What is Ethereum (ETH)?

While Bitcoin led the first generation of cryptocurrencies, the Ethereum platform with its currency, the Ether (ETH), represents the second generation of blockchains. In contrast to Bitcoin, Ethereum is not only designed as an alternative currency to the Fiat money system, but is an open source protocol which adds the possibility to program decentralized applications to the blockchain.

Just like Bitcoin, Ethereum is also a peer-to-peer system (P2P) that does not have a central instance, such as a data center. Ethereum is a gigantic global network spread across thousands of computers around the world. Ethereum is therefore also referred to as a “world computer”. At the same time, each individual computer, also known as a (full) node in the P2P network, stores a copy of the blockchain, just like in Bitcoin. The verification process for each individual transaction in the Ethereum network is also ensured by mining. As a reward for mining, the Ethereum miners also receive the native cryptocurrency, Ether (ETH), the currency of the Ethereum ecosystem, in return.

Simply put, Ethereum can be imagined as a “programmable Bitcoin”. For this purpose Ethereum provides a blockchain with an integrated, Turing complete programming language (Solidity) with which “Smart Contracts” can be programmed. This means that practically any application that already exists today in a centralized form (Google, Facebook, WhatsApp, Ebay, Amazon, …) can be developed in a decentralized form (dApp).

The advantage is obvious. While today’s Internet is still monopolized by a few central companies that base their business models on the personal data of their users, Ethereum is a decentralized blockchain system. There is no company and no middlemen who store all data in their central data centers. Users can freely decide which data they want to release. No stranger exercises control over personal data and no one owns it except yourself.

Ethereum’s vision is to enable users around the world to control their own data over a distributed computing platform.

The beginnings of Ethereum

For the first time Ethereum was described in detail by Vitalik Buterin in the Ethereum Whitepaper at the end of 2013. In it Vitalik Buterin explained the technical design, the architecture and the reasons for the Ethereum protocol. A little later, Buterin teamed up with some other developers to implement the idea of Ethereum. At first he began to work with Dr. Gavin Wood, who a little later (in April 2014) also published the Ethereum Yellow Paper. This contained the technical specifications for the Ethereum Virtual Machine (EVM).

A little later Ethereum was founded by Buterin, Woods, Mihai Alisie, Anthony Di Iorio, Joseph Lubin and Charles Hoskinson. In order to finance the development, the team decided to carry out an advance sale of Ether (ETH) and set up several legal entities, including the Ethereum Foundation in Zug, Switzerland (in June 2014).

In July 2014 Ethereum carried out the very first Initial Coin Offering (ICO) for ETH Zurich. The Ethereum Foundation was able to earn a total of 31,591 Bitcoins worth over USD 18 million. The revenues were initially used to use open invoices for legal liabilities, as well as open and future developer services.

The Ethereum Frontier network went live on 30 July 2015.

Smart Contracts

Smart Contracts fit into the architecture of Ethereum in a way that creates the possibility of generating automatic contracts that come into force upon the occurrence of one or more conditions. For example, a fixed amount is transferred to Ether (ETH) to the contract partner. The Smart Contract checks whether the amount corresponds to the agreed sum and releases a consideration. The contracts are managed by the network and their compliance is monitored and recorded. The transactions can thus be carried out with legal effect and without the involvement of a third party. Smart contracts thus form the basis for being able to use the blockchain outside the financial sector.

Smart Contracts thus offer the potential to transfer agreements and contracts that currently only exist offline into the digital world. The blockchain architecture ensures that the contract data is stored confidentially and with integrity maintained.

The Ethereum Virtual Machine shall ensure that each contract or transaction over the Blockchain Network is executed and recorded in the Public Blockchain by both parties as agreed. This automatism makes contracts “smart” and thus opens up a completely new universe for corporate responsibility and thus a new economy.

Ethereum Mining

Just like the Bitcoin Blockchain, the Ethereum Blockchain Miner also needs to verify transactions by cryptography. The miners merge the transactions into blocks and append them to the block chain. Currently, this is still done by a proof-of-work, as is the case with Bitcoin. However, the block time of Ethereum is only 5 seconds. This means that every 5 seconds a new block is created in which the open transactions and Smart Contract data are combined.

As a reward for their work, the miners receive Ether (ETH). However, it is important to know that Ethereum will switch to a proof-of-stake with one of the upcoming updates (“Casper“), which no longer requires any mining. New ethers are then activated proportionately by mere ownership (“staking“). Transactions are verified by a consensus algorithm, which is based on the value-based share (in ETH) of the network. However, it is still unclear when this will actually be the case. It is expected that there will be a hybrid change in which proof-of-work and proof-of-stake will initially exist in parallel.

To avoid a cleavage of the blockchain, as was observed in Ethereum Classic, a “Difficulty Bomb“, also known as “Ice Age“, was implemented in Ethereum. The Ethereum Ice Age increases mining difficulty exponentially, so everyone has an incentive to switch to proof-of-stake.

The four development phases of Ethereum

The introduction process of Ethereum is divided into 4 milestone phases:

Phase 1: Frontier

Frontier went live in July 2015 and was a most minimalist form of Ethereum. There was an interface around ether mines and a possibility to upload and execute Smart Contracts. Cryptocurrency exchanges could offer Ether for trading.

Phase 2: Homestead

The homestead phase was introduced in March 2016, after Frontier was extensively tested and rated safe by the core developers.

Phase 3: Metropolis

The Metropolis phase is divided into two phases: Byzantium and Constantinople. The Byzantium Hard Fork took place in October 2017. Byzantium initiated a series of improvements. The biggest change concerned the Mininig. With the upgrade the “Difficulty Bomb” was reduced, but in return the Block-Reward decreased from 5 to 3 ethers per block. The aim was to prepare the Ethereum network for the switch to proof-of-stake. The Constantinople upgrade, which took place in October 2018, further reduced the block reward to 2 ETH. The reduction of the block reward enabled a further delay of the Difficulty Bomb.

Phase 4: Serenity

Serenity is the fourth and final phase of Ethereum. It is expected that the Ethereum network will switch to the Proof of Stake and that various solutions such as Plasma and Sharding will be implemented to make the network faster and more efficient.

Bottom line: Is Ethereum worth an investment?

Ethereum is the second largest cryptocurrency by market capitalization, and that is for good reason. The blockchain designed by Vitalik Buterin already has a broad network of companies supporting the blockchain as part of the Ethereum Enterprise Alliance. Ether (ETH) is the fuel of the network. In this respect Ethereum is a very interesting investment.

If you want to see the current Ether (ETH) price, just have a look at our Ethereum price index.

If you are interested in investing in Ethereum (ETH), we recommend our tutorial where and how to buy ETH.