In contrast to other blockchains offering just a single use-case, such as a network for a cryptocurrency, the Ethereum Blockchain is more like a distributed operating system with smart contract support. Therefore Ethereum offers not one, but multiple use-cases. 

These include:

Cryptocurrency Ether

In most cases, referring to the term “Ethereum” actually means “Ether”, the cryptocurrency running on the Ethereum blockchain. So, Ether is the network’s currency and Ethereum is the network itself. These terms are not to be confused with Ethereum Gas. Gas is the unit used by the Ethereum network to gauge the computational effort required to execute certain operations.

ICOs and tokens

Ethereum is and will likely remain the most important platform for Initial Coin Offerings (ICOs) in the crypto sphere. As we also mentioned in our lesson on ICOs, at this point, the bulk of all projects in the cryptocurrency sphere run on the Ethereum network.

DApps and CryptoKitties

DApps are built on the Ethereum blockchain. The advantage of DApps is that computation is decentralised. Developers are charged in Ether for using the computing power in the network. No single institution or authority is controlling the Ethereum network, thus essential components are distributed. For this reason it is almost impossible to attack the network, which in turn provides an enhanced customer experience of reliable and secure decentralised applications.

One of the best-known applications running on the Ethereum network is one of the world’s first blockchain games, CryptoKitties. The game allows users to buy, sell, breed and collect virtual cats.

Each CryptoKitty is represented as a non-fungible token, the game uses the ERC-721 token standard on Ethereum. The ownership structure of CryptoKitties is tracked via smart contracts on the Ethereum blockchain.

Digital Identity

Identity theft and other issues involving privacy and security risks pose a threat to every user of the internet. Unique identifiers and patterns of use enable others to detect individual entities or their devices. However, digital identities could help to combat this problem. Elements of a digital identity include fundamental information that can be accessed online about individual persons, organisations or electronic devices. Such bodies are made up of information such as usernames, passwords, date of birth, online search activities and so on. 

One of the most disruptive use cases for the Ethereum network is the concept of a decentralised identity ecosystem. Decentralised identities (DIDs) are independent from any centralised registry, certificate authority or identity provider and under full control of the owner who created the ID in the blockchain without the need for intermediaries.

A blockchain identity relies on self-sovereign management across all borders and is anchored to a zero-trust datastore. Zero-trust datastores, such as the Ethereum Claims Registry, are based on a security concept which assumes no system, actor or service is automatically trusted. Instead, Zero Trust datastores ensure that every data unit and every data subject is verified before it controls or accesses data, thus greatly reducing the risk of identity theft. 

Property Rights

Another use case for the Ethereum blockchain is end-to-end real estate transactions. Utilising blockchains greatly reduces engineering time and complexity in creating and executing legally binding agreements for selling and purchasing real estate. 

Using the Ethereum blockchain, a buyer and seller can negotiate, manage and execute their agreement using smart contracts without the need for a third party. 

Use cases not yet known

Currently, there are about 1,000 applications running on the Ethereum network. However, the technology offers a vast spectrum of future use cases that are yet to be explored and utilised in all areas, with potential to use tokenised assets, in supply chains and logistics operations, gaming, data storage and many more. 

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FURTHER READING

BOOKS

  • Andreas M. Antonopoulos - Mastering Ethereum: Building Smart Contracts and DApps
  • Roberto Infante - Building Ethereum DApps: Decentralized Applications on the Ethereum Blockchain
  • Michael G. Solomon - Ethereum for Dummies

LINKS

Cryptocurrencies are Smart Contracts

CryptoKitties

The Impact of Digital Identity

The Basics of Decentralized Identity

Ethereum Claims Registry

What is digital identity?

The Purchase and Sale of Real Property on Ethereum

What is Ethereum Used For?