What are Ethereum Smart Contracts?
Smart contracts, for which Ethereum is perhaps best known, are like regular written business or legal contracts but are programmed in code on a blockchain platform. Due to the programmability and the decentralized nature of blockchain, smart contracts can operate and deploy without the need for any intermediary. For example, a smart contract can automatically trigger a payment from business A to business B if the contract’s terms are met (i.e., the delivery of a good or service).
While other blockchain platforms have smart contract capabilities, Ethereum was the first of its kind, and presently has more smart contracts in existence on its platform than many of the closest competitors combined.
What are dApps?
Ethereum dApps are “decentralized applications” that can be made by anyone who wishes to build a smart contract for themselves or their enterprise. The user-friendly nature of the Ethereum dApp creation has caused its popularity to increase, with over 3,000 dApps in existence on Ethereum by late 2022.
The dApps are created on the ‘Ethereum Virtual Machine’ (EVM), which is a software platform on the network that not only enables developers to construct their own applications but is used to deploy all existing smart contracts on the network.
Each dApp or smart contract on the Ethereum network must follow ‘ERC20,’ a set standard which was established in 2015. ERC20 lists a number of rules and characteristics that must be followed before a contract can be implemented. In addition to creating a smart contract, developers can mint corresponding ‘ERC20 tokens’ to be used within their applications. These tokens can, and indeed do, have a market value in many cases and are easily added to cryptocurrency exchanges that already have Ethereum custody ability. As of late 2022, there were over 400,000 ERC20 tokens in existence.
How Does Ethereum Work?
Since its inception, Ethereum has functioned on ‘Proof of Work,’ the same consensus mechanism as Bitcoin, in which network users process transactions and mine new Ethereum by solving complex, algorithmically produced equations. Each transfer of ETH requires ‘gas,’ a varying fee paid to the network’s node operators for the transaction request.
In September 2022, the network switched to Proof of Stake, which will reportedly drop the network’s energy consumption by 99% and erase the need for mining. The transfer to Proof of Stake was successful, though this will not remove the need for ETH gas fees until layer 2 solutions are found.
The History of Ethereum
In 2013, Vitalik Buterin, a young Russian-born Canadian who founded Bitcoin Magazine and was briefly an intern at blockchain payments company Ripple, wrote and published the Ethereum Whitepaper. He was soon joined in the effort by entrepreneurs and programmers and at the North American Bitcoin conference in January 2014, Ethereum was announced.
Citing regulatory concerns within the United States, Buterin and the Ethereum co-founders decided to launch the ‘Ethereum Foundation’ in Switzerland, holding a worldwide crowd-funding effort, or ICO (initial coin offering), from July to August 2014 before the building of the network, raising over $17 million by selling over 50 million Ether IOUs. Nearly 10% of the Ether was promised at the time to the individuals on the founding team and 10% to the Ethereum Foundation to proliferate the network.
Ethereum went live in July 2015 and began hosting smart contracts and using Proof of Work mining. Many users began setting up Ethereum mining rigs and people and businesses immediately began building on the network.
In 2016, an entrepreneur and co-founder of Ethereum, Joseph Lubin, started ConsenSys, a company devoted to developing services and applications on the Ethereum blockchain. Since its foundation, ConsenSys has purchased many different companies, many of which are outside of their core business, and several ConsenSys projects have raised public capital from ICOs, including Gnosis (GNO tokens) and Civil Media (CVL tokens).
Ethereum has gone through many changes and updates which have modified particular aspects of its blockchain, some being planned and some being forced adjustments due to sudden network problems. In 2016, a decentralized autonomous organization (DAO) was formed to pool funds from ETH users who in turn could vote on how the fund allocated the capital. The DAO experienced a hack in the same year, suffering losses of over 3.6 million ETH. Because the community disagreed on how to handle the problem, a fork was created which resulted in a new Ethereum (ETH) and a continuation of the original network, now labeled as Ethereum Classic (ETC).
What Tools/Platforms Have Been Built on this blockchain?
Ethereum has been arguably the most successful platform for creators and enterprises thus far in blockchain. Below is a list of some of the types of tools and associated projects that have proliferated on the network:
Decentralized Finance (DeFi)—Dozens of projects including Maker DAO, Curve, Aave, Compound
Decentralized Exchanges—1inch, Bancor, Kyber, Loopring, Uniswap
Gaming—GALA Games, Dapper Labs, Sky Mavis
Marketplaces—Opensea, X2Y2, Gem, Foundation
Oracles—Chainlink, Universal Market Access (UMA), iExec