Ethereum Simply Explained

Ethereum is an open-source software platform that focuses on dynamic and distributed computing. The proprietary crypto currency used by this system is called Ether (ETH).

Ethereum is based on a so-called block chain and thus on the same technical foundation as Bitcoin. However, Ethereum is not a pure crypto currency, but serves with extended functions such as Smart Contracts as a decentralized ecosystem for block chain projects of all kinds. Therefore, Ethereum can also be described as an open protocol or building block for decentralized applications. More details and background information will be given in the following article.

Blockchain explained simply

In our comprehensive article about blockchain you will learn in a simple and understandable way what a blockchain is and how it works.

Ethereum is the alternative to the classic client-server concept, which is widely used on the Internet, where data is stored centrally on servers of large Internet companies or in the cloud and can be requested and retrieved from various devices as needed. As is usual for block chain technology, Ethereum’s data is distributed decentrally on devices around the world, publicly accessible and traceable. This ensures data integrity and makes Ethereum and its data practically tamper-proof.

Centralized vs. decentralized

Ethereum brings its own crypto currency: Ether (ETH). This is a digital currency that works similarly to the most prominent example Bitcoin and is suitable for payments within the network or as an investment. The block chain of Ethereum offers meanwhile the basis for innumerable further Kryptow√§hrungen, which came out from so-called “Initial Coin Offerings” (ICOs) and are realized as “ERC-20-Token” on the Ethereum block chain.

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What are the advantages of Ethereum?

The big advantage of Ethereum is its programmability, which makes it stand out from Bitcoin, Litecoin and many other simple representatives. Ethereum is therefore also known as “Crypto Currency 2.0”, whereby Ethereum is much more than a pure crypto currency. The ability to organize Initial Coin Offerings (ICOs) for crowd-funding of projects, to program a wide variety of decentralized applications (dApps) and to build Smart Contracts based on Ethereum is what makes the technology so special.

Application examples for Ethereum

Due to its programmability, Ethereum offers a particularly wide range of uses and applications. With the help of ICOs, dApps, Smart Contracts and DeFi, the options range from raising capital, simple everyday applications and games to projects that aim to revolutionize the financial industry and bring an entire industry into the digital age using block chain technology.

  • ICOs – Initial Coin Offerings
  • dApps – Decentralized Applications
  • DeFiDecentralized Finance
  • Insurance, sports betting and more

Potential application areas of Ethereum and Smart Contracts:

  • Financial Transactions & Capital Market
  • Real estate: land register entries, notary public services, crowd investing, etc.
  • Political elections and votes
  • Energy Industry
  • Logistics & Supply Chains
  • Insurance
  • Health Care (Health History)
  • Personal data / identity
  • Cybersecurity
  • Internet of Things
  • and much more.

How does Ethereum work?

Ethereum is the name and umbrella term for the decentralized and programmable crypto platform developed since 2013. But how does Ethereum actually work in detail?

Similar to classic crypto currencies, the basis is a decentralized network or a system distributed all over the world without a central server structure. The Ethereum block chain forms the common database with which all network participants – nodes and clients – work.

A copy of the block chain with all transactions and data is stored in parts (light nodes) or completely (full nodes) on all participating clients and is constantly updated. Mining nodes do the “mining”, i.e. they confirm transactions and thus also generate new units of the internal crypto currency ether.

  • Smart Contracts
  • Ethereum Virtual Machine (EVM) and Gas
  • Ethereum Mining
  • Further development of Ethereum

Ethereum is a living project where development does not stand still. Ethereum was launched in July 2015 as beta in the “Frontier” phase. Frontier was to be the foundation and framework for Ethereum and its main functions – in other words, the foundation for the entire project. Among other things, the proof-of-work algorithm was implemented and the foundation for important components such as dApps and Smart Contracts was also laid.

The second phase of Ethereum‘s development followed in March 2016: “Homestead”. With Homestead, the developers focused on troubleshooting to eliminate problems, streamline processes and increase security for all parties involved.

The third phase, “Metropolis” aims to make Ethereum fit for everyday life and for the masses. With Metropolis, applications for end users and everyday use are to be created, and Metropolis also brings light clients. Light Clients save users from having to download and store the complete block chain, which is several hundred gigabytes in size. With so-called “zk-SNARKs”, Metropolis also has an innovation in its luggage that enables anonymous transactions.

The fourth and final development phase of Ethereum is called “Serenity” and is intended to implement the change from PoW to PoS algorithms and be the basis on the way to “Ethereum 2.0”.

The future: From Ethereum to Ethereum 2.0

The development of Ethereum is constantly progressing. The Ethereum developers are currently working intensively on “Ethereum 2.0” – an improved and future-proof form, which should make some existing problems a thing of the past.

Ethereum 2.0 includes not only the change to the proof-of-stake algorithm and thus the introduction of power-saving and resource-saving staking, but also the introduction of a new virtual machine or runtime environment called eWASM.

Ethereum founder Vitalik Buterin shared a roadmap and thus provided a glimpse of his vision of the Ethereum in the coming years. The implementation of Ethereum 2.0 should take five to ten years and is divided into six phases.

The starting point is phase 0, in which Ethereum switches to the proof-of-stake algorithm and in the course of which the necessary new beacon chain is launched. In connection with this, a new token is also issued as a reward for Staker: ETH2. In later phases, so-called Shard-Chains will follow for an optimal scalability of Ethereum and also the introduction of the new virtual machine, which will provide even more possibilities for developers and their projects.

Risks and challenges at Ethereum

Ethereum is certainly one of the most complex and intricate cryptoprojects due to its programmability and the associated application scenarios – and that brings problems with it. In the worst case Ethereum becomes a platform for specialists and “Nerds” and does not create due to the complexity the jump into the everyday life of humans, which is necessary for a lasting success.

Many critics also doubt that simple things like sports betting and sales contracts and even more complex projects around insurance, decentralized finance and e-government can be implemented easily as a smart contract based on Ethereum. What is important is the trust of the people who want to be sure that their contracts are securely programmed and therefore reliably executed. The “scams”, i.e. frauds, which are still common in the crypto scene, make the headlines again and again and are therefore a problem for almost all crypto platforms and crypto currencies.

What Ethereum accordingly still lacks is a genuine “killer app” – an application scenario for everyone, which convinces with the advantages of the block chain, the special functions of Ethereum and the necessary security.

Ethereum: Future and forecast

Regardless of critics and the undoubted challenges, Ethereum is certainly one of the most interesting crypto projects and Ether is accordingly a crypto currency with great potential – this became clear not least at the beginning of 2018 when an ETH was worth more than 1000 Euros.

Among the great advantages of Ethereum are its great popularity in the crypto scene, numerous active developers who use Ethereum as a basis for their own projects and tokens, and last but not least the active further development. Vitalik Buterin and other creators did not stop their work after the launch of Ethereum in mid 2015, but continue to push their project with new developments.

With Ethereum 2.0, the platform is to be made finally fit for the future and for even more applications in the coming years. The true potential of Ethereum and Ether will therefore probably only become clear over time. Perhaps the “killer app” with which Ethereum makes it into the lives of the broad masses is already in development and will help ETH Zurich’s course into new spheres in the future.