Ethereum and Bitcoin are so popular in the 21st century that almost everybody who has access to the internet has heard something about them. Bitcoin has introduced the blockchain technology to the world and it changed the way we think of cryptocurrencies. Currently, it is the largest and most valuable crypto-coin that we have access to, but what’s more impressive is that it has spawned many other (similar) cryptocurrencies too. Ethereum is one of these networks that works on blockchain technology, but there are some major differences between Bitcoin and Ethereum.
In this article, we will try to explain exactly what Ethereum is, what people are using it for and how they benefit from it. We will also talk about the main differences between Bitcoin and Ethereum. Many people think that these two are the same, but that’s not true. This article aims to tell you everything you need to know about Ethereum in a simple and tidy manner.
Before we jump into explaining everything there is to know about Ethereum, let’s take a look at what you can expect to find in this Ethereum review:
- What is Ethereum
- What is Ether
- Proof of Work vs. Proof of Stake
- Ethereum timeline
- Difference between Ethereum and Bitcoin
We will try to explain everything as straightforward as possible, but there is still one thing that you should familiarize yourself with before continuing this article. Bitcoin, Ethereum and every other cryptocurrency out there works on blockchain technology. In order to understand the concept of Ethereum more easily, you should learn about the technology behind it. Thankfully, we have already published an article that explains what blockchain technology is, so you can easily go ahead and read that before continuing with this one. Click on the following link to read about what blockchain technology is and come back whenever you are ready!
What is Ethereum?
Ethereum is a decentralized, open-source blockchain protocol (separate from Bitcoin) that works with smart contracts. Smart contracts are basically lines of code that execute certain actions (scripts). They can interact with other smart contracts, make decisions based on the available information and they store digital data. They also send out Ether, the currency of the Ethereum network when completing actions.
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The mastermind behind Ethereum is Vitalik Buterin, a researcher and programmer who worked closely on the Bitcoin project in its early phase. He realized that there are many other opportunities and possibilities with the blockchain technology; possibilities that Bitcoin isn’t taking advantage of. He pitched his idea of creating a decentralized, distributed computing platform that works with smart contracts, but his idea was turned down. Vitalik decided to go solo and he created the Ethereum network for everyone to use.
Basically what Vitalik Buterin created is a so called “world computer” that stores applications and all of the necessary elements to run them on a decentralized network. These applications are called “DApps” (decentralized applications). The database is spread out across many different computers (nodes) on the globe. These nodes collectively work on maintaining and updating the database and executing the necessary smart contracts. Once an action is completed, the smart contract releases a set amount of Ether as a reward for the computing power.
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What is Ether?
Ether is the fuel that powers the smart contracts on the Ethereum network. It is a special line of code that is used to pay for the computing power that’s necessary for executing a smart contract. Think of it as cash for using a vending machine (DApp). Ether is required for developers who want to build applications on the network, as well as users who want to interact with smart contracts on the Ethereum network.
Yes, Ether is a cryptocurrency, but it’s not just that; it is the gas that’s needed for the Ethereum network to function. All of the decentralized apps use it and the smart contracts automatically release Ether, without the need of a third party. While Bitcoin has a hard cap of 21 million Bitcoins, Ether doesn’t have this limit. Ether is rather capped at maximum 18 million per year, which is 25% of the initial supply created for the crowdfunders in 2014.
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Proof of Work vs. Proof of Stake
As of 2017, Ethereum uses a proof of work (PoW) algorithm. This means that you are getting rewarded for the computing power that you use to successfully add a block to the blockchain. According to a recent press release by Vitalik Buterin, the Ethereum network might be switching to a proof of stake (PoS) algorithm in 2018.
What proof of stake basically means is that rather than proving how fast you can solve the mathematical puzzle, you need proof of how much Ethereum you own. You create this proof by making so called “master nodes”. These nodes contain a certain amount of Ethereum as proof of stake. The system distributes the rewards according to the proof of stake that each user has.
In the following section, we are taking a look at everything important that’s happened to Ethereum since Vitalik Buterin came up with the idea.
- Late 2013 – Vitalik Buterin proposes his idea of a decentralized virtual machine to his peers, but he is turned down. He leaves the Bitcoin project that he was working on and starts prepping the Ethereum project.
- 2014 January – The core Ethereum team announces that they are working on a new platform for developing decentralized applications.
- 2014 July – The Ethereum team sets up a month-long online crowdfunding, where users are able to contribute by buying Ether using Bitcoins. Approximately 60 million Ether was awarded to the contributors. Additional 12 million Ether were created as fuel for the development fund. This is also when all parties involved agreed on the terms of the maximum 18 million Ethereum per year.
- 2014 August – The Ethereum genesis block is released to the public and the network is officially launched. The first live release of the Ethereum project is called Frontier and it’s a great success.
- 2014 November – The Ethereum development team organizes the DEVCON-0 event. This happening brought together developers from all around the world who intended on developing applications on the Ethereum network. One year later, the DEVCON-1 conference is held in London. More than 400 investors attend the event and huge enterprise level companies (IBM, Microsoft) are present as well.
- 2016 June – The Decentralized Autonomous Organization aka The DAO (huge Ethereum venture capital fund) gets hacked and over 3 million Ether gets stolen. The hacker or hackers found an exploit in the system and they were able to withdraw Ether with the same DAO Tokens multiple times. This was due to a flaw, whereas the transactions were completed first and the internal token balance was updated after.
- 2016 July – Ethereum undergoes a hard fork (completely new version of the blockchain) because of the DAO hack. Majority of the Ether shareholders agree on the hard fork, and thus two separate blockchains are created. Ethereum (ETH, the subject of this review) continues on the forked blockchain, while Ethereum Classic (ETC) stays on the original one. The price of ETC drops by more than half and the two cryptocurrencies rival each other in the upcoming months.
- 2016 November – Two additional forks had to be done on the Ethereum network for it to get stable. The new versions increased the blockchain’s security and DDoS protection. A few other fixes and improvements were also introduced.
- 2017 March – A large number of Ethereum startups and research groups announce the creation of the Enterprise Ethereum Alliance (EAA). This nonprofit organization wants to coordinate the engineering of this open-source blockchain. By the end of July, there were more than 150 members in the alliance, including multi-billion companies.
- 2018 – According to a recent press release by Vitalik Buterin, the Ethereum blockchain protocol might go from proof of work to proof or stake. This is a huge change for investors and developers as well, as it completely changes the way Ether is distributed in the network.
Difference between Ethereum and Bitcoin
Some may think that Ethereum and Bitcoin are the same exact thing with a different name, but that is not true at all. While they are indeed the two leading cryptocurrencies right now, there are some key differences in their core system protocol.
Bitcoin’s blockchain revolves around a decentralized open ledger of transactions that constantly keeps getting updated. The nodes in the network work on solving mathematical equations in order to successfully add a block to the blockchain.
While the Ethereum network does this, it is also a platform that allows work with smart contracts. Smart contracts (lines of codes, scripts) are the main thing that sets Bitcoin and Ethereum apart from each other. The Ethereum network allows for DApps to be created for seemingly any real-world application. Everything is automated; those who do not hold up their end of the bargain even get penalized.
While it is true that Bitcoin is still by far the most valuable cryptocurrency, many people consider the Ethereum network to be the more advantageous one.
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Ethereum has gone through a lot since its launch, but there are still millions of people using it. Its exponential growth since the start of 2017 has made a lot of people conscious about this cryptocurrency. It has also allowed developers to work on an open-source, decentralized network. Ethereum is a lot more than a simple cryptocurrency; it has opened up development opportunities that were not possible before its existence.
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Right now, Bitcoin and Ethereum and the two main attractions in the cryptocurrency world. Both of these cryptos are highly valuable and millions, if not billions of people are investing into them. Not only is it important to educate yourself about cryptocurrencies from a technical standpoint, but a financial one as well. Mining is one way of making money with these virtual currencies, but there are other, more passive alternatives. One of these alternatives is Optioment, a new and unique Bitcoin investment fund. If you are interested in a Bitcoin investment opportunity, be sure to read our Optioment review.
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The main objective of this Ethereum review was to try and explain exactly what this system is and how it is used. Hopefully, you have learned something about this cryptocurrency and the blockchain that it’s built on. If you deemed our review helpful, be sure to read some of our other articles that we have published about cryptocurrencies: