What is Ethereum and How It’s Different from Bitcoin?

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Filip Soszyński

Jul 19, 2017 • 7 min read

Ethereum is a great step forward in dealing with immediate, trustless value transferring in decentralised way.

It is one of the most promising technologies of the future that already holds a great potential for online business.

Why do I need it?

Any situation when we are exchanging money for some value or service, there is always a risk of some kind of fraudulent activity and it is especially true in case of online transactions when two parties don’t trust or even know each other. Ethereum minimises that risk by providing a completely trustless value transferring mechanism based on cryptography rules and the same technology that made Bitcoin so successful - Blockchain. Actually, it does a whole lot more to the online business than just ensuring security of transfers.

A word about Blockchain and Bitcoin

Ethereum can be described as an evolutionary successor of Bitcoin. Both of these technologies are based on Blockchain which introduced the ability to build internally secure global peer to peer networks for storing account balance information based on common consensus.

But what does it really mean? In Bitcoin the consensus comes down to a common agreement on the content of a global ledger which keeps track of all transactions and user account balances. The ledger is practically impossible to forge and the whole idea of digital currency is based upon it. Blockchain is the reason that Bitcoin is a secure and reliable technology and we can all see that by its remarkable expansion in recent years.

What is Ethereum?

Now, Ethereum takes advantage of Blockchain even more and brings the whole idea to the next level. Apart from having its own cryptocurrency, called ether, there is one significant difference. While Bitcoin lets users easily and reliably transfer digital currency, Ethereum also adds a possibility to execute their own code in the distributed network.

In simple words, it can be described as a single global supercomputer or the one big cloud computing platform which is run and maintained by its users and therefore completely decentralised and independent of any third party companies.

The code which can be executed in Ethereum is arranged in class-like structures called smart contracts. These are basically small programs that performs some actions based on the given input and can be executed by anyone on the network. Contracts are executed in Ethereum Virtual Machine (EVM) and this way they are platform-independent, the same code will produce the same results in every environment. They are also visible to anyone on the network so possible outcomes of running an arbitrary contract are clear and transparent before actually making a call.

Another great thing is that all transactions within Blockchain happen almost immediately which is especially helpful in transferring money worldwide or executing a time-dependent smart contract. It is no longer necessary to wait hours or days to receive the transferred money and we don’t need any intermediary banking companies.

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What makes contracts smart?

With the use of smart contracts, untrusted parties can transact directly with each other without the need for any third party service. They can execute an arbitrary action based on if-this-then-that logic and simple triggers. For example, a contract can ship a product when it is triggered by payment confirmation. It automatically verifies the confirmation and releases the contract value, which is the shipping of the item.

The risk of fraud is minimised because business agreements are enforced by the Blockchain automatically. Moreover, there is no longer a need for intermediary services taking their share, so all transfer fees are significantly reduced. Nobody will ever manipulate with the contract code as it is immutable. Once deployed, it cannot be erased, which also means that you need to be extra cautious about what you deploy to the public Ethereum network.

What’s so great about decentralisation?

It basically eliminates the need of running your own central server or database. That means no single person controls the state of data, it’s being validated and maintained by all network users simultaneously. It cannot be tampered with, censored or interfered in any way by a single person as it is the case in traditional centralised architecture. This concept eliminates the risk of running malicious actions on a central application server and makes dealing with application infrastructure so much easier.

Data stored on the Blockchain cannot be erased, all the transactions are documented, traceable and transparent to everyone. There are no server or database downtimes, no risk of losing your valuable data - simply no single point of failure. This decentralised architecture holds a great potential and it is possible that the internet of the future will be completely decentralised without any reliance on huge third party authorities holding user data, and this future starts now.

What are use cases?

As for today, Ethereum is still in its early phase, and development process often requires deep research efforts as many tools from the ecosystem are in testing stages. Nevertheless, there are already many successful decentralised apps (DApps) which proved their value and most of them leverage Ethereum to build systems which are impossible to create using centralised architecture.

One of the most interesting DApps is FirstBlood.io, which brings Blockchain advantages to the e-sport community. The service eliminates cases when dishonest players interfere with a payout system for game winners. It detects the winner and runs the smart contract which automatically transfers ether to the proper account. In effect, the whole community is healthier and everybody benefits.

Another successful idea created with Ethereum is Alice.Si which is a charity donating service. It makes sure that the donated money is actually serving the right purpose, meaning charity gets the raised money only if it achieves its goals. The service runs verification and a charity receives donation after positive outcome. The whole process is possible by using smart contracts.

Jump right in

Ethereum is expanding rapidly and it can revolutionise the whole internet in the future. It has already made a big impact on how people think about cryptocurrencies and decentralised networks. Soon we can expect more and more applications based on Blockchain and Ethereum technologies and this is just the beginning. Why don’t you jump right in?

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Filip Soszyński

Filip is a Junior Ruby on Rails developer who enjoys programming in Ruby. Currently studying...

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