Understanding Ethereum

If we want to understand Ethereum, probably the best starting point is to have a look at its whitepaper. So, let's see how its founders describe it, shall we?

The Ethereum whitepaper starts as follows:

"Satoshi Nakamoto's development of Bitcoin in 2009 has often been hailed as a radical development in money and currency, being the first example of a digital asset, which simultaneously has no backing or "intrinsic value" and no centralized issuer or controller. However, another, arguably more important, part of the Bitcoin experiment is the underlying blockchain technology as a tool of distributed consensus, and attention is rapidly starting to shift to this other aspect of Bitcoin. Commonly cited alternative applications of blockchain technology include using on-blockchain digital assets to represent custom currencies and financial instruments (colored coins), the ownership of an underlying physical device (smart property), non-fungible assets such as domain names (Namecoin), as well as more complex applications involving having digital assets being directly controlled by a piece of code implementing arbitrary rules (smart contracts) or even blockchain-based decentralized autonomous organizations (DAOs). What Ethereum intends to provide is a blockchain with a built-in fully fledged Turing-complete programming language that can be used to create contracts that can be used to encode arbitrary state transition functions, allowing users to create any of the systems described here, as well as many others that we have not yet imagined, simply by writing up the logic in a few lines of code."

What the whitepaper tells us, is that blockchain technology has many potential use cases beyond payments. Ethereum takes the technology a step further innovating upon the pioneer in the space, Bitcoin. A very ambitious plan, isn't it?

Ethereum provides the tools to facilitate the creation of custom digital assets, financial instruments, and decentralized applications. Everyone can launch their own project and create a digital asset, a DAPP, or an entire DAO using the open source Ethereum protocol.

Digital assets on the blockchain are referred to as smart property, meaning that any physical asset such as gold, real estate, stocks, bonds, art, and so on, can be represented by a token, and stored or transacted on a distributed ledger.

In addition, smart contracts enable complex financial instruments and applications to be created. In this way, smart property can be included in smart contracts and transacted under certain conditions programmed in the contract. Remember our trade finance example from the Bitcoin chapter where a smart contract can substitute an escrow account and a letter of credit provided by a bank? In transactions where product delivery takes time, a smart contract can be set up, so it releases the funds to the vendor upon successful delivery of the goods to the buyer.

Combining smart property and smart contracts could lead to DAOs where the business logic of operating an entire organization is programmed in a complex system of smart contracts. For now, it remains to be seen how this would work in practice.

As mentioned previously, these ideas have been explored by various projects before Ethereum. However, previous projects were using Bitcoin and other blockchain protocols less suitable for the purpose, while Ethereum is specifically designed for this.

The Ethereum protocol and its development team do not directly create or support decentralized applications, but they provide the tools, building blocks, and infrastructure for developers to launch them. Ethereum takes the concept of a blockchain beyond cryptocurrency in an innovative and meaningful way.

Next, we'll have a closer look at some of the key elements of Ethereum.