For many people, Bitcoin was the most amazing technology… ever! Not only did it allow the P2P (peer-to-peer) transfer of value without needing to go through a bank or other ‘trusted’ third party, it allowed for cross-border transfers at speeds of minutes rather than days. There was a problem though – that’s all it did. It’s pretty much all it does still to this day.
However, in 2013, Vitalik Buterin, co-founder and inventor of Ethereum, published the Ethereum whitepaper. In it, he proposed that a scripting language needed to be developed for the Bitcoin blockchain to increase its utility. However, his ideas did not gain general agreement, so he instead proposed a brand-new platform that developers could develop on using a programming language called Solidity.
The Ethereum blockchain works in much the same way that the Bitcoin blockchain does but has faster transfers and similar transaction fees. Transactions are confirmed by miners using a PoW (proof-of-work) consensus mechanism, but miners are rewarded with ETH (Ether) instead of BTC (Bitcoin).
The most important difference between Bitcoin and Ethereum, however, is that Ethereum allows for the development of dApps (decentralized applications), smart contracts, and can facilitate the creation of brand-new cryptocurrencies. I’ll tell you about all those in a minute.
Before I do, if you’ve not signed up to the Crypto Disrupt newsletter, you should. It’s a great way to keep up with all the changes that happen in the crypto world. (Some days, it absolutely crazy!) Also, you should head over to our Telegram channel. You’ll learn tons, I promise.
Okay, so I just mentioned that Ethereum can facilitate the creation of brand-new cryptocurrencies. These cryptocurrencies are also known as tokens, and I’m sure if you’ve done much reading about blockchain you’ll have an inkling of what they are. Although there are many different standards of the token, the ERC-20 standard is the most widely used in the creation of new cryptocurrencies and is the most commonly used token type in ICOs.
ERC-20 tokens allow for smart contracts, which in turn allow for transactions to be made without third parties. Okay, Bitcoin could already do that… but only when it comes to the transfer of value.
Smart contracts are protocols that can execute an agreement between two or more parties. These contracts can self-execute and self-enforce. Since smart contracts are mathematical in nature, and since mathematics is absolute, some people believe that smart contracts are superior to traditional law because the written law is open to interpretation.
DApps typically use ERC-20 tokens to fuel their ecosystems. By this, I mean they can be used to pay for services, and/or they can be used as incentives for validating transactions. Most of the time, the code used to build the dApp is open source, which means that it is viewable by anyone. Also, to be considered a dApp, all transactions should be recorded on a publicly viewable blockchain without any third-party intervention (i.e. decentralized).
DApps are still very much in their early days, so no strict definition yet exists as to what constitutes a true dApp, but there are many successful ones including Augur, Aragon, and – much to my chagrin – CryptoKitties.
I hope this article has been of some use in helping you understand the importance of Ethereum. Quite simply, it’s amazing technology that will change the technological landscape forever. Although there are scalability issues with the Ethereum blockchain, solutions are already in development to help it cope with the sheer number of transactions being processed on it. But, it is a far cry from the sluggish, yet still useful, Bitcoin blockchain.
If you’ve learned something by reading this, you should pop over to our Telegram channel where you can learn even more about crypto.
Chronic crypto nut and freelance writer/editor for longer than I care to remember. Have finally found a home here at Crypto Disrupt.