Ethereum is a decentralized computing platform. You can think of it as a laptop or PC, but it doesn’t run on a single device. Instead, it simultaneously runs on thousands of machines around the world, meaning that it has no owner.
Ethereum, like Bitcoin and other cryptocurrencies, allows you to transfer digital money. However, it’s capable of a lot more – you can deploy your own code, and interact with applications created by other users. Because it’s so flexible, all sorts of sophisticated programs can be launched on Ethereum.
Simply put, the main idea behind Ethereum is that developers can create and launch code that runs across a distributed network instead of existing on a centralized server. This means that, in theory, these applications can’t be shut down or censored.
It might be unintuitive, but the units used in Ethereum are not called Ethereum or Ethereums. Ethereum is the protocol itself, but the currency that powers it is simply known as ether (or ETH).
We touched on the idea that Ethereum can run code across a distributed system. As such, programs can’t be tampered with by external parties. They’re added to Ethereum’s database (i.e., the blockchain), and can be programmed so that the code can’t be edited. In addition, the database is visible to everyone, so users can audit code before interacting with it.
What this means is that anyone, anywhere, can launch applications that can’t be taken offline. More interestingly, because its native unit – ether – stores value, these applications can set conditions on how value is transferred. We call the programs that makeup applications smart contracts. In most cases, they can be set to operate without human intervention.
Understandably, the idea of “programmable money” has captivated users, developers, and businesses around the globe.
Bitcoin relies on blockchain technology and financial incentives to create a global digital cash system. It has introduced a few key innovations that allow the coordination of users around the globe without the need for a central party. By having each participant run a program on their computer, Bitcoin made it possible for users to agree upon the state of a financial database in a trustless, decentralized environment.
Bitcoin is often referred to as a first-generation blockchain. It wasn’t created as an overly complex system, and that’s a strength when it comes to security. It’s kept intentionally inflexible to prioritize security at its base layer. Indeed, the smart contract language in Bitcoin is extremely constrained, and it doesn’t accommodate applications outside of transactions very well.
The second generation of blockchains, by contrast, is capable of more. On top of financial transactions, these platforms enable a greater degree of programmability. Ethereum provides developers with much more freedom to experiment with their own code and create what we call Decentralized Applications (DApps).
Ethereum was the first of the second-generation wave of blockchains and remains the most prominent one to date. It bears similarities to Bitcoin and can perform many of the same functions. Under the hood, however, the two are very different, and each has its own advantages over the other.
We could define Ethereum as a state machine. All this means is that, at any given time, you have a snapshot of all the account balances and smart contracts as they currently look. Certain actions will cause the state to be updated, meaning that all of the nodes update their own snapshot to reflect the change.
A transition in Ethereum’s state.
The smart contracts that run on Ethereum are triggered by transactions (either from users or other contracts). When a user sends a transaction to a contract, every node on the network runs the contract’s code and records the output. It does this by using the Ethereum Virtual Machine (EVM), which converts the smart contracts into instructions the computer can read.
To update the state, a special mechanism called mining is used (for now). Mining is done with a Proof of Work algorithm, much like Bitcoin’s. We’ll get into more depth on this shortly.
A smart contract is just code. The code is neither smart nor is it a contract in the traditional sense. But we call it smart because it executes itself under certain conditions, and it could be regarded as a contract in that it enforces agreements between parties.
Computer scientist Nick Szabo can be credited with the idea, which he proposed in the late 1990s. He used the example of a vending machine to explain the concept, stating that it could be viewed as a precursor to the modern smart contract. In the case of a vending machine, there is a simple contract being executed. Users insert coins, and in return, the machine dispenses a product of their choosing.
A smart contract applies this kind of logic in a digital setting. You could specify something simple in the code like return “Hello, World!” when two ether is sent to this contract.
In Ethereum, the developer would code this so that it can later be read by the EVM. They then publish it by sending it to a special address that registers the contract. At that point, anyone can use it. And the contract can’t be deleted unless a condition is specified by the developer when writing it.
Now, the contract has an address. To interact with it, users just need to send 2 ETH to that address. This will trigger the contract’s code – all the computers on the network will run it, see that the payment has been made to the contract, and record its output (“Hello, World!”).
The above is perhaps one of the most basic examples of what can be done with Ethereum. More sophisticated applications that connect many contracts can – and have – been built.
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