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What is Ethereum?

What is Ethereum?

The development of Ethereum is a decentralized computing platform. It can be thought of as if it were a computer, but it doesn't run on a single device. Without a single owner, it runs simultaneously on thousands of machines around the world. Ethereum, such as Bitcoin and other cryptocurrencies, enables the transfer of digital money. However, it is capable of much more – we can implement our code and interact with applications created by other users. Thanks to its flexibility, any kind of sophisticated program can be run on Ethereum.

The developers can create and release code that runs on a distributed network rather than a centralized server is the main idea behind ethereum. This means that, theoretically, these applications cannot be disabled or censored.


What makes Ethereum valuable?

We already mentioned that Ethereum can run code on a distributed system. In other words, the programs cannot be tampered with by third parties: they are added to Ethereum's database (the blockchain) and can be programmed so that it is not possible to change the code. Furthermore, the database is visible to everyone, so users can audit the code before interacting with it.

What this means is that anyone, anywhere, can run applications that cannot be taken offline. Furthermore, as its native unit – ether – stores value, these applications can set conditions on how the value is transferred.

We call “smart contracts” the programs that compose applications. In most cases, these can be configured to operate without any human intervention.

It is understandable that this idea of “programmable money” has captivated users, developers, and companies around the world.

What is the Ethereum blockchain?

The database that holds the information used by the protocol is the blockchain which is the heart of Ethereum. Ethereum's blockchain is similar to Bitcoin's, although the data it stores – and the way it stores it – is different.

It might be easier to think of the development of Ethereum blockchain as a book to which we continue to add pages. Each page is filled with transaction information and it is called a block. We need to include a special value at the top of the page when we want to add a new page; this value should allow anyone to see that the new page was added after the previous page and not just randomly inserted into the book.

Essentially, it's like a page number that references the previous one. When looking at the new page, we can say, with certainty, that it is a continuation of the previous one. For this, a hashing process is used.

We now have a mechanism to link our pages in the correct order. Any attempt to change the order or remove the pages will make it clear that our book has been tampered with. 

Ethereum vs. Bitcoin – what's the difference?

Bitcoin depends on blockchain technology and financial incentives to create a global system of digital money. It introduced important innovations that allow the coordination of users around the world, without the need for central command. By having each participant run a program on their computer, Bitcoin allows users to agree on the status of a financial database in a decentralized and trustless environment.

Bitcoin is generally considered to be the first generation blockchain. It wasn't created as an extremely complex system, which is a plus when it comes to security; it is a system that is intentionally inflexible to prioritize security at its base layer. Bitcoin's smart contract language is extremely strict and doesn't accommodate applications outside of transactions very well.

Second-generation blockchains, on the other hand, are more capable. In addition to financial transactions, these platforms allow for a more complex degree of programming. Ethereum gives programmers much more freedom to experiment with their code and create what we call “Decentralized Applications” (DApps).

Ethereum was the first second-generation blockchain and remains the most prominent to this day. It has similarities to Bitcoin and can perform many of the same functions. But in reality, the two are very different and each has its advantages and disadvantages.

How does Ethereum work?

We could define Ethereum as a  state machine (literally, “state machine”). This means that, at any time, we have a  snapshot  (instantaneous information) of all account balances and smart contracts, showing their current status. Certain actions will cause the state to be updated, meaning that all “nodes” update their snapshot to publicize the change.

Smart contracts executed on Ethereum are triggered by transactions (from users or other contracts). When a user sends a transaction to a contract, all “nodes” in the network execute the contract code and record the output (output). This is done using the  Ethereum Virtual Machine (EVM), which converts smart contracts into instructions that the computer can read.

To update the state, a mining engine is used (for now). Mining is done with the “Proof of Work” algorithm, which is similar to Bitcoin. We'll go into more details about this shortly.

What is a smart contract?

A smart contract, which we'll talk about in more detail in a separate article, is just code. The code is neither smart nor a contract in the traditional sense. But we call it “smart” because it is performed under certain conditions and can be considered a contract, as it imposes agreements between the parties.

We can credit this idea to computer scientist Nick Szabo, who proposed it in the late 1990s. Vending machines were used as an example to explain the concept, claiming it could be seen as a precursor to the modern smart contract. In the case of a vending machine, there is a simple contract to be executed: we insert coins and, in exchange, the machine delivers the chosen product.

Now, an intelligent contract applies this kind of logic in a digital scenario. We can specify something simple in the code like displaying "Hello world!" when transactions are sent to this contract.

On Ethereum, the programmer would code this so that it could later be read by the EVM. It would then be published by sending it to a special address that registers the contract. From this moment on, anyone can use it – and the contract cannot be deleted unless a condition is specified by the programmer during its creation.

Now the contract has an address. To interact with it, users only need to send 2 ETH to that address. This will trigger the contract code – all computers on the network will run, verify that payment has been made, and record its output ( “Hello world!” )

This is the basic example of what ethereum can do. More sophisticated applications that link many contracts can be – and have been – created.

Who created Ethereum?

In 2008, an unknown programmer (or group of programmers) using the pseudonym Satoshi Nakamoto published the Bitcoin white paper. This completely changed the digital money landscape. A few years later, a young programmer named Vitalik Buterin devised a way to take this idea further and apply it to any type of application. The concept expanded until the emergence of Ethereum.

Ethereum was proposed by Buterin in a 2013 publication entitled  Ethereum: The Ultimate Smart Contract and Decentralized Application Platform. In his post, he described a blockchain idea “Turing-complete” – a decentralized computer that, given enough time and resources, could run any application. 

Over time, the types of applications that could be deployed on a blockchain would be limited only by the developers' imaginations. The main aim of Ethereum is to find out if blockchain technology has valid uses outside of Bitcoin's intentional design limitations.

How was ether distributed?

With an initial supply of 72 million ether, Ethereum was launched in2015. More than 50 million tokens were distributed in a public sale of tokens, what is called an ICO, initials of Initial Coin Offering, where those who wanted to participate can exchange bitcoins and fiat currency to ether

What is Ethereum Classic?

And what was DAO?

Entirely new forms of open collaboration over the Internet have become possible with Ethereum. Let's consider, for example, DAOs (initial “decentralized autonomous organizations”), entities governed by computer code, similar to a computer program.

One of the first and most ambitious attempts at the organization of this type was called “The DAO”. It would have been made up of complex smart contracts, run on top of Ethereum, functioning as an autonomous risk fund. DAO tokens were distributed at an ICO and gave a shareholding as well as voting rights to token holders.

Shortly after its release, however, malicious agents exploited a DAO vulnerability and stole nearly a third of its funds. Note that at that time 14% of the entire ether supply was locked in DAO. This was a devastating event for the still inexperienced Ethereum network.

After some discussions, the chain suffered a "hard fork", separating into two new chains. In one, the malicious transactions were effectively “rolled back” to restore the funds – this chain is now known as the Ethereum blockchain. The original chain, where transactions were not rolled back and immutability was maintained, is now known as  Ethereum Classic.

The event served as a stark lesson in the risks of this technology and showed how trusting large amounts of autonomous code can be dangerous. It was also an interesting example of how difficult collective decision-making in an open environment can be.

However, it was by neglecting its security vulnerabilities that DAO perfectly illustrated the potential of smart contracts by enabling large-scale “trustless” collaboration on the Internet.



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