Ethereum Basics: A Starter Guide for Entrepreneurs and Investors
If you are familiar with the terms “Bitcoin” or “blockchain,” you’ve probably heard of Ethereum, as it has been one of the most widely covered projects in the media. This primer will provide a basic understanding of its viability and future prospects.
What Is Ethereum and How Does It Work
These “Smart Contracts” are applications that execute pre-programmed commands all while mitigating the likelihood of fraud, downtime, censorship, or third-party tampering. They have myriad applications to support functions like trade settlements and the management of real estate transactions.
This coding language and protocol in these smart contracts as a foundational element of Ethereum possess the intelligence to self-enforce and execute commands without human intervention. They can be utilized for multiple purposes involving such things as title registries, corporate entities, election result tabulations, and untold other applications. For this reason, many believe that these programs could replace lawyers, banks and other third-party intermediaries for many common legal and financial transactions.
Each participating stakeholder in the vast Ethereum system is rewarded for their investment in hardware, electricity and processing power used to help run the network. This reward to “miners” comes in the form of a newly created crypto-token known as ether.
Once received, computer owner have a couple of options in terms of the use of the ether. For starters, they can further monetize their work and then exchange the ether for fiat in the form of dollars for example. Or they can sell their ether to decentralized app (dApp) developers who may be seeking it for funding to run their dApps on the Ethereum network.
What Makes Ethereum Unique
Unlike all other blockchain platforms in existence, Ethereum is a “Turing complete” system which allows highly sophisticated programs to be designed to run on it. In a 2015 article in Fast Company Magazine, Ethereum was described as a “global computer” that can deliver applications for enterprises while circumventing “inefficient bureaucracies and the other intermediaries who take a slice of the pie.”
Unlike the Bitcoin blockchain which has limitations in terms of its functional potential, mostly tied to its scripting language, Ethereum is more broad and expansive regarding its applied nature. This is largely the result of the fact that its functionality allows for the development of dApps on top of it.
As opposed to the Bitcoin community which is embroiled in a fierce debate over its storage capacity, Ethereum can be easily scaled. This means that Ethereum’s capacity for acquiring a massive user base is beyond limits. As both a digital currency and technology platform that is not as hindered by political or ideological barriers, the reliability of growth and flexibility with Ethereum is greater than most other blockchain-based options thanks to a coherent community. Nevertheless, from a technical standpoint, if Ethereum reaches Bitcoin’s level of popularity, it will run into the same scaling problems.
History of Ethereum
The beginning of Ethereum dates back to 2009, with the emergence of Bitcoin as the world’s first ever practical, decentralized solution. Bitcoin and its supportive blockchain ecosystem served as a catalyst and inspiration for Vitalik Buterin.
The journey of Buterin, a Russian-born Canadian in conceiving Ethereum is an interesting one. He cofounded Bitcoin Magazine in September 2011, and then in 2012, he dropped out of the University of Waterloo to trek the world and engage in a number of cryptocurrency projects. After this trip and over two years of examining prevailing blockchain technologies and applications, he wrote a much publicized white paper which was released in November 2013. The purpose of this document was to offer a template and vision about the new Ethereum technology, along with basic principles and potential applications. This was the catalyst for the commencement of the Ethereum Project on January 23, 2014, per Buterin’s announcement on the Bitcointalk forum.
Ether and the Ethereum Foundation
Ethereum’s currency is known as ether (ETH). And as in the case of Bitcoin, it, too, is situated on a blockchain.
Ether is the digital currency which fuels the execution of and modification of applications situated on the decentralized Ethereum network. The key driver of this initial funding effort was the Ethereum Foundation, a Swiss legal entity created in 2014, to oversee the legal and marketing efforts for the initial crowdfunding campaign. A pre-sale of over 60 million ether was conducted to foster a community of software developers, miners, investors and other stakeholders charged with developing the ecosystem. Ethereum has consistently held the position as the second largest market capitalized cryptocurrency after bitcoin.
With Ethereum still in its infancy, new digital wallets and exchanges for purchasing and storing ether have been slow in development. Currently, the most prominent, stable and popular options are MyEtherWallet, Kraken, Coinbase, Circle, and Shapeshift.io.
While Bitcoin has a hard cap on the total number of coins released into its system, Ethereum utilizes a disinflationary model, which means the rate of inflation will decrease steadily year after year. This model has both positives and drawbacks.
ETH DEV was set up for the sole purpose of overseeing and orchestrating the ever-changing roadmap of Ethereum development. Several Proof-of-Concept versions of the Ethereum software have since been released with ongoing updates provided via the official blog.
In 2014 DEVCON-0 hosted developers from throughout the world gathered to explore issues around network security and scalability. This gathering fueled several crucial updates to the software.
As is the case with any emerging, application technology, security is paramount to establishing trust within the entrepreneurial and investor communities. While the core protocol is generally secure and tamper resistant, a well-publicized breach with The DAO – the first Decentralized Autonomous Organization on the Ethereum blockchain struck a cautionary tale in terms of potential vulnerabilities with any new technology. To address any looming concerns, the Ethereum Bounty Program has been in place for a number of months, offering substantial incentives for anyone able to find weaknesses in the software or code methodology.
The beauty of the platform is that it allows any developer to utilize it to build and publish new, distributed applications. To fuel development on this front, the Ethereum Foundation established a DEVgrants program to identify and fund promising projects. This program was re-started January 2016 after a brief hiatus, for aspiring developers to take advantage of.
As a result, growing numbers of developers have migrated to the network, launching new projects and promising application experiments.
Long-Term Investment and Entrepreneurial Possibilities
The immense potential of Ethereum-related applications has sparked a growing interest among major stakeholders and investors worldwide. Many startups in this space are showing significant interest, and in some cases, receiving silent investments, from VC firms specializing in blockchain-related innovation
Growing numbers of investors are engaged in due diligence and research on the ever expanding number of startups that are employing these Ethereum-based dApps. Many, while cautiously optimistic, are hesitant however to take the leap amid an evolving developer community that is still relatively small and lacks sustained case examples.
For entrepreneurs, Ethereum offers an ocean of possibilities for layering solutions on top of its ecosystem. Despite Bitcoin’s meteoric rise, some see Ethereum as a more robust platform for smart contracts, identity management, and other advanced technology applications; many startups are considering the second most valuable blockchain network because of its ease of use and simple scripting language.
For both investors and entrepreneurs, the overall mood is a positive one. However, these potential stakeholders are only now beginning to assess the long-term prospects of Ethereum’s value.
Blockchain-centric Ethereum, promises to usher in a new age of technological advancement by taking information and transactions out from under monopolist institutions and creating decentralized mechanisms for the free exchange of goods and services.
Ethereum’s biggest impact may well be found in both traditional economic systems as well as the rapidly emerging sharing economy. Eventually, it is believed that its presence will infiltrate all segments of society tied to advancements in the Internet of Things. As a result, financial and other legacy institutions will experience massive competition forcing them to reexamine the core models that brought them to this point. Through all of this, reduced costs and increases economic activity will harken in a new economy.
In the end, the long-term trajectory of Ethereum’s future rise is anyone’s guess. But many in the community would argue that it appears quite favorable based on some early use case successes. Moving forward, Ethereum’s progress will be largely predicated on its ability to grow and adapt over time amid what is certain to be many hiccups and missteps along the way.