Operated by a Swiss non-profit called The Ethereum Foundation, the Ethereum network offers enormous potential to users who can build and benefit from a variety of functions, and to businesses that can use the promising blockchain technology for enhancing the efficiency of their processes, operations, and workflows. This article takes a detailed look at Ethereum, its major components, how it operates, and what makes it so special.
Understanding Ethereum—A Compare with the Internet
All your online data—email, social media posts, photos, and even key financial information—is stored on computers/servers which are owned and managed by large and small organizations or governments. The case is the same with the various apps that you use, as your activities—like booking a cab—are tracked and recorded by the app provider.
As a user, you don’t have any control over how your personal data and records of your online activities are managed and handled by these third parties. While these organizations do specialize in securing your data, the possibility of hacks cannot be ruled out, along with the possibility of misuse and selling of data . This leads to a user’s data being “centralized”—that is, the particular organization is in command of your data.
A blockchain-based platform like Ethereum attempts to address this problem of centralization by operating autonomously in a decentralized manner based on a clearly defined set of rules. It allows for a user’s data, their identities, their usage of apps, and their network activities to remain concealed to a large extent, and free from centralized control.
Decentralized, Autonomous Solution—“Global Super Computer”?
Imagine writing your all-important thesis notes on a Wordpad like a mobile application or on an online web portal, and all of a sudden that app/portal is discontinued by its owner. All your important data will be gone forever. In Ethereum, one entity alone does not have control over your data and no one alone can suddenly forbid an app. Only users can make changes, and that keeps the user in full control of their data even if it is being accessed through a particular app.
Ethereum attempts to offer a decentralized and democratized solution, much like the present-day Internet, but free from the control of any central authority. Instead of running on a few computers owned by an organization, it runs on the global network of hundreds of computers called nodes that are owned and operated by anonymous but reliable volunteers, thus creating a kind of “Global Super Computer.”
Any individual can easily join and use the various resources available on the Ethereum network, similar to using various sites and portals on the Internet or various mobile apps, with the added benefits of anonymity and decentralization.
It is possible for an individual, whether tech-savvy or a complete novice, to easily build, release, run and monetize apps on the Ethereum network. One can also earn from contributing to the necessary activities, like mining, that are needed to keep the Ethereum network agile and functioning.
How Can Ethereum Be Defined?
In the simplest forms, Ethereum can be defined as a blockchain-based, open public network platform that enables developers to build and deploy decentralized applications for use by businesses as well as individual users. Similar to the Internet, it acts as the necessary platform on which a whole virtual ecosystem can be developed, stored, executed and used by users securely and anonymously. In contrast to commission-based app stores that demand a cut for hosting and running the various apps, the decentralized and autonomous nature of Ethereum keeps it zero- to low-cost.
How Do Different Ethereum Components Fit Together?
At the root of Ethereum lies the blockchain, which acts as the storage of all the necessary transactions occurring on the network. The blockchain protocol also offers the necessary consensus mechanism that helps decide on important tasks, like verifying a user’s identity, participant's network contribution, or authenticity of transactions, apps, addresses, and usernames. Storage and content delivery are also taken care of by the blockchain but are limited to storing transaction details and qualifying code snippets.
On top of the blockchain, there is a separate, dedicated data container for storing non-transactional content. For example, it is possible to build an app that stores movies and allows users to access them via pay-per-view. While the payment details and user entitlement can be stored in the blockchain, the movie file needs separate storage. Since Ethereum nodes store the whole blockchain, it is not possible to store large, non-transactional content on the blockchain itself. Hence, an IPFS-supported data container is used that allows for the seamless flow of all kinds of data.
Smart contracts, which are self-executing code snippets that are stored and executed on top of the Ethereum blockchain, form the next important part. For example, one can create a smart contract-based crowdfunding app that aims to collect minimum 10 ethers each from a minimum of 500 contributors over a month and in return allocate 1 share to each contributor in a business project. If the set target is achieved, then the collected money is sent to the project owner’s wallet, and contributors are granted proportional shares. If not, the collected ethers are returned to each contributor. Such smart contracts are important to maintain the decentralized functionality of Ethereum as they run on their own code without any possibility of censorship, fraud, downtime, or third-party interference.
Lots of interfaces, like Mist Browser, are available for exploring the Ethereum network and its contents. These interfaces also allow a user to easily build, store, and execute the various apps on the Ethereum network.
Why would someone put effort to build a great app, if there is no reward for them? Why would someone join the Ethereum network as a node and contribute to keeping it agile and functional, if there is no incentive involved? Additionally, all the various artifacts and apps on the network may need to interact with each other based on user requirements and need a mode of transaction.
To address all these issues, Ethereum has a native cryptocurrency called ether, which acts as a medium of payment for network contributors, app developers, and users. Essentially, ether is the currency of the Ethereum ecosystem. An app developer can pay app hosting charges and can get paid by app users in ethers. Similarly, node participants are paid in ethers for their contributions like mining and verification services. Various apps can be used and re-used by other artifacts on the network, based on pre-defined ether-based payments.
Examples of Ethereum Apps
Decentralized Autonomous Organizations (DAO) – using a combination of smart contracts, the rules and structure can be drafted to run a leaderless company. Such a DAO can be owned by anyone who through ether tokens who gets voting rights.
WeiFund – smart contracts-based, decentralized, crowdfunding technology that runs on Ethereum. It allows contributions to be turned into contractually backed digital assets which can be used, traded or sold on Ethereum.
Provenance – makes the supply chain transparent and empowers all involved stakeholders to receive real-time updates about the origin and history of products allowing consumers to make informed decisions.
Augur – enables participants to make predictions about the outcome of real-world events and be rewarded for correctly predicting one. Participants can make predictions by trading virtual shares and backing them with cryptocoins. Even the correct reporting of outcome is automatically rewarded.
The openness and the enormous potential of Ethereum come with a few pitfalls. Ethereum’s core components, smart contracts, and decentralized apps are based on programming code. As the code is written by humans and is prone to bugs, functional vulnerabilities, as well as hacking, the apps are only as good as the humans who write them.
In 2016, a DAO project called ‘The DAO’ that successfully raised $150 million through a token sale was targeted by a hacker and $50 million worth of ether were stolen. While there were no problems with the Ethereum network, a technical flaw in the code of ‘The DAO’ was to blame.
The Bottom Line
While Bitcoin is limited to a particular “payment-only” application of blockchain technology, Ethereum can support anything and everything through its apps and programming. The application-oriented Ethereum network allows any feasible concept, process, or operation to leverage the blockchain technology benefits and operate in an autonomous and decentralized manner. With open programming and easy-to-use smart contract-based decentralized apps, the sky is the limit for using Ethereum.
Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative. This article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date, this article was written, the author owns no cryptocurrencies.