What is Ethereum? A Beginner's Explanation in Plain English

What the hell is Ethereum? I mean, I keep hearing about this all the time, I've seen that it's the second largest cryptocurrency out there, but I can't seem to figure it out. Is it as revolutionary as Bitcoin? Can it really change the world as we know it? If you want to understand Ethereum better, but are tired of

explanation

s that sound like complete technical gibberish, stick around... Here at Bitcoin Whiteboard Tuesday, or should I say Ethereum Whiteboard Tuesday, we'll answer these questions and more. Before getting into Ethereum, we must do a brief summary about Bitcoin, since it is the foundation on which Ethereum was born.

You probably already know that Bitcoin is a form of decentralized money, and if you still have some questions about

what

that means or how it works, then you might consider revisiting our original video, "What is Bitcoin?" Before Bitcoin was invented, the only way to use money digitally was through an intermediary like a bank or Paypal. Even then, the money used was still a currency issued and controlled by the government. However, Bitcoin changed all that by creating a decentralized form of currency that individuals could trade directly without the need for a middleman. Each Bitcoin transaction is validated and confirmed by the entire Bitcoin network.

There is no single point of failure, making it virtually impossible to shut down, tamper with, or control the system. Pretty nice huh? Well, now that we know that money can be decentralized,

what

other functions of society that are centralized today would be better fulfilled in a decentralized system? What about the vote? Voting requires a central authority to count and validate the votes. Real estate transfer registries currently use centralized land registration authorities. Social networks like Facebook are based on centralized servers that control all the data we upload to them. What if we could use the technology behind Bitcoin, more commonly known as Blockchain, to decentralize other things as well?

The interesting thing about Blockchain technology is that it is actually a byproduct of the invention of Bitcoin. Blockchain technology was created by merging existing technologies such as cryptography, proof of work, and decentralized network architecture to create a system that can make decisions without a central authority. There was no “blockchain technology” before Bitcoin was invented. But once Bitcoin became a reality, people started to realize how and why it works and called this “thing” blockchain technology. Blockchain is to Bitcoin what the Internet is to email; a system on which applications and programs can be created. A currency like Bitcoin is just one of the options.

This got people really excited and they started exploring what else we can decentralize. However, for a system to be truly decentralized it needs a large network of computers to run it. At that time the only network that existed was Bitcoin and it was quite limited. Bitcoin is written in what is known as a “turing incomplete” language, which allows it to understand only a small set of commands, such as who sent how much money to whom. If you want to create a more complex system, you will need a different programming language, which means a different computer network.

Imagine for a second that you wanted to create your own decentralized program, like Bitcoin, at home. You would need to understand how Bitcoin decentralization works, write code that mimics the same behavior, get a huge network of computers to run this code, etc. And that's a lot of work. Enter Ethereum. Ethereum was first proposed in late 2013 and then brought to life in 2014 by Vitalik Buterin, who at the time was the co-founder of Bitcoin magazine. Ethereum is the Do It Yourself platform for decentralized programs, also known as Dapps: decentralized applications. If you want to create a decentralized program that no one controls, not even you, even if you wrote it, all you have to do is learn the Ethereum programming language called Solidity and start coding.

The Ethereum platform has thousands of independent computers running it, meaning it is completely decentralized. Once a program is deployed to the Ethereum network, these computers, also known as nodes, will ensure that it runs as written. Ethereum is the infrastructure to run Dapps around the world. It is not a currency, it is a platform. The currency used to incentivize the network is called Ether, but more on that later. The goal of Ethereum is to truly decentralize the Internet. Wait? Is the Internet centralized? I thought the internet was already decentralized and anyone could start their own site. While in theory that might be true, in practice Amazon, Google, Facebook, Netflix and other giants control most of the world wide web as we know it.

There is almost no activity on the web that is carried out without some type of intermediary or third party. But once Bitcoin demonstrated the concept of digital decentralization, a whole new range of opportunities emerged. We can finally begin to imagine and design an Internet that connects users directly without the need for a centralized third party. People can “rent” hard drive space directly from other people and make Dropbox obsolete. Drivers can offer their services directly to passengers and eliminate “Uber” as an intermediary. People can buy cryptocurrency directly from each other without the need for an exchange that can be hacked or have their money stolen.

Ethereum allows people to connect directly to each other without a central authority running things. It is a network of computers that together are combined into a powerful decentralized supercomputer. Okay, now you know what Ethereum does, but we haven't mentioned HOW it does it. Ethereum's coding language, Solidity, is used to write "smart contracts," which are the logic that runs Dapps. Let me ex

plain

... In real life, all a contract is is a set of "If's" and "Then." That is, a set of conditions and actions. For example, if I pay my landlord $1500 on the 1st of the month, then he lets me use my apartment.

This is exactly how smart contracts work on Ethereum. Ethereum developers write the conditions for their program or Dapp and then the

ethereum

network executes it. They are called smart contracts because they address all aspects of the contract: execution, management, execution and payment. For example, if I have a smart contract that is used to pay rent, the landlord does not need to actively collect the money. The contract itself “knows” if the money has been sent. If I actually sent the money, I will be able to open the door to my apartment. If I didn't make my payment, I will be excluded.

However, smart contracts also have their disadvantages. Going back to my previous example, instead of having to kick out a non-paying tenant, a “smart” contract would lock the non-paying tenant out of your apartment. On the other hand, a truly smart contract would also take into account other factors, such as extenuating circumstances, the spirit in which the contract was drafted, and could also make exceptions if necessary. In other words, he would act as a very good judge. Instead, a "smart contract" in the context of Ethereum is not smart at all. In reality, it is strictly strict to the letter.

It follows the rules to the letter and cannot take into account secondary considerations or the "spirit" of the law, as is commonly the case with real-world contracts. Once a smart contract is deployed on the Ethereum network, it cannot be edited or corrected, not even by its original author. It is immutable. The only way to change this contract would be to convince the entire Ethereum network that a change must be made and that is practically impossible. This creates a very serious problem since, unlike Bitcoin, Ethereum was created with the ability to create really complex contracts, and complex contracts are very difficult to secure.

In any contract, the more complicated it is, the more difficult it is to enforce, as more room for interpretation is left or more clauses must be drafted to deal with contingencies. With smart contracts, security means handling with perfect precision every possible way a contract could be executed to ensure that the contract does only what the author intended. Ethereum was launched with the idea that “code is law.” That is, a contract on Ethereum is the maximum authority and no one can void the contract. Well, all of that stopped when the DAO event occurred. “Dow” or DAO stands for “Decentralized Autonomous Organization” which allowed users to deposit money and earn returns based on the investments the DAO made.

The decisions themselves would be decentralized and crowdsourced. The DAO raised $150 million in Ethereum currency, ether, when ether was trading around $20. While this all sounded great, the code was not very well protected and resulted in someone finding a way to take money from the DAO. Now you could say that the person who drained the DAO was a "hacker". But some would say that this was simply someone taking advantage of loopholes he found in the DAO smart contract. This is not unlike a creative attorney discovering a loophole in the current law to achieve a positive outcome for his client.

What happened next is that the Ethereum community decided that the code is no longer law and changed the rules of Ethereum to reverse all the money that went into the DAO. In other words, the contract writers and investors did something stupid and the Ethereum developers decided to bail them out. The small minority that did not agree with this move stuck to the original Ethereum Blockchain before its protocol was modified and thus Ethereum Classic was born, which is actually the original Ethereum. We've covered a lot so far and the last thing I want to talk about is Ethereum as a currency.

We have already established that Ethereum is basically a large group of computers that work together as a super computer to run the code that powers Dapps. However, this costs money: money to get the machines, power them up, store them, and cool them down if necessary. That's why ether was invented. When people talk about the price of Ethereum, they are actually referring to Ether, the currency that incentivizes people to run the Ethereum protocol on their computer. This is very similar to the way Bitcoin miners are paid to maintain the Bitcoin blockchain. To deploy a smart contract on the Ethereum platform, its author must pay to do so.

That payment is made in the form of ether. This is done so that people write optimized and efficient code and do not waste the computing power of the Ethereum network on unnecessary tasks. Ether was first distributed in the original Ethereum Initial Coin Offering in 2014. Back then, purchasing one Ether cost around 40 cents. Today, one Ether is valued in hundreds of dollars as the usage of the Ethereum network has grown tremendously due to the ICO hype that started in 2017. Still confused? Don't worry; We'll talk more about Ether and mining in a later video. The Ethereum network and Ether are a whole new rabbit hole that we'll cover, but I think this will serve as an introduction to Ethereum for now.

This concludes this week's episode of Ethereum Whiteboard Tuesday. Hopefully you now have a better understanding of what Ethereum is: a network of computers working together to replace the centralized model of programs and companies that run the Internet today. You may still have some questions. If so, please leave them in the comments section below. And if you're watching this video on YouTube and enjoy what you've seen, don't forget to hit the like button. Then be sure to subscribe to receive notifications about new episodes. Thank you for joining me here on the board. For 99bitcoins.com, I'm Nate Martin and I'll see you... in a moment.