Ethereum is an open-source blockchain-based platform that essentially enables hundreds of decentralized cryptocurrencies and projects to be built and deployed without having to build their own blockchains.

With the second largest market cap in the cryptocurrency world, Ethereum has drawn a lot of attention from investors and crypto enthusiasts alike.

Ethereum not only presents a significant change to the status quo, it also allows for the quick development and deployment of new applications presenting niche solutions for various industries.

While Ethereums utility is obvious to programmers and the tech world at large, many people who are less tech-savvy have trouble understanding it. Weve designed this guide to appeal to both crowds and expose anyone from complete crypto beginners and intermediates to this potentially world-changing cryptocurrency.

If youre interested in Ethereum, chances are you have some sort of foundational knowledge of Bitcoin.

All cryptocurrencies inevitably get compared to Bitcoin, and it frankly makes understanding them much easier.

Bitcoin launched in 2009 as the worlds first cryptocurrency, with the single goal of creating a decentralized universal currency. This currency would not require any intermediary financial institutions, but would still ensure safe and valid transactions. This was made possible by a revolutionary technology called the blockchain.

The blockchain is a digital ledger, continuously recording and verifying records. Its used to track and verify Bitcoin transactions. Since the global network of communicating nodes maintains the blockchain, its pretty much incorruptible. As new blocks are added to the network, they are constantly validated.

Similar to Bitcoin, Ethereum is a distributed public blockchain network. While both Ethereum and Bitcoin are cryptocurrencies that can be traded among users, there are many substantial differences between the two.

Bitcoin, for example, utilizes blockchain to track ownership of the digital currency, making it an extremely effective peer to peer electronic cash system. Ethereum, on the other hand, focuses on running the programming code of an application. Application developers largely use it to pay for services and transaction fees on the Ethereum network.

Both Bitcoin and Ethereum are decentralized, meaning they have no central control or issuing authority. Respective miners run each network by validating transactions to earn either bitcoin (for Bitcoin) or ether (for Ethereum).

If youre still having trouble making the distinction, the words of Dr. Gavin Woodone of Ethereums Co-Foundersmight help:

Bitcoin is first and foremost a currency; this is one particular application of a blockchain. However, it is far from the only application. To take a past example of a similar situation, e-mail is one particular use of the internet, and for sure helped popularise it, but there are many others.

Ethereum is simply the application of blockchain technology for a completely different purpose.

Simply put, Ethereum is a blockchain-based decentralized platform on which decentralized applications (Dapps) can be built.

Ethereums appeal is that its built in a way that enables developers to create smart contracts. Smart contracts are scripts that automatically execute tasks when certain conditions are met. For example, a smart contract could technically say, pay Jane $10 if she submits a 1000 word article on goats by September 15, 2018, and it would pay Jane once the conditions are met.

These smart contracts are executed by the Turing-complete Ethereum Virtual Machine (EVM), run by an international public network of nodes.

The cryptocurrency of the Ethereum network is called ether. Ether serves two different functions:

If youre still a little confused, dont worry. The underlying technology is complicated even at a surface level.

By the end of this guide, youll have a better understanding of Ethereum than 99.999% of people out there and thats a pretty good start!

Well go over things such as how Ethereum functions, Ethereums history, and some of the exciting dapps running on the Ethereum platform.

In 2011, a 17-year-old Russian-Canadian boy named Vitalik Buterin learned about Bitcoin from his father.Buterin became a co-founder of Bitcoin Magazine and a leading writer for the publication.Buterin currently serves on the Editorial Board of Ledger. As a peer-reviewed scholarly journal, Ledger publishes original research articles on cryptocurrency and blockchain technology. The publication shows interest in any topics relating blockchain to mathematics, computer science, engineering, law, and economics.

In 2013, after visiting developers across the world who shared an enthusiasm for programming, Buterin published a white-paper proposing Ethereum.

In 2014, Buterin dropped out of the University of Waterloo after receiving the Thiel Fellowship of $100,000 to work on Ethereum full-time.

In 2015, the Ethereum system went live.

In 2017, Ethereum hit a cap rate of $36 billion dollars.

Whether youre looking at this from an investment standpoint, tech perspective, or witness to history; Ethereum is extremely exciting.

Buterins goal was to bring the same decentralization from Bitcoin to more than just currency. This could be accomplished by building a fully-fledged Turing-complete programming language into the Ethereum blockchain.

The Ethereum white paper goes into detail for some of the potential use cases, all of which could be built through decentralized apps on the Ethereum network. The list goes on and on:

By building these apps on the Ethereum network, these dapps can utilize Ethereums blockchain instead of having to create their own.

The core Ethereum founding team in 2014 consisted of Vitalik Buterin, Mihai Alisie, Anthony Di Iorio, and Charles Hoskinson, additionally attracting the attention of Joseph Lubin to join the team. Lubin moved on to found the now near 1,000-employee Brooklyn-based venture production studio ConsenSys.

Rumored to be one of the top buyers in the Ethereum crowdsale, Lubin, who had been funding ConsenSys with his stash of Bitcoins, says he began selling some of his Ethers last year to fund the firms development

Early blockchain applications like Bitcoin only allowed users a set of predefined operations. For example, Bitcoin was created exclusively to operate as a cryptocurrency.

Unlike these early blockchain projects, Ethereum allows users to create their own operations. The Ethereum Virtual Machine (EVM) makes this possible. As Ethereums runtime environment, the EVM executes smart contracts. Since every Ethereum node runs the EVM, applications built on it reap the benefits of being decentralized without having to build their own blockchain.

Smart contracts are strings of computer code capable of automatically executing when certain predetermined conditions are met.

Instead of requiring a single central authority to say yay or nay, these contracts are self-operated. This not only makes the entire process more effective, it also makes it more fair and objective.

For example, a simple smart contract use case would be:

Using the smart contract, theres no need for Jim and Sarah to trust each other. They just have to trust the data feed.

Keep in mind that this is only a very simple example. Many smart contracts are extremely complex and can work wonders.

The takeaway: Smart contracts can automate a variety of tasks, without requiring intermediaries. All a smart contract needs is the arbitrary rules written into it.

Handling financial transactions alone presents hugely complex problems in terms of reliability and security. And since the Ethereum network comprises a general purpose blockchain that handles assets other than money, more complex challenges arise beyond mere financial transactions. Moving into the future, Ethereum confronts issues of scalability, energy consumption, security, privacy, and decentralization.

As a general purpose blockchain, Ethereum needs a mechanism to represent assets other than money. The ERC-721 standard has been created to transact unique items of value. The ERC acronym stands for Ethereum Request for Comment and provides a formal process for the Ethereum Foundation to improve its product. The ERC-721 standard originally drove the development of the highly successful CryptoKitties collectibles, but it allows for the representation of any digital asset.

Any blockchain relies on a trustworthy, fair, secure, and reliable consensus protocol for placing transactions onto the system. Like Bitcoin, Ethereum uses a Proof of Work (PoW) approach, but the Ethereum blockchain plans to implement a Proof of Stake (PoS) algorithm.

The Casper finality gadget implements PoS as an independent module. As an independent module, Casper lives on top of the current PoW system, making the Ethereum network a hybrid system of both PoW and PoS. Also as an independent module, this allows the PoW portion of the network to be removed at a later date.

The Casper PoS protocol utilized game theory incentives to maintain the integrity of the system. It also provides benefits of greater security and reduces the massive energy consumption required by PoW mining.

Scaling presents a great challenge for Ethereum, as it does for other blockchains. Scaling defines a systems ability to handle a large and growing workload without showing strain or stress to the system. Think of this both as a systems power and efficiency to complete tasks and also as a user experience challenge. If a user waits too long for a response after clicking a button, frustration results, and users give up on the system.

The web confronted this problem in the early days as well. In the first web applications, every action a user took on a web page resulted in the entire page having to be reloaded from the server and rendered again on the clients browser. Web 2.0 came along, introduced the ability to refresh only the relevant part of the page, and responsive user interfaces became the norm on the internet.

Vitalik Buterin identifies scaling as a primary concern that needs to be addressed in blockchain technology. He made the following comments in September 2017 in an interview with Naval Ravikant at the Disrupt SF 2017 conference.

Bitcoin is currently processing a bit less than three transactions a second; and if it goes close to four, its already at peak capacity. Ethereum over the last few days, its been doing five a second. And if it goes above six, then its also at peak capacity. On the other hand, Uber on average 12 rides a second, PayPal several hundred, Visa several thousand, major stock exchanges tens of thousands. And if you want to go up to IoT, then youre talking hundreds of thousands

What the Lightning Network brings to Bitcoin, Plasma brings to Ethereum. Joseph Poon (the creator of the Lightning Network protocol) and Vitalik Buterin jointly design and architect Plasma.

Efforts like Lightning and Plasma ease stress on the network by taking work offline to a side chain. Users engage in multiple transactions over time on a channel on the side chain without utilizing the main blockchain at this point. After a number of transactions complete, the final state of these transactions moves over to the main blockchain as a single transaction with a single fee. Multiple interactions to process thereby reduce to a single action on the blockchain, consequently reducing strain on resources and improving scalability.

Computer science boils down to the art of putting something somewhere, then retrieving it when you want it. Storing only what you require in a manner that makes retrieval simple and elegant, and retrieving only what you need, and doing it all as quickly as possible defines efficiency. Sharding presents a technique for storing data in an efficient manner to improve retrieval. And efficiency determines scalability.

Sharding basically defines ways to break data into separate pieces and store them separately. Consequently, you only have to deal with the small piece containing the data you are interested in and not wade through every piece of data contained in the entire system. Database technology has long utilized sharding to increase scalability, and now the Ethereum Foundation researches how sharding can improve blockchain technology.

Similarly, Raiden also presents side chain capability similar to Lighting and Plasma. Raiden is not a project of the Ethereum Foundation but a product of an independent company.

Most of us have a pretty good understanding of what an application (app) is. An application is formally defined as a program or piece of software designed and written to fulfill a particular purpose of the user. We use apps every day: Apps allow us to check our bank balance, scroll through a live feed of pictures, or even launch a Flappy Bird into oblivion.

Now take this definition and ~*~decentralize~*~ it. Dapps serve similar functions, but run on an entire network of nodes rather than a central source. The fact that they are decentralized gives dapps an enormous advantage over traditional apps.

You know when Instagram is down because the server is down? This doesnt happen with dapps. How about when Zomato got hacked and exposed the information of 17 million people? This doesnt happen either.

Moreover, Dapps are:

In many cases, front-end users cant even distinguish dapps from regular apps. Dapps typically use HTML/JavaScript web applications to communicate with the blockchain, appearing the same to users as many applications youre already using today.

While Bitcoin provides a network for financial transactions, Ethereum aspires to provide a platform for decentralized application development. Ultimately, a programming platform requires good applications built on it to be taken seriously. CryptoKitties gained popularity for a while, but we continue to wait and see how well Ethereum serves as a foundation for application development.

Quartz asked Vitalik Buterin What decentralized apps do you find interesting? on September 14, 2017. He answered as follows:

There are a few categories that are flourishing already. Some of them are various financial applications, financial contracts, derivatives, things like Maker. Games are another one. In the non-financial space, identity verification is getting to be a big one. With prediction markets, Augur and Gnosis are going to be fairly successful. Also in the not-quite financial space theres an interesting thing called Akasha. Its an Ethereum-based forum that uses ether-based cryptocurrency mechanisms to manage things like upvote and downvote and spam prevention.

Fasten your seatbelts and get your Twitter-fingers ready, its finally time for the most exciting part of this guide.

Ethereums intersection with the real world is paved with innovation and disruption. There are already a huge number of projects, both live and in development, built on the Ethereum network. Here are just some of the most successful and promising of these dapps.

Golem: The Golem project aims to make a global supercomputer easily accessible to anyone. Its essentially the first decentralized sharing economy of computing power. As a global market, users would be able to make money by renting out their idle computing power, or spend money to have access to a supercomputer. Hold up, have you ever used a supercomputer? Supercomputers cost between a million dollars and a good fraction of a billion dollars. The modern Tianhe-2 Supercomputer has the power of roughly 18,400 Playstation 4s. Golems goal is to make this sort of power easily accessible anywhere in the world at an infinitesimal cost.

Check out our Golem Beginners Guide.

Augur: Augurs goal is to utilize a decentralized network to create a powerful forecasting tool using prediction markets. Augur would reward users for correctly predicting future events. While at a surface level it may just seem like a decentralized betting platform (which is still worth a lot), Augur could potentially provide powerful predictive data for virtually any industry. Prediction markets are more accurate at forecasting than individual experts, traditional opinion polling, and surveys.

Check out our Augur Beginners Guide.

Civic: Civic aims to protect users identities and provide blockchain-based, secure, low-cost, on-demand access to identity verification. This would not only prevent and provide users with assistance for identity fraud, but it would also remove the need for constant personal information and background verification checks. Think about how many times youve left your social security number with someones assistant and you can see the benefits of Civic.

Check out our Civic Beginners Guide.

OmiseGO: OmiseGO vision is to solve the problems and inefficiencies of financial institutions, processors, and gateways by enabling decentralized exchange on a public blockchain at a lower cost and high volume. This means anyone will be able to conduct financial transactions such as payments, payroll deposits, B2B commerce, supply-chain finance, asset management, and loyalty programs without having to rely on a single server and without exorbitant fees! The system is built in a way that allows the best currency (whether fiat or decentralized) to win.

Check out our OmiseGO Beginners Guide.

Storj: Storjs aim is to make it possible for users to rent out their excess hard drive space in exchange for the crypto STORJ. Users could therefore also use Storj to rent additional hard drive space.

These are only a handful of different dapps all running on the Ethereum platform. What really stands out with dapps is how their founder are able to raise real capital by selling tokens. Whereas traditional apps have to seek outside investment or IPO, a dapp can simply ICO and raise the capital they need to build their company. While this removes friction from the financing processes, it has unfortunately also made it possible for many sub-par dapps to ICO and take advantage of eager speculators.

Check out our Storj Beginners Guide.

For more dapps, check out the State of the Dapps.

Now that you have a decent understanding of what Ethereum is and how it functions, its useful to revisit how it compares to Bitcoin at a technical level.

While the two cryptocurrencies serve different purposes, Ethereum provides a number of benefits over Bitcoin:

Ethereum arguably currently functions better than Bitcoin as a currency. With Ethereum, you can reliably send transactions faster, pay lower transaction fees, and mine at a more profitable rate (although it still has its downfalls for miners).

Read: Is Ethereum Mining Profitable?

However, Bitcoin does have a relatively more stable priceand therefore functions as a better value storage optionfrom a trading and value storage perspective. Ethereum is much younger but has covered a substantial amount of ground in recent years. Although Ethereum certainly shows promise as a currency, its true potential lies in features nonexistent in Bitcoins code.

The most famous DAO was simply known as The DAO. The nearly identical name causes a lot of confusion for people and gives DAOs a bad reputation.

The DAO was a decentralized autonomous organization primarily functioning as its own investor-directed venture capital fund. It didnt have the conventional management structure or board of directors, was not tied to any particular government, and instead ran on open source code. The DAO was set up to give funders the power to vote for which dapps deserved investment through DAO tokens.

Dapps had somewhat of an approval process:

The DAO is most famous for the largest crowdfunding campaign in history, raising over $150 million in ether from more than 11,000 investors. The DAO is also most infamous for getting hacked for $50 million. This hack inevitably caused a split in the Ethereum community, creating what we now know as Ethereum (ETH) and Ethereum Classic (ETC).

The hack happened because of The DAOs Split Function. Funders who wanted to exit The DAO could use its Split Function, which would give them back the ether they had invested. The only stipulation was that existing funders had to hold their ether for 28 days before they could withdraw them.

On June 17th 2016, an unknown person or group of people took advantage of a lapse in the Split Functions security with a simple recursive function. This frustratingly easy hack allowed the hacker(s) to repeat their request to withdraw the same DAO tokens multiple times before the system registered it as $50 million.

The news of this hack created chaos in the Ethereum community. While this hack had nothing to do with the Ethereum platform and everything to do with The DAO platform, many members of the Ethereum community were invested in The DAO. The community as a whole had 28 days to come up with a solution, which ended up being to forkstop the current blockchain entirely and create something new from scratch.

The new Ethereum (ETH) is the result of the fork, and is essentially the blockchain before the hack. The old Ethereum (Ethereum Classic ETC) is still running the original blockchain with the hack included.

The vast majority of the Ethereum community including the Ethereum founders pivoted along with ETH, with a small minority staying loyal to the original blockchain.

Software never stops changing until people stop using it. The Ethereum Foundation follows a roadmap of future modifications and enhancements to the system. No system ever runs fast enough, so scaling continues to develop. Privacy remains paramount, and research into zero-knowledge proofs continues. Decentralized systems demand constant attention to security. Many aspects of the future remain unknown. Some new and popular application not yet on the market may well demand new capabilities from the system. As the world changes, Ethereum continues to evolve.

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What is Ethereum? | The Ultimate Beginners Guide