Learning about Ethereum

Ethereum proves to be one of the most interesting things to come out of the cryptocurrency world, because it’s not just a cryptocurrency. In this article we’ll give an in-depth explanation of what Ethereum is.

What is it?


To put it briefly, it’s a global computer. Ethereum works as a worldwide network of nodes that are able to enforce, execute and validate programs in a decentralized manner, meaning that no server is required, nor is CPU or any other computing function needed, because the Ethereum nodes provide all of this.

The network allows Decentralized Apps or DApps through the use of a thing called smart contracts, which is simple javascript like code. This lets the Apps to run exactly as they were intended, without intervention from a third party, meaning no censorship, fraud or downtime.

This already sets a base for the operation of Ether (ETH). This is Ethereum’s digital currency, and it turns money into code, this opens plenty of new opportunities, like direct machine to machine payments, one click online shopping, new business models or even a decentralized autonomous organization.

The platform has garnered a lot of attention over the course of time and with good reason, the potential behind Ethereum is immense, and throughout this article you might see it.

Small note: you might find some of the concepts talked about here to be either too easy or too complex. This is so that we can cover as much as possible about how the entire platform works, making this article useful for newbies and experts alike.

Ether – a centralized digital currency

If you already know how cryptocurrency works, you can safely skip this section, if you don’t, keep on reading.


ETH is a new decentralized digital currency. What this means is that different to fiat currencies issued by central banks, ETH is created through the thousands of nodes in the network in a decentralized manner without the need of third party intervention. The open source code of Ethereum determines which one of the nodes gets ETH based on a series of calculations called proof of work, these are code based solutions to random math problems that prove work has been done by hardware such as a GPU or other, more specialized hardware. These are known as miners because they “dig” through useless code until it finds the reward, which is 5 ETH. As of today, ETH is priced at just a bit over $700.

BitCoin transaction

Anyone can mine, but it might not prove to be profitable, since it tends to require a relatively big initial investment. The reason for this is that the efficiency in mining comes from the hashrate of the hardware used. The higher the hashrate is the more likely is miner to get the reward, which is given every 12 seconds. Because of this reason, there are some big groups or companies that invest a lot of money on setting up “mining farms” which is basically stacked hardware that works 24/7 for the sole purpose of mining, making it harder for the average Joe that only has a small setup to mine.

So, most users tend to go straight to buying ETH directly from exchanges such as Coinbase. Once a user purchases the currency, they can send it to anyone through the decentralized network, which uses a blockchain. The blockchain is essentially a public ledger that keeps track of every transaction made with the currency, tracing every coin back to the miner that initially got it.

Despite the fact that the blockchain ledger is fully public, it contains no names. Instead, it contains the public address of every user that does transactions with the currency. An address is pretty similar to something like a nickname in a forum, meaning that you could actually have an idea of who is paying who by the characters on their address, but the network itself doesn’t really show who owns the address, since anonymity, or rather, pseudo-anonymity is one of the selling points of cryptocurrencies.

Satoshi Nakamoto’s consensus

BitCoin input and output

The last point to address about the currency is how the decentralized nature of it came to be. Before Bitcoin, the idea of a decentralized currency was seen as an impossible feat because of double spending, since anyone can copy and paste some lines of code. But Nakamoto proved that decentralized currency was a possible thing by making sure that the code could not be tampered with through the use of cryptography. There are three main elements to this, a private key corresponding to a public one (a public address), the proof of work algorithm that validates every transaction made in a way that cannot be faked and most importantly, what is now called the Nakamoto consensus.

The Nakamoto consensus is a solution to a computer science problem illustrated in the tale of the two byzantine generals. The problem establishes how an agreement can be reached when communicating through potentially malicious and hostile network actors who may betray the general, informing the king or enemy of their planned action, leading to failure. As for the actual code, here’s how Nakamoto described the solution for the problem:

“They use a proof-of-work chain to solve the problem. Once each general receives whatever attack time he hears first, he sets his computer to solve an extremely difficult proof-of-work problem that includes the attack time in its hash. The proof-of-work is so difficult that it’s expected to take 10 minutes [~12 seconds for ETH] of them all working at once before one of them finds a solution. Once one of the generals finds a proof-of-work, he broadcasts it to the network, and everyone changes their current proof-of-work computation to include that proof-of-work in the hash they’re working on. If anyone was working on a different attack time, they switch to this one, because its proof-of-work chain is now longer. “

That’s a description of how the code works, simplified to 51% of miners decide, but the code is limited in the sense that it only protects from double spending and other malicious or dishonest behavior. This means that whenever the genuine need to upgrade the network shows up, the consensus can’t really do anything.

When a situation like that appears, the solution tends to come up shortly after, because of a mutual agreement from the community due to clear benefits. However, disputes occasionally do happen on whether an upgrade should be done or not to. In these cases, Nakamoto’s consensus doesn’t assist because its only concern is the prevention of double spending.

Chain splits

In some cases whenever a dispute happens, the individuals that disagree with an upgrade can and have split on more than one occasion, and they go to create their own blockchain and currency.

What makes this interesting is that everyone holding ETH before the split into two different blockchains has an equal amount of them on both chains, and the way they “vote” is by selling their ETH on one of the blockchains.

It’s also important to note that these splits can happen by anyone at any time, for a “justifiable” reason or for no reason. If you keep that in mind, it’s quite a revolutionary thing because it shows the decentralized function of blockchains. This means that everyone is free to decide their own rules, so everything that is established as a “rule” is simply an agreement between individuals, so they’re subject to change according to the community.

Whether these individuals care about the rules established is a different question, and here is where the function of public blockchains comes into play. The code says it is 51% of miners or nodes, but in reality it’s actually 51% of people that we must assume are honest.

Therefore, we can assume there is a “rule” established, where if an attempt at behaving in a dishonest or malicious manner, like double spending, the Nakamoto consensus will successfully prevent the attempt by cutting off the malicious user from the network, since the code validates and applies the honest rules established by the 51%.

Bitcoin Wallet

Where a legitimate dispute happens is when an attempt to reach a consensus regarding the rules that should apply in the first place happens, the Nakamoto consensus isn’t of much use in these scenarios because it only applies within one blockchain, not to decisions between two blockchains where one of them is split intentionally.

This is a complicated subject that hasn’t been fully explored or understood for that matter. To explain the basics of how it would work, we can say that the decision on whether or not to offer the option of more than one rule relies on the coders. An initiator has to offer the two options, and if this happens, the miners then take a decision, which is the biggest influence here – although the level of influence may vary depending on the specifics of the proposed rule change.

Following logic, you can assume that by having both initiator and miners agree, their chain will be dominant. However, that doesn’t mean the other chain can’t continue going forward, it can, just in a less relevant manner – but this all depends on the specifics of the proposed rule change and the circumstances surrounding it.

In the end, a final decision is made, sort of a referendum if you will, where the value holders can “vote” by selling or buying one chain, or make no decision at all.

Despite all of this, the minority chain can keep operating and have value with no issues whatsoever. It all depends on the circumstances, but this is definitely an underestimated quality of public blockchains that many users tend to overlook.

During the early days of the blockchain it was said that the foundation of ether, the currency, came from fringe thoughts, which couldn’t be farther from the truth. In reality, ETH came from the insights of Nobel Prize winner Friedrich August Hayek, a man that spent almost his whole life studying money. In the denationalization of money he states:

“The past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process… only competition in a free market can take account of all the circumstances which ought to be taken account of.”

The thing that made Nakamoto’s approach brilliant was that he forced the creation of free market money through decentralization, making it impossible to shut down unless the market itself decides to do so. Whether ETH prospers or not is based exclusively on its own market and if the market thinks it should split, the performance of these now split currencies depends on their management.

It’s worth noting that this is just one of aspect, since Ethereum is more than just money, it’s an upgrade. It turns paper into code, opening the door to a new world of possibilities.

The potential of it goes beyond comprehension at this point, because new ways to use it keep showing up every day.

Codable money

Because ETH is computer code, new ways to use money appear that were previously impossible to do with fiat currency. Through Ethereum’s programming language, solidity, smart contracts can be coded. These contracts can order ETH funds to operate in certain ways, giving way to machines to hold and transfer value in an automated manner.

A good example to illustrate this better is Etherisc Flight Delay. This website uses the blockchain to access the flightdelay’s smart contract. What makes this unique is that the code doesn’t have a centralized server, so permission to run it isn’t required.  Because of this, the site can function automatically, allowing machines or another code to communicate with the smart contract and automatically transfer or receive value. Because the code is held and executed in thousands of machines all over the network, it’s pretty much impossible to tamper with it. This is one of the main features that make decentralization so attractive, the lack of third party intervention makes everything far more secure.

Bitcoin Wallet

The way the smart contract works is that it gets a data feed for flights and, based on mathematical algorithms set by coders, determines the mount of ETH you will receive if your flight is delayed or canceled. What is truly remarkable is that it all runs on its own. It’s just code that does the entire process.

The Ethereum blockchain and smart contracts can also be used in plenty of other ways, such as authentication. An example would be tagging shoes or scanning high-end clothing. Blockchain technology is capable to let owners verify how genuine and authentic a product is, a fantastic way to counter the trade of fake goods and increasing the enforcement of property rights.

Furthermore, new and different business structures can be created, like Decentralized Autonomous Organizations (DAOs). Because smart contracts can hold funds, investors have no need to transfer money upfront to the management class, they can instead vote on the release of a specific amount of money depending on the results. This model would replace CEOs and board of directors.

This can be done through the use of tokens. Ethereum allows for the creation of new currencies (tokens) on top of Ethereum’s network. Because of this, entrepreneurs are able to issue tokens in return for ETH so that they can create projects that range from something like music to even automatic machine payments. These are just a small example of the impressive amount of innovative project that this platform allows.

The internet of things

With the idea of money transforming into a truly digital medium already taking shape, a lot of possibilities open up, and one of the most promising is machine to machine payments, also known as IoT.

The way the monetary system works currently requires bank accounts with authentication and verification that goes through a centralized party that is dependent on security measures that could be considered a hassle. However, Ethereum doesn’t require an account, just a public or smart contract address. Additional to this, no intervention from a third party is ever needed and, interestingly enough, while humans need a private key to verify public addresses, machines (smart contracts) go through an automated authentication and verification process by Ethereum’s global node network.

Smart contracts have a public address, meaning that anyone can send whatever amount of ETH they want, and the smart contract won’t need a private key to prove ownership of their ETH, since the network knows the rules of that specific code and knows the amount of ETH it has in addition to knowing whether the transfer was done in accord to its own rules. Because of this, stealing or cheating the smart contract is impossible, as it only responds to its own code which is previously verified by thousands of nodes, making it completely secure (unless the coder has made some mistake).

This gives way to new opportunities. Smart contracts are now able to hold and exchange value. Because of the many advances in computer science and its constant evolution, your fridge could, for example, realize you ran out of milk, and automatically place an order with your local supermarket paying them 0.1 ETH in exchange for milk. The supermarket’s machines can then automatically order and pay a delivery car once the time comes for delivery. On the way to delivering, the car could stop at a gas station and the payment goes through automatically based on the level of gas or electricity needed, and by the time you arrive home, the milk will be in front of your door.

While this is all still in a very early stage, the possibilities that Ethereum allows has given incentive to a lot of developers to work on a lot of ETH based and some more widely based blockchain projects.

DAOs, for example, make it possible to create a way of organizing without the need of a CEO or a board of directors, employing decentralized voting in its stead, which could completely transform the way labor co-ordinates.

Through a simple plugin, called MetaMask, you can even do simple one click purchases. Just with a few lines of code, a lot of resources in money and labor that go into intermediaries are replaced with a system that is far more efficient and cheaper.

The smart contracts function of Ethereum made it become the platform of choice for many big companies, including Microsoft and JP Morgan, which modify Ethereum’s code for use in private blockchains.

It’s a bit early to say, but it seems Ethereum is the most common choice to base private blockchains on because of higher security measures that are going through constant improvement.

The relationship between private and public blockchains is still to be seen, but it seems logical that businesses make the move from private to public as required. Because of this, it’s quite possible that a web of “mutated” private blockchains will communicate with the public blockchain while all of them are under the same core code.

As a small note, it’s important to know that even if this space has matured significantly, it’s still quite new, so plenty of mistakes are expected to be made over the next couple of years. This is just the beginning.

It’s not that unreasonable to think of the possibility of all money becoming digital in a somewhat near future when you see the benefits that ETH brings to the table. Because of this, everyone seems to be positioning themselves to gain an advantage or at least, prepare for this possible new world.

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