Blockchain: How the Technology Underlying Ethereum Works

Of all currently existing blockchains, Ethereum is the most popular for developing decentralized applications due to the large number of developers and companies that support it.

Currently, according to Coinmarketrate.com, about 200,000 developers are creating applications on this blockchain, and this number is expected to continue to grow. The reason for its popularity and the fact that it remains at the top, despite all the competitors, is related to how its creators approached the project, as well as its goals.

To understand this, we need to look at the history of Ethereum in detail.

A decentralized global computer

The history of the creation of Ethereum is very funny. It all started with a Russian-Canadian developer Vitalik Buterin, who loved playing World of Warcraft as a child.

One day Blizzard radically changed one of the character classes in the game (warlocks), changing the spell that was widely used with it. This led to the fact that the game stopped being fun, and Vitalik left the game.

This story is important because it led to the fact that this young man began to hate centralized services, as a result, he discovered Bitcoin, and began writing about it in Bitcoin Magazine, while participating in various blockchain projects.

But he soon discovered that all these projects were too closed, because they did not allow creating decentralized applications on them in a simple way.

So he started creating his own Ethereum platform.

The development of the platform began in 2014, although he was not alone, and some very important people helped him in creating Ethereum. Among the founders were Gavin Wood, Joseph Lubin and Charles Hoskinson.

In July 2014, they held a public sale to finance the project. And in the same year they founded a non-profit organization called the Ethereum Foundation.

In the early days of its existence, Ethereum was similar to Bitcoin, since many blockchains at that time copied some of its features. It used the Proof-of-Work consensus algorithm to create blocks with the help of miners using their equipment and other resources.

But there is a difference between Bitcoin and Ethereum, and it lies in the Solidity programming language used, which allows you to write and run applications in a decentralized way.

Gavin Wood was the one who wrote Yellow Papper with all the specifications of the language before it was developed. This concept of decentralized application launch has led to the creation of so-called smart contracts – a series of predefined conditions that are evaluated and executed on the Ethereum blockchain.

Thus, Ethereum became the first decentralized blockchain using smart contracts.

DAO

During the first year of its existence, Ethereum was a virgin field for testing many ideas in the industry. One of them was the DAO (Decentralized Autonomous Organization).

In fact, it was an organization with its own rules, which operated in a decentralized manner. His goal was to manage the finances and resources of the Ethereum community as if it were a venture fund.

All this was achieved thanks to the investments of several ecosystem participants who provided their ETH tokens to a common pool, and then selected projects for financing. The idea turned out to be successful, and in a short time they raised more than $ 100 million, which made this enterprise one of the most funded in the industry today.

However, soon after that, the project will turn into the biggest Ethereum bug. There was a bug in one of the smart contracts, an exploit that allowed hackers to steal almost all the funds inside the DAO. After this theft, public confidence in Ethereum collapsed, a huge internal crisis began, which would provoke a hard fork.

The community, for the most part, agreed to create a fork that will return the state of the blockchain to the time when investors had funds at their disposal before depositing them into the DAO.

But this controversial action split the community into two parts: on the one hand, those who agreed with this step, and on the other, those who considered it an attack on the decentralized and immutable nature of the blockchain. The latter are those who kept the blockchain unchanged and gave rise to Ethereum Classic.

In a nutshell, this is the Ethereum blockchain, but without this return to the past. For some, this is the original blockchain, but the vast majority of developers have settled on Ethereum.

Excitement with ICO

Initial coin offerings, or ICOs, existed before Ethereum, but the opportunities that allowed them to cause a large-scale revolution appeared in this blockchain.

The first Ethereum-based ICOs were NEO (formerly known as Antshares), List and DigixDAO, which were held in 2015 and 2015. But it wasn’t until 2017 that these forms of financing really exploded and aroused great interest from the general public.

During 2017, $ 10 billion was raised, and next year – about $ 11.4 billion. A trend that did not continue to grow at such a pace due to the high percentage of failures of these projects.

Despite the fact that many investors received a large profit from their investments, most of the projects for which money was raised eventually disappeared. Some – because it was a scam as such, others – because the idea of the project was not good enough.

The governments of many countries of the world did not like the fact that ICOs were a way to raise money without following certain rules, so in the end they banned them.

Many social networks used to advertise these types of investments have also banned advertising. Thus, the bull market of 2017-2018 became a boom for these investment instruments.

Ethereum Today

The Ethereum Ecosystem

Most of the smart contract platforms we mentioned above are based on the DPoS algorithm, which means that they sacrifice decentralization for the sake of scaling.

Ethereum, on the other hand, is looking for another solution, and its team is working on implementing a PoS system with some new features. It is called Ethereum 2.0, and its implementation has been expected for some time, but the developers continue to postpone it in order to finalize all the details.

This new version will solve the existing major problems of Ethereum, such as network congestion and high fees. However, with regard to decentralization, it remains to be seen whether it will be maintained.

In this system, nodes need a certain number of tokens in order to be validators and, accordingly, produce blocks. There is a tendency towards centralization in a conventional PoS system, but thanks to sharding and other developments, Ethereum hopes that this will not happen.

The good news is that you won’t need a lot of equipment for mining, a simple computer is enough. The only barrier to entry will be the required amount of ETH.

Today, the crypto market has fallen, and naturally ETH too.

Its value is in the range of $2,300, with a capitalization of $286.5 billion.

Despite this, Ethereum remains the most popular platform for creating dApps, which is why so many companies support it.