Just like Bitcoin, Ethereum is based on blockchain technology. Ethereum transactions also travel via a decentralized network from sender to receiver. The essential difference is that Bitcoin aims to act as a digital means of payment, while Ethereum has been developed as a decentralized programming platform. Every user can write decentralized applications (DApps) using the programming language ‘Solidity’.
Of course, Ethereum has a decentralized application (Dapp) which you can simply pay with Ether (ETH, the coin used on Ethereum), but apps like Smart Contracts are much more interesting. These smart contracts contain metadata from a transaction. Smart Contracts are in a nutshell, contracts on the blockchain. This is revolutionary as a normal contract requires a middleman and a lot of costs in terms of money. Ethereum offers the possibility to have a deal with somebody or an institution that requires no middleman. You essentially trust the code, just like with Bitcoin.
I like to compare Smart Contracts with a vending machine. We are all familiar with this type of machine after all. Let’s say you want to buy 1 can of soda. The vending machine has a written code which basically says ‘if person X deposits 1 USD, I will release the can of coke’. You throw 1 USD into the machine and the machine knows that it can release the can of soda that you wanted. There is no middleman and you know 100% that you will get the can of coke (unless the machine has some hardware issues) if you put in the money. Smart Contracts are exactly the same thing: you set up a condition (x) and if this condition happens, the smart contract will release the Ethereum.
Think of it as an automated “if this then that” principle. If the incoming data on a contract meets the conditions of the contract, the confirmation follows. Because the Smart Contracts are on a decentralized network, it should be safe and cost-effective. A third party is not required for any form of contract mediation. An example is a will. If your will is on a Smart Contract and it comes into effect after the issuance of a death certificate (if), then (then) the legacy according to the Smart Contract is automatically divided (that). A notary is then no longer necessary.
Other examples include the track and trace coordinates of a shipment or the automatic payment of money after damage to property. Written apps can be checked throughout the Ethereum network. In addition, there are many projects that develop DApps that ultimately have to run on the Ethereum network. Because the Ethereum network is decentralized, DApps will have no censorship, downtime or influence from third parties.
From the year 2011 Vitalik Buterin slowly but surely came into contact with Bitcoin. In 2011, Mihai Alisie approaches him to write for Bitcoin Magazine. That is one of the first news websites about Bitcoin. Buterin was happy to accept this challenge. Until 2014 he wrote many pieces for the news platform.
During this time, he became increasingly involved in the world of Bitcoin and learns more and more about the possibilities of this digital currency. At the same time, he also sees a restriction that this currency has. Bitcoin is only a protocol for transferring transactions. There are no other applications.
Buterin had a clear vision. The blockchain technology can also be used in another way: it could also run decentralized applications. This idea is the inspiration for him to start a completely new platform: the Ethereum network.
The Ethereum network was developed by Vitalik Buterin, who was born in Russia. Vitalik has a great amount of knowledge of Bitcoin and blockchain technology in general. Together with Joseph Lubin, he eventually converted this knowledge into the Ethereum network. In the crypto world, Vitalik is considered a genius in which he has set a new path for global, decentralized, secure and equivalent peer-to-peer systems.
How does Ethereum work exactly?
The proof-of-work principle is used to reach consensus in the Ethereum network and to be able to create blocks. This also means that there are mining rewards just like with Bitcoin.
The Ethereum network works with a proof-of-work protocol. This means that blocks are verified and created by computing power. That computing power is provided by software on computers of individuals or organizations. Organizations often have large servers for this. Verifying blocks is therefore called mining. The mining process keeps the network safe and 24/7 running. The Ethereum network rewards the miners because it costs a lot of computing power to do so. In the crypto world, we call this “block rewards”. In the case of this specific network, the block reward consists of Ether (ETH). The allocated ETH consists of:
– A fraction of new-minted Ethereum on the network (which causes technically inflation on the network).
– The costs of the transaction, this is paid by the person that wants to send the token to another person or contract.
As pointed out, this inflation does mean that there is no maximum number of ETHs.