Editor’s Note: This is part one in a three-part series.
The first release of Ethereum occurred in 2015, six years after Satoshi Nakamoto created the bitcoin and the bitcoin network. Ethereum is a blockchain-based development platform that uses the ideas behind bitcoin and expands based on them.
If you want to learn more about Ethereum, but don’t know anything about blockchain or bitcoin, you should first familiarize yourself with bitcoin and the bitcoin network. Once you do that, you will have an easier time understanding Ethereum. Otherwise, you’ll have to figure out blockchain, cryptocurrencies, smart contracts and decentralization at the same time, which is not an easy task.
The Purpose of the Ethereum Network
Like Bitcoin, Ethereum is a decentralized blockchain network. There are two biggest differences between the bitcoin network and the ethereum network. The first difference is the purpose. Bitcoin is a specific blockchain application. It offers one solution to one issue. The issue is dealing with a third party when paying someone. Today most people use local money when they need to perform a financial transaction. The government prints the money. The banks manage the money. To get the money, the person needs to go to a bank. To send the money electronically, the person also needs to use services of a bank. Bitcoin solves this issue by putting people in charge of their money and by removing the third-party from financial transactions. If you own money in bitcoin, you can send it to anyone in the world at any time and you don’t need any government or financial institution in order to do so. This is what bitcoin and the bitcoin network are about. Ethereum blockchain is focused not on financial operations, but on the program code.
Capabilities of the Ethereum Network
The second difference between bitcoin and ethereum is capability. All blockchain networks can process code, but most of them have significant limitations in terms of functionality. For example, the bitcoin network processes code when users send and receive money. The network verifies transactions, has miners compiling transactions and adding blocks containing information about financial transactions to the blockchain. This is where Ethereum network is very different. Instead of developers working like miners on the bitcoin network, where miners perform only a few pre-determined operations, developers on the Ethereum network can create and use their own operations. This means the bitcoin network has the potential to change the financial landscape of the world and the ethereum network has the potential for thousands of various applications that can go far beyond anything the world has ever seen.
The main innovation that makes the Ethereum network different from other blockchain networks is the EVM or Ethereum Virtual Machine. The EVM is software that runs on the network and enables Ethereum network members to run whatever software they want no matter of the programming language of the software. Depending on the language, it may take time and memory to run it, but the network can do it. To run the software, the EVM uses a global network of public nodes.
This capability of the Ethereum network means that instead of having to create multiple blockchains to perform various functions, developers can build and use apps on one single platform. Instead of bitcoin, the Ethereum network uses Ether, a cryptocurrency token that network members use to compensate other members for performing computations.
Developers primarily use the Ethereum network to create and run decentralized applications, also known as Dapps. A typical Dapp serves a specific purpose. From the point of view of the Ethereum network, Bitcoin is a Dapp for peer-to-peer financial transactions. Because dapps run on a decentralized network, nobody can control a dapp once it becomes active on the network.
Smart Contracts on the Ethereum Network
One of the biggest ideas that the Ethereum network brought into life was the idea of a smart contract. On the network, a smart contract is a piece of computer code with instructions that describe conditions under which a transaction occurs. Because the network is decentralized, it executes the contract once it becomes active and no party can alter the contract, its state or its conditions. A contract on the network can contain Ethereum tokens, participate in a crowdfunding process or even be a voting member in another contract. This is very different from what has been happening in the past when all the contracts were occurring between people. On the Ethereum network, there is no discrimination and contracts can occur between people, organizations, or machines.
Developers can use the Ethereum network not just to build decentralized applications and smart contracts, but also decentralized autonomous organizations or DAOs. A DAO is an organization that runs according to rules described in a smart contract. According to the creators of the Ethereum network, the network brings true democracy into life because it makes it possible for organizations to truly have no single leader. The code of a smart contract can replace both the rules and the structure of a traditional organization and eliminate the need for a single governing structure that consists of people.
Because DAOs exist on a decentralized network, they don’t really belong to anyone. People that purchase Ethereum network tokens don’t get any ownership stake in DAOs. All they get is voting rights in an organization. Decentralization allows DAOs to stay immune to changes by a third-party, which makes DAOs tamper-proof, secure, and free of corruption.