What is Ethereum?

The blockchain is no longer limited to niche cryptography enthusiasts (sometimes to those enthusiast’s chagrin). In fact, there’s talk of the technology being used for everything from preventing illegal immigration to maintaining land records — and one of the public platforms that allows for the development of these applications is known as Ethereum.

Ethereum first appeared in 2013 in a white paper by Vitalik Buterin, a programmer who had spent time working with Bitcoin. He felt that the more important aspect of Bitcoin was the “underlying blockchain technology as a tool of distributed consensus” — rather than its functionality as a currency.

Buterin designed the Ethereum protocol to allow developers to create a larger diversity of applications not possible with Bitcoin — because that's simply not what bitcoin was built for. In other words, the ethereum blockchain exists to run the code of any application that’s been built on the platform, while the bitcoin blockchain is limited to tracking and storing ownership records of bitcoin. Buterin describes Ethereum as the “ultimate abstract foundational layer: a blockchain with a built-in Turing-complete programming language.” A Turing-complete language can theoretically solve any mathematical problem, provided you program it correctly — so in the case of Ethereum, it’s essentially a platform on which to build decentralized applications that leverage smart contracts.

Smart contracts

A smart contract (in any context — not just when it comes to Ethereum) is a computer protocol that facilitate and enforces the terms of a contract, using a virtual currency to form agreements with people via the blockchain. Because they exist on the blockchain, smart contracts provide higher security at a lower cost than traditional contracts — and because they’re run on computers, they automatically execute the terms once the conditions are met. The initial descriptor (way back in 1994) of a smart contract as a way to “satisfy common contractual conditions (such as payment terms, liens, confidentiality, and even enforcement), minimize exceptions both malicious and accidental, and minimize the need for trusted intermediaries” sounds strangely familiar, despite the fact that the first conceptualization of the blockchain did not occur until 2008 with the advent of Bitcoin

Ether

Ethereum’s tradable cryptocurrency is called ether, and it can be used to pay fees on the Ethereum network. In Ethereum’s own words: “ether is the incentive ensuring that developers write quality applications (wasteful code costs more), and that the network remains healthy (people are compensated for their contributed resources).” Smaller denominations of the currency labeled ‘finney,’ ‘szabo,’ and ‘wei’ can be used for microtransactions (think of these like dollars and cents, except there are even smaller ones). Like many cryptocurrencies, ether can be volatile based on circumstances, and even Ethereum’s founder has sold 25% of his coins, citing “sound financial planning” as his reasoning.

Applications of Ethereum

Perhaps the easiest way to understand Ethereum’s functionality is through examples of how it’s already being applied. There are currently a few hundred projects under development on Ethereum, but here are some highlights.

Prediction market platform

Augur is a decentralized betting and trading platform that allows anyone in the world to create a prediction market by asking any type of question. As with any prediction market, Augur uses the principle of “Wisdom of the Crowd” to more accurately forecast the chance that an event will occur — and reward those who predict correctly.

Augur is built on the Ethereum blockchain, which means that, as compared to more traditional prediction markets, the platform does not rely on central servers, its fees are set by users (and are much lower), and the risk of human error or manipulation in both reporting and payments is minimized.

Supply chain transparency

Provenance brings transparency to the supply chain by creating a digital history for products on its platform. This solves a number of problems, including authenticity verification and double spending on existing certifications, not to mention provides increasingly-aware consumers with information about how their products are produced, which can incentivize brands to utilize more sustainable, ethical practices.

By using the Ethereum blockchain, Provenance can guarantee that their product data is trustworthy: “auditable, unchangeable and open” in their words, and not subject to fraud as are centralized systems.

Decentralized crowdfunding

WeiFund recently joined the plethora of online crowdfunding platforms — but used a different model than most. While many crowdfunding sites can only be profitable by taking a significant percentage of the money, WeiFund is built on the Ethereum blockchain, which enables the company to charge lower fees. In addition, WeiFund leverages smart contracts, meaning contributions to a campaign can be turned into sellable, usable, and tradable digital assets.

In sum

Ethereum is a prime example of how blockchain technology can be applied to not only the movement of money, but across virtually unlimited use cases — and how decentralized applications can be more cost-effective, secure, and trustworthy than their centralized equivalents. Unlike bitcoin and some other cryptocurrencies with protocols that do not allow such flexibility, developers can (theoretically) use Ethereum to build applications for any sector that might benefit from distributed ledger functionality.