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What is Ethereum? A Beginner's Explanation in Plain English - YouTube
Channel: 99Bitcoins
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What on earth is Ethereum?
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I mean, I keep hearing about it all the time,
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Iâve seen itâs the second largest
cryptocurrency around
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but I just canât seem to
wrap my head around it.
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Is it as revolutionary as Bitcoin?
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Can it actually change the world
as we know it?
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If you want to have
a better understanding of Ethereum,
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but are tired of explanations that sound like
complete technical gibberish, stick aroundâŠ
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Here on Bitcoin Whiteboard Tuesday,
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or should I say Ethereum Whiteboard Tuesday
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weâll answer these questions and more.
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Before we get into Ethereum
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we need to do a quick recap about Bitcoin,
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since itâs the basis from which
Ethereum was born.
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By now you probably know that
Bitcoin is a form of decentralized money,
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and if you still have some questions about
what that means or how it works,
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then you might consider revisiting
our original video,
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âwhat is Bitcoinâ.
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Before Bitcoin was invented,
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the only way to use money digitally
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was through an intermediary
like a bank, or Paypal.
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Even then, the money used was still
a government issued and controlled currency.
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However, Bitcoin changed all that by creating
a decentralized form of currency
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that individuals could trade directly
without the need for an intermediary.
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Each Bitcoin transaction is
validated and confirmed by
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the entire Bitcoin network.
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Thereâs no single point of failure
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so the system is virtually impossible to
shut down, manipulate or control.
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Pretty neat huh?
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Well, now that we know that
money can be decentralized,
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what other functions of society
that are centralized today
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would be better served on
a decentralized system?
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What about voting?
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Voting requires a central authority to
count and validate votes.
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Real estate transfer records
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currently use centralized
property registration authorities.
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Social networks like Facebook
are based on centralized servers
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that control all of the data
we upload to them.
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What if we could use
the technology behind Bitcoin,
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more commonly known as Blockchain,
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to decentralize other things as well?
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The interesting thing about
Blockchain technology
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is that itâs actually the by-product of
the Bitcoin invention.
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Blockchain technology was created by
fusing already existing technologies like
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cryptography, proof of work
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and decentralized
network architecture together
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in order to create a system
that can reach decisions
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without a central authority.
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There was no such thing as
âblockchain technologyâ
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before Bitcoin was invented.
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But once Bitcoin became a reality,
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people started noticing
how and why it works
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and named this âthingâ blockchain technology.
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Blockchain is to Bitcoin
what the Internet is to email;
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a system on top of which you can build
applications and programs.
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A currency like Bitcoin
is just one of the options.
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So this got people very excited,
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and they began to explore
what else can we decentralize.
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However, in order for a system to be
truly decentralized
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it needs a large
network of computers to run it.
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Back then the only network
that existed was Bitcoin
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and it was pretty limited.
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Bitcoin is written in what is known as
a âturing incompleteâ language
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which makes it understand
only a small set of orders,
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like who sent how much money to whom.
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If you want to create
a more complex system,
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youâll need a different
programming language,
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which means a different
network of computers.
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Imagine for a second you wanted to
build your own decentralized program,
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just like Bitcoin, at home.
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Youâd need to understand
how Bitcoinâs decentralization works,
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write code that mimics the same behaviour,
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get a huge network of computers
to run this code and so onâŠ.
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And that is a lot of work.
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Enter Ethereum.
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Ethereum was first proposed in late 2013
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and then brought to life in 2014
by Vitalik Buterin
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who at the time was
the co-founder of Bitcoin Magazine.
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Ethereum is the Do It Yourself platform
for decentralized programs
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also known as Dapps - decentralized apps.
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If you want to create
a decentralized program
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that no single person controls,
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not even you even though you wrote it,
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all you have to do is learn
the Ethereum programming language
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called Solidity and begin coding.
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The Ethereum platform has thousands of
independent computers running it
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meaning itâs fully decentralized.
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Once a program is deployed
to the Ethereum network
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these computers, also known as nodes,
will make sure it executes as written.
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Ethereum is the infrastructure
for running Dapps worldwide.
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Itâs not a currency, itâs a platform.
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The currency used to incentivize
the network is called Ether
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but more on that later.
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Ethereumâs goal is to truly
decentralize the Internet.
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Wait?
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The internet is centralized?
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I thought the Internet already
was decentralized
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and that anyone can start their own site.
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While in theory that might be true,
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in practice Amazon, Google,
Facebook, Netflix and other giants
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control most of the world wide web
as we know it.
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Thereâs almost no activity on the web
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that happens without some sort of
intermediary or 3rd party.
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But once the concept of
digital decentralization
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was demonstrated by Bitcoin,
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a whole new array of opportunities
became available.
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We can finally start to imagine and design
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an Internet that connects users directly
without the need for a centralized 3rd party.
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People can ârentâ hard drive space
directly to other people
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and make Dropbox obsolete.
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Drivers can offer their services
directly to passengers
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and remove âUberâ as the middleman.
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People can buy cryptocurrencies
directly from one another
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without the need for an exchange
that can get hacked or steal your money.
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Ethereum allows people to connect
directly with each other
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without a central authority
to take care of things.
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Itâs a network of computers that together
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combine into one powerful,
decentralized supercomputer.
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Ok, So now you know what Ethereum does
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but we havenât touched upon HOW it does it.
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Ethereumâs coding language, Solidity,
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is used to write âSmart Contractsâ
that are the logic that runs Dapps.
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Let me explain...
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In real life, all a contract is,
is a sets of âIfsâ and âThensâ.
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Meaning a set of conditions and actions.
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For example, if I pay my landlord
$1500 on the 1st of the month
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then he lets me use my apartment.
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Thatâs exactly how
smart contracts work on Ethereum.
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Ethereum developers write
the conditions for their program or Dapp
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and then the ethereum network executes it.
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They are called smart contracts
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because they deal with
all of the aspects of the contract -
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enforcement, management,
performance, and payment.
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For example, if I have a smart contract
that is used for paying rent,
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the landlord doesnât need to
actively collect the money.
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The contract itself âknowsâ
if the money has been sent.
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If I indeed sent the money,
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then I will be able to open
my apartment door.
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If I missed my payment,
I will be locked out.
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However smart contracts
also have their downsides.
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Going back to my previous example,
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instead of having to kick out a renter
that isnât paying,
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a âsmartâ contract would lock
the non-paying renter
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out of their apartment.
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A truly intelligent contract
on the other hand,
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would take into account
other factors as well,
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such as extenuating circumstances,
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the spirit with which
the contract was written
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and it would also be able to
make exceptions if warranted.
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In other words, it would act like
a really good judge.
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Instead, a âsmart contractâ
in the context of Ethereum
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is not intelligent at all.
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Itâs actually uncompromisingly letter strict.
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It follows the rules down to a T
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and canât take any secondary considerations
or the âspiritâ of the law into account
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like what commonly happens with
real world contracts.
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Once a smart contract is deployed
on the Ethereum network,
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it cannot be edited or corrected,
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even by its original author.
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Itâs immutable.
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The only way to change this contract
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would be to convince
the entire Ethereum network
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that a change should be made
and thatâs virtually impossible.
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This creates a very serious problem
since unlike Bitcoin,
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Ethereum was built with
the ability to create
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really complex contracts,
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and complex contracts
are very difficult to secure.
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With any contract,
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the more complicated it is,
the harder it is to enforce
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as more room is left for interpretations,
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or more clauses must be written
to deal with contingencies.
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With smart contracts,
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security means handling with perfect accuracy
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every possible way in which
a contract could be executed
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in order to make sure that the contract
does only what the author intended.
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Ethereum launched with the idea that
âcode is lawâ.
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That is, a contract on Ethereum
is the ultimate authority
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and nobody could overrule the contract.
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Well, that all came to a crashing halt
when the DAO event happened.
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âDowâ or DAO stands for
âDecentralized Autonomous Organizationâ
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which allowed users to deposit money
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and get returns based on
the investments that the DAO made.
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The decisions themselves
would be crowd-sourced and decentralized.
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The DAO raised $150M
in Ethereum currency, ether,
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when ether was trading around $20.
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While this all sounded very good,
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the code wasnât secured very well
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and resulted in someone figuring out
a way to drain the DAO out of money.
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Now you could say that the person
who drained the DAO was a âhackerâ.
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But some would argue that
this was just someone
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who was taking advantage of the loopholes
he found in the DAOâs smart contract.
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This isnât very different
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than a creative lawyer figuring out
a loophole in the current law
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to effect a positive result for his client.
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What happened next is that
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the Ethereum community decided that
code no longer is law
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and changed the Ethereum rules
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in order to revert all the money
that went into the DAO.
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In other words,
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the contract writers and investors
did something stupid
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and the Ethereum developers
decided to bail them out.
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The small minority that didnât
agree with this move
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stuck to the original Ethereum Blockchain
before its protocol was altered
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and thatâs how Ethereum Classic was born,
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which is actually the original Ethereum.
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Weâve covered a lot up until now
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and the last thing I want to
talk about is Ethereum as a currency.
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Weâve already established that
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Ethereum is basically
a large bunch of computers
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working together like one super computer
to execute code that powers Dapps.
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However this costs money -
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Money to get the machines, to power them up,
store them and cool them if needed.
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Thatâs why Ether was invented.
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When people talk about the price of Ethereum
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they actually are referring to Ether -
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the currency that incentivizes people to run
the Ethereum protocol on their computer.
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This is very similar to
the way Bitcoin miners get paid
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for maintaining the Bitcoin blockchain.
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In order to deploy a smart contract
to the Ethereum platform,
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its author must pay to do so.
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That payment is made in the form of ether.
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This is done so that people will write
optimized and efficient code
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and wonât waste the Ethereum network
computing power on unnecessary tasks.
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Ether was first distributed in Ethereumâs
original Initial Coin Offering
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back in 2014.
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Back then it cost around
40 cents to buy one Ether.
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Today, one Ether is valued in
hundreds of dollars
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since the use of the Ethereum network
has grown immensely
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due to the ICO hype that started in 2017.
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Still Confused?
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Donât worry;
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weâll get more into
Ether and mining in a later video.
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Ethereumâs network and Ether are a whole
new rabbit hole that weâll cover
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but I think this will do for now
as an intro to Ethereum.
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This concludes this weekâs episode of
Ethereum Whiteboard Tuesday.
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Hopefully by now you have
a better understanding of what Ethereum is -
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A network of computers
working together to replace
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the centralized model of programs
and companies which run the Internet today.
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You may still have some questions.
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If so, just leave them
in the comment section below.
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And if youâre watching this video on YouTube,
and enjoy what youâve seen,
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donât forget to hit the like button.
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Then make sure to subscribe
for notifications about new episodes.
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Thanks for joining me here at the Whiteboard.
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For 99bitcoins.com, Iâm Nate Martin,
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and Iâll see you⊠in a bit.
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