Though Bitcoin grabs all of the news headlines and is the cryptocurrency most familiar to those with minimal exposure to cryptocurrencies, Ethereum is powerful and fundamentally different from Bitcoin in its design and purpose as a cryptocurrency. A more extended examination of the way in which cryptocurrencies differ can be found here. This piece is a high level overview of Ethereum and provides links to additional resources.
What Is Ethereum
As explained on the Ethereum project website (https://www.ethereum.org), “Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.”
Ethereum creates what is effectively a massively distributed computer. Each node participating in the Ethereum network contributes to executing the code associated with smart contracts and stores the resulting state on the blockchain.
As the Ethereum project website goes on to explain, “This enables developers to create markets, store registries of debts or promises, move funds in accordance with instructions given long in the past (like a will or a futures contract) and many other things that have not been invented yet, all without a middleman or counterparty risk.”
This is what makes Ethereum exciting and fundamentally different. By being able to run smart contracts and host state on a blockchain, Ethereum creates new possibilities by removing the ability to censor or shut down intermediaries related to an application.
The Ethereum project was funded by a crowdsale that took place between July and August of 2014 and wint live in July 2015.
How Is Ethereum Different From Bitcoin
Bitcoin represents what is essentially the digital equivalent of currency with the properties of being a means of exchange, store of value, etc. While Ethereum is tradable and also exhibits the properties of a digital currency, what makes Ethereum an exciting project is the potential to run smart contracts on top of the protocol using Solidity, a programming language to write these contracts on Ethereum. Bitcoin does not have this capability, nor is it intended to. Ethereum is decentralized in the same way that Bitcoin is and this is critically important because it allows for the creation of applications that are resistant to censorship and cannot be undermined by a single point of failure.
Use Cases For Ethereum
Fundraising for new cryptocurrency projects: One of the most interesting use cases for Ethereum has been the creation of new cryptocurrencies through crowdfunding. A crowdsale for a project can be conducted by creating a smart contract to handle incoming funds and issue tokens if the project meets its funding goal.
Decentralized Applications (dApps): Applications can be built on top of and run on Ethereum. As described in the “What Is Ethereum” section, smart contracts can be run on top of Ethereum with state being maintained on the Ethereum blockchain. One example of a decentralized application is Augur, a decentralized prediction market that allows individuals to place financial bets on predictions related to macroeconomics, politics, and sports. By effectively crowdsourcing predictions backed with a financial incentive, prediction markets allow for a more accurate estimation of the likelihood of events (a phenomenon known as “wisdom of the crowd”).
More dApps like Augur can be found on “State of the dApps.”
Identity Management: uPort is building a decentralized solution to identity management. As explained by the uPort whitepaper, “Uport is a secure, easy-to-use system for self-sovereign identity, built on Ethereum. … uPort allows end-users to: own and control their personal identity, reputation, data, and digital assets; securely and selectively disclose their data to counterparties; access digital services without using passwords; digitally sign claims, transactions, and documents; control and send value on a blockchain; interact with decentralized applications and smart contracts; and encrypt messages and data.”
Decentralized Autonomous Organizations (DAOs): Ethereum smart contracts can also be used to create a decentralized autonomous organization (DAO). One project this is working to usher in DAOs is Aragon. As explained in the Aragon whitepaper, “Aragon is a dApp that lets anyone create and manage any kind of organization (companies, open source projects, NGOs, foundations, hedge funds…) on the Ethereum blockchain. Aragon implements basic features of an organization like a cap table, token transfers, voting, role assignments, fundraising, and accounting. The behavior of an Aragon organization is easily customized by changing the bylaws. In addition, Aragon organizations are extensible through third party modules that interact with the organizations’ contracts.”
Sharing Computing Power: Ethereum can be used to massively coordinate available computing power. This is different from running smart contracts on Ethereum and refers to a distributed marketplace for computing power like an electricity grid that matches up providers of excess computing power with those seeking to run programs. One project built on top of Ethereum that does this is Golem. As described by the Golem project website, “Golem is a global, open source, decentralized supercomputer that anyone can access. It is made up of the combined power of users’ machines, from PCs to entire data centers. Golem is capable of computing a wide variety of tasks, from CGI rendering, through machine learning to scientific computing. Golem’s limitations are only defined by our developer community’s creativity. Golem creates a decentralized sharing economy of computing power and supplies software developers with a flexible, reliable and cheap source of computing power.”
It is important to recognize that while Bitcoin and Ethereum share the commonalities of being decentralized and utilizing blockchain technology, they are fundamentally different and are not two different solutions to the same problem. The use cases profiled only scratch the surface of what is possible building on top of Ethereum and it will be exciting to see how the Ethereum ecosystem evolves.