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Ethereum Simply Explained

April 5, 2022
Paul Roux
Cryptocurrency

Cryptocurrencies have taken the world by storm in the past decade. Are they a stroke of genius, or a soon-to-be-forgotten, failed experiment? This article will investigate the2nd largest cryptocurrency by market cap: Ethereum.

Ethereum was conceived in 2013 by programmer Vitalik Buterin. It was built as an open-source, decentralized blockchain with smart contract functionality, with Ether serving as the native cryptocurrency of the platform. “Open source”, “decentralized”,blockchain”, “smart contracts”… A long list of crypto lingo that can easily go over one’s head. Let’s explore the basics.

Open source

Opensource means that no permission is needed to build on the platform. Whilst Bitcoin primarily serves as a ledger payment system, Ethereum is more like a marketplace. The software that developers build on the Ethereum blockchain is called “dApps”, short for Decentralized Applications. We can think of Ethereum as being the “www” of any website on the internet: Ethereum is the base layer, whilst the rest of the URL serves as the application built on top of it, e.g., www.finmeup.co.za. There are currently over 3 000 dApps built on the Ethereum blockchain with various purposes, including finance, games, gambling, exchanges, insurance, and many more.

Decentralized

Before cryptocurrency, the only way to use money digitally was through an intermediary bank. The money was government-issued and controlled.  Decentralization means that individuals can trade directly with one another without the need for an intermediary. Connecting directly to one another is called a “peer-to-peer” network.Each transaction is validated and confirmed by the entire global network. No single point of authority, no single point of failure. The system is virtually impossible to shut down, manipulate or control. Decentralization is a system for the people, with everyone having little control instead of one entity having all the control. We will discuss the exact process of decentralization and how it is maintained on the network in the next article.

Server-Based (left) vs Peer-to-Peer (right)

Blockchain

Blockchain technology, simply put, is a public record of all transactions that have taken place on the network. All transactions will be verified and stored in data“blocks” using cryptography. Each block can store up to a certain number of transactions before a new block is created, with every new block containing a zip version of the previous one and receiving a new block ID called the “Hash”.If any information in any block must be changed, all the blocks must be changed. It was originally referred to as the “chain of blocks” but was later adopted simply as “blockchain”.

Smart contracts

Are you smart enough to understand smart contracts? Let’s dig in. Smart contracts are coded contracts that automatically execute when specific terms/conditions are met.Using basic code, it functions on the “if-then” rule. If X happens, then execute Y. If you give me your PlayStation, then I will give you0.2 Ether. If you reach 100 000 views on your YouTube video, then10 Ether will be transferred to your account. If the Springboks beatNew Zealand by more than 8 points this weekend, then I will send you 1Ether. When the conditions in a smart contract are met, the Ether will be transferred immediately and automatically. If not, the Ether will remain with the original user. By using smart contracts, we essentially remove the middle man from the equation.

Let’s use a more complicated example: Bob wants to sell his house to Alice. Bob lists the title deed to his house on the Ethereum blockchain in a smart contract. IfAlice transfers 500 Ether to Bob’s wallet address, then the smart contract will execute, and Alice will receive the title deed and become the new owner of the house. The transaction will be recorded for everyone to see on the publicly displayed Ethereum blockchain. With this contract, there is no 3rd party, and all the validators in the network will have recorded the transaction. The Ethereum Blockchain is where the history of all the smart contracts is stored.

Smart contracts are immutable, which means they cannot change. The rules are set. In the case where a mistake wasmade on the original, we can simply create a new smart contract with new terms including scrapping the old one. The benefits are clear: We have coded financial agreements, that nobody can argue, that don’t change, that don’t need an intermediary, and that everybody has access to via the public blockchain.

Alice pays 500 Ether to Bob. Nodes across the world record and store the transaction on the blockchain.

Closing remarks

Ethereum is an open-source, decentralized blockchain with smart contract functionality.Whilst the future of cryptocurrencies is unclear, Ethereum’s potential in this space can not be underestimated. In the next article, we will discuss the structure of the decentralized Ethereum blockchain.