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First, we need to talk about Bitcoin before jumping to Ethereum. Bitcoin is a form of decentralized money. Before Bitcoin, exchanging money was possible through an intermediary like a bank, or PayPal and the money used was a currency issued and controlled by the government. With Decentralized money, individuals can trade directly without the need for an intermediary.
Each Bitcoin transaction is validated and confirmed by the entire Bitcoin network. There’s no single point of failure so the system is virtually impossible to shut down, manipulate or control.
This technology raises the question that what other things can be decentralized and better served:
- Voting requires a central authority to count and validate votes.
- Real estate transfer records currently use centralized property registration authorities.
- Social networks like Facebook are based on centralized servers that control all of the data we upload to them.
Blockchain technology is the by-product of the Bitcoin invention. Blockchain technology was created by fusing already existing technologies like cryptography, proof of work, and decentralized network architecture together to create a system that can reach decisions without a central authority.
Blockchain to bitcoin is like the internet to email. It’s a system on top of which you can build applications and programs. A currency like Bitcoin is just one of the options and this started the exploration and curiosity of decentralizing other things. However, for a system to be truly decentralized, it needs a large network of computers to run it. Back then the only network that existed was Bitcoin and it was limited. Bitcoin is written in what is known as a “Turing Incomplete” language which makes it understand only a small set of orders, like who sent how much money to whom. If you want to create a more complex system, you’ll need a different programming language, which means a different network of computers.
If you wanted to build your own decentralized program, just like Bitcoin, you would need to understand how Bitcoin’s decentralization works, write code that mimics the same behavior, get a huge network of computers to run this code, and so on. That is a lot of work. Now we can talk about 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 apps.
If you want to create a decentralized program that no single person controls, not even you even though you wrote it, all you have to do is learn the Ethereum programming language called Solidity and begin coding. The Ethereum platform has thousands of independent computers running it meaning it’s fully decentralized. Once a program is deployed to the Ethereum network these computers, also known as nodes, will make sure it executes as written.
Ethereum is the infrastructure for running Dapps worldwide. It’s not a currency, it’s a platform. The currency used to incentivize the network is called Ether but more on that later.
Ethereum’s goal is to truly decentralize the Internet. Maybe you thought the Internet already was decentralized and that anyone can 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’s almost no activity on the web that happens without some sort of intermediary or 3rd party. But once the concept of digital decentralization was demonstrated by Bitcoin, a whole new array of opportunities became available.
We can finally start to imagine and design an Internet that connects users directly without the need for a centralized 3rd party. People can “rent” hard drive space directly to other people and make Dropbox obsolete. Drivers can offer their services directly to passengers and remove “Uber” as the middleman. People can trade cryptocurrencies directly from one another without the need for an exchange authority that can get hacked or steal your money.
Ethereum’s coding language, Solidity, is used to write “Smart Contracts” which are the logic that runs Dapps.
In real life a contract is just a set of “If” and “Then”, meaning 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. That’s exactly how smart contracts work on Ethereum.
Ethereum developers write the conditions for their programs or Dapps and then the Ethereum network executes it. They are called smart contracts because they deal with all of the aspects of the contract — enforcement, management, performance, and payment.
For example, if I have a smart contract that is used for paying rent, the landlord doesn’t need to actively collect the money. The contract itself “knows” if the money has been sent. If I indeed sent the money, then I will be able to open my apartment door. If I missed my payment, I will be locked out. But small contracts like in this example face can cause some problems.
Once a smart contract is deployed on the Ethereum network, it cannot be edited or corrected, even by its original author. It’s immutable. The only way to change this contract would be to convince the entire Ethereum network that a change should be made and that’s virtually impossible.
Ethereum launched with the idea that “code is law”. That is, a contract on Ethereum is the ultimate authority and nobody could overrule the contract. Well, that all came to a crashing halt when the DAO event happened and forced the community to change the rules to prevent the damage caused.
Ethereum network needs computers and that costs money to get the machines, to power them up, store them and cool them if needed. That’s why Ether was invented. When people talk about the price of Ethereum they are 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 get paid for maintaining the Bitcoin blockchain. To deploy a smart contract to 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 will write optimized and efficient code and won’t waste the Ethereum network computing power on unnecessary tasks.
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