What is Ethereum? (Part 1)

A Crash Course To The 2nd biggest Digital Currency In The World

Author

Gannon Breslin
June 01, 2021

Welcome to Rebel Markets Newsletter by Gannon Breslin. If you’re reading my opinionated non-professional finance newsletter but haven’t subscribed, please join to learn more about investing, business, personal finance, and all things that involve money alongside 2,860+ other subscribers. LET’S KEEP THIS MOMENTUM. Thank you to all who are following along on this journey!

2013

Is the year that Vitalik Buterin proposed Ethereum, a digital currency that currently sits second to Bitcoin in market cap - currently $391 Billion. Ethereum was later launched in 2014 with Gavin Wood after a crowdfunding campaign and went live in 2015. This newsletter aims at tackling what this digital currency is all about in the most basic, non BS, and straightforward approach possible.

Let’s get into it step by step.

Vitalik Buterin

Is the creator of Ethereum. This is important because Bitcoin has an unknown founder(s) which for a global currency can be a double-edged sword that we will get into later. If you were to judge a book by its cover, Vitalik looks like a supervillain in a Sci-Fi comic book. Like most savants, he can come off as quite odd and awkward. Regardless of this, I have begun to realize he is quite the opposite of a supervillain and could be the most intelligent human being in the world that is under 30 years old. Born in Kolomna, Russia, and immigrating to Canada at the age of 6, Vitalik was immersed in the cryptocurrency space at a very young age. He was fascinated with programming, economics, coding, and mathematics. In 2011 he began writing for Bitcoin Weekly and was offered 5 Bitcoin ($36,740 currently and only a couple dollars at the time) per article. In 2012 he became the co-founder of Bitcoin Magazine which still to this day is considered one of the most well-respected publications dedicated to cryptocurrencies and the space at large. During this time, Vatalik excelled at his studies and in particular coding. He started school at the University of Waterloo in Ontario, Canada, and was taking advanced studies. Like most geniuses, college didn’t last long because in late 2013 he published his white paper for Ethereum which made its way across Peter Teil’s desk. In 2014 Vitalik dropped out of school to pursue working on Ethereum full time because he was awarded $100,000 by the Theil Fellowship. The rest is history - well actually it’s happening right now.

Cryptocurrency

Is probably something you have heard hundreds if not thousands before. Before I get into Ethereum I have to briefly explain some keywords or else people new to crypto will be completely lost and I truly don’t blame them. This is NOT an easy space to understand and in all honesty, I am learning every single day new things. Originally this newsletter was supposed to come out a week ago but as I kept digging in articles the hole got deeper and deeper.

Cryptocurrency “Crypto”: This is a form of money that is purely digital that can be used to buy goods or services online. Usually known as “tokens” or “coins” that are exchanged on a ledger for optimal security.

Ledger: This is a public record recordkeeping system that keeps a tab of all transactions between accounts. Although not a perfect illustration my any means, think of it as a baseball scoreboard and the teams are individuals, and the home runs are coins/tokens being exchanged.

Decentralized: Quite possibly the most important aspect of a cryptocurrency, decentralized means that a system or exchange is purely “peer to peer” without needing a 3rd party or centralized network/bank/government/entity being involved. This truly is the backbone of crypto and why it is capable of changing all of finance and money as we know it.

Blockchain: This is a type of database in which transactions made between peers are stored in blocks. When a certain amount of data of the transactions are collected on the ledger they are formed in a block and chained to the previous block. All data is in chronological order, irreversible, and able to be viewed by anyone.

Mining: Mining cryptocurrency is using a computer to solve “calculations” to receive crypto. When mining you aren’t spending money but you are using an immense amount of computing power which in turn costs money. Miners are rewarded for verifying transactions and completing a block in the blockchain. In essence, crypto miners are the CPAs, IRS, and auditors of the entire network. This system of public verifications is what safeguards against double-spending, fraud, and any other attack on the network and is the security cornerstone of the entire operation.

Nodes: Slightly different than mining, a node is a computer server that is connected to the blockchain network, has an entire copy of the blockchain, and using strict guidelines guarantees/verifies all transactions.

Ether: Used to describe the Ethereum coin. Also used is “ETH” or the ticker on exchanges “$ETH”. Operations on the Ethereum network run on Ether and when a function is performed Ether is required. Often known as the “fuel” of the network and what people like you and me can purchase.

Token vs. Coin: A coin has a standalone and independent blockchain (Bitcoin, Ethereum, etc.) whereas a token does not have its own blockchain and lives on top of other blockchains - such as most altcoins.

*I could probably have over 100 definitions but in an effort to keep this as short and straight to the point as possible I am going to stop here with these important definitions*

Ethereum

Is center stage, and finally, we made it. If you weren’t confused before hang in there because this is the fun part.

“There are two kinds of average people, there’s the average person that has already heard of Bitcoin and there’s the average person who hasn’t. The first category is easier (to explain to)” -Vitalik Buterin at Tech Crunch 2017

In an effort to explain Ethereum, I have to cover Bitcoin lightly because in all reality it is much easier to get a good picture of what Ethereum is doing right now and where it is heading once a fundamental understanding of Bitcoin is understood.

Ethereum was in reality Vitalik’s response to Bitcoin. Bitcoin was the first cryptocurrency to hit the center stage and Vitalik created Ethereum in an attempt to upgrade some of its qualities and add different features. It is well documented that Ethereum in Vitalik’s mind wasn’t created to rival Bitcoin but to supplement it. To someone who doesn’t know Bitcoin or Ethereum my best way to explain the difference is to say that Ethereum is what the iPhone is to a Nokia cellphone. The cellphone was an incredible invention and truly changed the world in comparison to the landline phone. The cellphone was exceptional at specified things: receiving and giving calls while not being attached to a line. This of course changed the world forever and is one of the greatest inventions in the history of mankind. But the iPhone for many was an upgrade and has the internet, applications, and entire ecosystems integrated into it. Soon people were carrying entire computers, businesses, networks in their pockets - a whole different beast. On a surface level, Bitcoin is extremely good at what it does - transactions and as a store of wealth that can’t be tampered with. Ethereum has many differences that I will attempt to cover in this newsletter. To be transparent, I own both Bitcoin and Ethereum and very bullish on both in the long term. This article is NOT an Ethereum vs. Bitcoin debate, they are different cryptocurrencies that do different things and in my opinion, can (and have) flourish alongside each other. Along with this, I don’t care if you buy/sell Bitcoin or Ethereum. This is not a recommendation or financial advice, only an article breaking down my own research in an attempt to educate the masses. However, I will be using a lot of comparison and contrast statements against Bitcoin to be able to describe Ethereum effectively.

Key Similarities

1) Both Bitcoin and Ethereum are decentralized and not controlled by any bank or government. The operations and validation of the entire system are by peers in the network, not some outside controlling force.

1) Both use a ledger to record the transactions/exchange of coins and the data of these transactions are stored in blocks on a blockchain.

2) Both can be mined to receive coins (what is called “Proof of Work” PoW) but Ethereum is planning to change that when it moves to “Proof of Stake” (PoS) (more on that later).

3) As years go on, halving events occur in which Bitcoin’s rewards get split in half, and upgrades to Ethereum’s network have split the rewards for each block smaller and smaller. When Ethereum was first launched you could get 5 ETH for mining one block! These splits are carefully calculated to maintain to scarcity of the currency.

Key Differences

1) The supply of Bitcoins (the number of coins available) is capped at 21 million coins. Ether does not have a cap (more on that later).

2) Bitcoin solely transfers payment data. Ether can not only be exchanged as a form of currency but also decentralized applications and smart contracts can be embedded into the blocks of the blockchain allowing for companies to build their ecosystems integrated into Ethereum itself (more on that later).

3) Although Bitcoin can be “upgraded” and modified the likelihood of that occurring is minimal in comparison to Ethereum which seeks to be extremely flexible and improve as issues come to light.

4) The Bitcoin blockchain itself has never been hacked (exchanges and wallets have been hacked) whereas Ethereum’s smart contracts have been hacked before which in turn created the hard fork into what we see as Ethereum today (definitely more on that later). This hack was called the infamous “DAO” hack.

5) Bitcoin block time is 10 minutes and Ethereum’s block time is around an average of 13 seconds. Meaning that every time these transactions are grouped in a block Ethereum is far faster. In turn, there is much more Ethereum being mined every day than Bitcoin (around 6500 blocks for Ethereum and 144 blocks for Bitcoin).

In Summary:

  • Ethereum is a combination of cryptographic algorithms, digital signatures, with economic incentives all used to create a network that is on decentralized public ledgers using blockchain technology.

  • The Ethereum network, instead of just transacting, recording, and storing coins as the Bitcoin protocol does, has the capability of storing entire decentralized applications on the blockchain. What Bitcoin does for payments, Ethereum does for anything that can be programmed and the future is practically limitless.

The DAO Event

Is something, in my opinion, you can’t explain Ethereum without explaining the DAO event which changed Ethereum forever. As I explained earlier, Ethereum allows for smart contracts or programs to be run on its blockchain. One of these programs was a crowdfunded campaign called the Decentralized Autonomous Organization or simply “DAO”. In April of 2016, the goal of the DAO was to raise money by donations in Ether to fund projects that revolved around making complex systems automated. For instance, one of its main focuses was making a system for decentralizing companies and an example of this was the group that created the DAO was planning on “building “smart locks” that let people share their things (cars, boats, apartments) in a decentralized version of Airbnb”. This was just one of the many proposals that the DAO had in store. The DAO project was running on the Ethereum blockchain and raised a TON of money (over $150 million worth of Ether). Nobody expected this project to be one of the largest crowdfunded projects in existence and it was safe to say it wasn’t ready for the limelight. Several key figures expressed that The DAO had vulnerabilities in its program to be hacked. Sure enough in 2016, The DAO smart contract itself (not Ethereum) was hacked by an attacker that took roughly $50 million worth of Ethereum. Obviously, this sent shockwaves around the crypto and Ethereum community and the price of Ethereum plummeted from $20 to around $13. The Ethereum Foundation was faced with a major dilemma at this point try to freeze the funds through a soft fork which essentially is making minor changes in the protocol, alter the protocol altogether with a hard fork and return all the Ether donated to The DAO back to the donors, or do nothing and let the attacker get off scot-free. All solutions were met with problems since Ethereum is built on decentralization and the entire community would have to rally behind one decision. Eventually, a decision was made and a fork did occur and the $50 million was recouped. A new blockchain was created and the old blockchain (the one that The DAO ran off of) is known as Ethereum Classic $ETC. What you see today as “Ethereum” or “ETH” on Coinbase for example is that new blockchain from that fork. You can still purchase Ethereum Classic coins on some exchanges but all the future progress, foundation, institutional, venture capital, etc. backing is on the new blockchain after The DAO event. As tough as it was on Ethereum during 2016 that was, in my opinion, a good lesson learned by the entire community and in turn made the coin even stronger since it was able to face the problem head-on. Still, some people still prefer Ethereum Classic due to its reliability, security (The DAO hack had nothing to do with the protocol itself), focus on scaling the blockchain, and hard cap supply at 210,700,000 ETC via the Gotham hard fork upgrade in 2017.

Ethereum 2.0

Or ETH 2 is an upgrade to the Ethereum network that has been long-awaited by the community and seems to be coming to fruition very soon. The goal is to make Ethereum more scalable, safe, and environmentally friendly. Luckily Ethereum by far has the most amount of developing talent in the entire cryptocurrency space and is capable of making these massive upgrades in an effort to be at the top of the digital currencies. What does the environment have to do with it? Well as we all know mining (validating transactions on the blockchain) requires a large amount of computer power and electricity. The goal is to move from Proof of Work to Proof of Stake in which case mining Ethereum will be obsolete. Instead, people will just receive ETH rewards for holding ETH by “staking” their ETH and becoming validators, and receiving the block reward and transaction fee. If validators act dishonestly in their verifications of the network their staked ETH will be “slashed” or taken away assuring the security of the network. Another goal of ETH 2 is to greatly upgrade the transaction time. Right now the transaction speed is 15 transactions per second and ETH 2 aims at 1000 tx/s which would greatly increase the likelihood of it being an everyday currency. Who wants to wait 3-5 minutes at the Starbucks counter to see if the ETH they sent paid for their coffee? Transactions will be much faster. Lastly, the security of the network will be upgraded in which the only way to pull off a “51% attack” would require for the attacker to own 51% of all staked ETH which is more money than anyone owns in the world currently and increasingly becomes more difficult each day. There are two other concepts to grasp such as Beacon Chain and Sharding but I am going to let this incredible ETH 2 video below explain it in greater detail.

In an effort to not completely make you snooze off, that’s the wrap for this week’s newsletter on Ethereum. This hopefully will build a solid groundwork in your mind for what Ehtereum is. The next newsletter is “What is Ethereum? Part 2" I will cover where Ethereum is heading in a more futuristic less granular approach - Dapps (decentralized applications), the future of Ethereum, NFTs, gas fees, and the supply cap dilemma will be discussed so sub below to not miss out because it will be a much more entertaining approach!

Everything in this article was not financial advice, I know nothing.

Have a good rest of the week,

If you know someone who is interested in ETH, or has been trying to figure out what the crypto fuss is all about consider giving it a share…

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Sources