Name came from Aether, which 19th-century scientists hypothesized was the medium our universe was built on. Vitalik liked the analogy for what he wanted to do and used it for his creation.
Ethereum is built on neutral, open-access infrastructure running smart contracts. A core proposition of the Ethereum network is smart contracts that require computational resources, and Ether is the asset paying for them. It is maintained and improved by a community of contributors working on everything from core protocol to consumer applications. It works on collective contributions. The Ethereum blockchain was developed so that it can serve as an internet where money and payments are built-in, where users can own their data and apps do not spy and steal your information and everyone has the ability to use an open financial system.
The creator of Ethereum is Vitalik Buterin, a programmer from Canada. He first encountered Bitcoin and cryptocurrencies in 2011. That same year, he co-founded The Bitcoin Magazine. He came up with the idea for Ethereum from a belief that the Bitcoin blockchain is limited in scope. The Ethereum whitepaper was released in 2013 and documented a new open-source protocol for creating decentralized applications. In addition to Buterin, Ethereum was co-founded by Mihai Alisie, Anthony di Iori and Charles Hoskinson. Soon after, Ethereum’s yellow paper was released by Dr.Gavin Wood, describing the Ethereum Virtual Machine (EVM) and the runtime environment that executes all of the smart contracts on the network. The Ethereum Foundation held an Ether crowd sale in July 2014.
On the Ethereum network, you can use cryptographic algorithms (hashing, digital signatures) with economic incentives for the use of decentralized networks with memories. What it does is attempt to provide a base for applications of blockchain technology. The big difference from other blockchains is that there can be a blockchain that understands a general-purpose programming language, (eg. Android or iOS). The Ethereum community calls it a flexible blockchain.
What is Ether (ETH)
Like other blockchains, Ethereum has a native currency called Ether, with ticker symbol ETH and uppercase Xi as a currency symbol. Ether is often mistakenly referred to as Ethereum. Unlike other blockchains, Ether is not meant to serve as a unit of currency but as fuel for the computations powering the Ethereum network. Therefore, it has no maximum supply. Regardless of its primary function, it is traded on markets as any other token and is ranked second largest by market cap.
Ether’s most common denomination is 1 Ether = 1,000,000,000 Gwei.
Sixty million Ether were created during the initial crowd sale, known as the first pre-ICO. Ether issuance differs from other popular cryptocurrencies by not emphasising deflation.
Ether (ETH) is an incentive for nodes to validate blocks on the Ethereum chain containing smart contract code. The award is five Ethers for every successful block validation on Ethereum network, which normally occurs every 15-17 seconds. In cases where nodes find the correct solution but do not include it on the network, the reward is two to three Ethers. ETH also provides an incentive for developers to make quality decentralized apps while network users pay in ETH for network use.
As with any other cryptocurrencies, private keys that unlock Ether are stored in a wallet. Options for a wallet are as follows: desktop wallets, web wallets, hardware and paper wallets. To continue reading about ETH wallets, click on the link to our blog post How to choose the best Ethereum Wallet
How Ethereum Works: Protocols and Architecture
The structure of the Ethereum blockchain is a shared ledger of the entire transaction history. Every Ethereum node also stores the most recent state of each smart contract. For each application run on Ethereum, the network has to maintain current information, a state, including users’ balance, smart contract code and where it is stored.
As with any other blockchain, Ethereum has a scaling limit. Ethereum depends on a network of nodes and when users are increasing, this might make full nodes more difficult to run. The goal is to change from full node to nodes storing only a subset of data. A scaling project they are considering is Sharding, which breaks a database apart and locates each part on a different server.
Ethereum transactions use accounts similar to bank accounts but consist of cryptocurrency typical characteristics: ETH address, transaction hash, block, status, timestamp, tokens, price, transaction fee and, different from Bitcoin, the ability to look at the history of ETH address. Ether tokens from one wallet can be moved to another wallet with transactions easily tracked on, e.g. Etherscan.io or Ethplorer.io.
Ethereum addresses are composed of the prefix “0x”. The address of a smart contract is also in this format, but determined by the sender and creation transaction nonce.
The mining process for Ethereum is very similar to Bitcoin mining. It keeps honest records, generates new ETH and makes up for decentralisation. Miners find a block on average every 12th second by repeatedly finding the block’s unique header metadata through a hash function, only changing the nonce value. Miners earn ETH randomly by validating transactions and blocks. It is the same puzzle-solving algorithm as with Bitcoin, a Proof-of-Work. More specifically, the Ethereum version of proof-of-work called Ethash is designed to require more memory to make it harder to mine using ASICs.
Ethereum aims for a shift from PoW to Proof-of-Stake (PoS), which uses less resources to achieve a consensus, where it isn’t miners but owners of the tokens that secure the network.
The Ethereum Virtual Machine (EVM) is the runtime environment for smart contracts on Ethereum. The EVM can read and execute and normally compiles smart contracts written in a specific programming language into bytecode. Every node is using their EVM. As mentioned earlier, every node has a copy of the transaction and smart contract history and to maintain the current state, when there is a change of state, the node confirms it is responsible for the change and has to come to an agreement with others that change has happened.
The Ethereum blockchain works with a secured base layer that does not have too many features, allowing innovation to happen on top.
How to mine Ethereum?
Ethereum miners are the cornerstone of the Ethereum network, as miners usually are in the cryptocurrency network. For now, mining Ethereum uses a Proof-of-Work algorithm for verifying Ether transactions but there is a plan to switch to Proof-of-Stake. By verifying transactions on the network, miners are rewarded in Ether, and this is how new Ether comes into circulation.Read more in Mining Ethereum blog post.
Smart contracts originate from a 1990 Nick Szabo proposition with the underlying idea of a computer protocol intended to digitally facilitate, verify or enforce the negotiation or performance of a contract. A smart contract in Ethereum is a code that automatically executes the terms of an agreement so that third party reliance is not needed. A smart contract analogy is a vending machine that has an encoded set of rules to keep it secure. Physical hardware has an implementation of an agreement and its conditions (e.g. insert two dollars and water comes out, don’t insert two dollars and water does not come out).
Smart contracts have different uses. They can arrange agreements between users, provide utility for other contracts, storing information and functioning as multi-signature accounts. The currency notion of a smart contract is a computer program that directly controls digital assets. It’s a computer program with the instructions on what to do with a digital asset, providing many options for its security and trustworthiness. A possible example in crowdfunding: send ETH to a computer program, and the program has a set of instructions on what to do with it. If the cap is reached, money is sent to the developer. If the cap is not reached, everyone gets refunded, etc.
Another example of a smart contract is the Ethereum Name System (ENS), an Ethereum version of DNS (Domain Naming System) that addresses resources on and off the chain with human-readable names that are not tied to an issuer.
The Ethereum smart contracts language is Turing-complete, so they can be written in different computer languages, such as Solidity, Serpent, LLL and Mutan.
Being a programmable blockchain, Ethereum allows developers to use it to build new applications, also called DApps (decentralized applications). DApps are bundles of smart contracts connecting users and providers directly. The benefits of DApps come from cryptocurrency and blockchain technology that always run as programmed. There can be different types of Dapps: cryptocurrency wallets, financial applications for trading and prediction markets, games, governance systems and others.
CriptoKitties is one of blockchain’s first games. It was developed by an Ethereum developer and players can purchase, collect, breed and sell virtual cats. Each Cryptokitty is a unique non-fungible token (NFT) operating on the Ethereum blockchain. At the peak of the game’s hype in December 2017, CryptoKitties congested the Ethereum network, causing it to reach an all-time high in the number of transactions, slowing it down significantly.
The Initial Coin Offering is, somewhat similar to an IPO, a funding mechanism in which new projects sell their underlying crypto tokens in exchange for Bitcoin and Ether. The ICO was a relatively new concept but quickly boomed in 2017. In the aftermath, some view ICO projects as unregulated financial securities for raising large amounts of capital, while others see it as an innovation in the traditional venture-funding business.
The first attempt at fundraising a new token on Ethereum was The DAO. Successful in raising the money — $150 million — but later became infamous for the DAO hack, where all the funds were stolen due to technical vulnerabilities. Nonetheless, despite the DAO fund raising going sour, the blockchain developers recognized that using Ethereum to launch a token is easier than going through a standard seed round in the venture capital model. Some of the biggest amounts raised were by Aragon ($25M), BAT ($35M) and Status.im ($270M).
To improve the situation around The DAO, the Ethereum Foundation took the decision to move forward with a hard fork to allow The DAO funds to be saved. The Ethereum blockchain was split into two separate chains. The original chain was continued under the name Ethereum Classic (ETC) and the new version of the Ethereum chain with the theft reversed is today’s Ethereum (ETH).
The ERC-20 standard is a list of rules that an Ethereum token has to implement at the time of ICOs. The ERC-20 protocol describes functions and events that an Ethereum token smart contract should have. DTR is an example of an ERC-20 token.
As usual with open source software development, Ethereum upgrades are public and famous their contentiousness. Since its beginning, Ethereum was meant to undergo changes over time. To find out about major Ethereum forks, follow the link to our blog post Major Ethereum Forks