What is Ethereum?
Ethereum is a worldwide network of interconnected computers (nodes) that enforce, execute and validate programs in a decentralized manner without requiring a server, memory, CPU power, or any other computing function, as it is all provided by thousands of ethereum nodes scattered across the world. In short, ethereum is a global computer.
It further ensures the operation of ETH – ethereum’s digital currency which turns money into pure code – opening many new opportunities, including machine to machine payments, one click online commerce, decentralized autonomous organizations as well as completely new business models.
The platform has attracted significant interest by many household brands which are positioning for what some have called a fourth industrial revolution.
The reasons might become apparent as you read this article which is mainly concerned with high-level concepts. You might find some parts to be far too advanced or far too simple. That is because this introduction tries to provide a holistic answer to the title’s question. As such, some parts might be useful even for experts.
To aid you in finding potential sections you might wish to skip, the decentralized digital currency is firstly introduced in some detail, explaining Nakamoto’s consensus and chain splits in their own subsections. You might find more interesting one specific aspect of the digital currency, codable money, which has a section of its own. That is followed by explaining ethereum’s potential role in bringing a future where machines can act by holding, transferring and accepting value, giving them a very primitive level of intelligence.
ETH – The Decentralized Digital Currency
ETH is a new decentralized digital currency backed by the free market. Unlike currencies issued by a central bank (such as dollars or pounds), or a central private company (none exist), ethereum is issued through open-source code executed in a decentralized fashion on thousands of nodes. That code determines which node gets eth based on a number of calculations called proof of work – code based solutions to useless math problems that aim to just prove work was done by hardware such as GPUs, better known as “miners” for their “digging” through the useless code, waiting to strike gold (the 5 eth reward).
The more hashrate (hardware) share of the total network a node has, the more often they earn the reward, which is currently valued at around $60 dollars and is automatically given to only one miner every ~17 seconds.
There are massive mining facilities stacked with hardware that only performs the “digging” function. Soon, that will change. All one will require to “digg” is the running of a node (just a downloadable software program) and the locking of a certain amount of eth in a saving account like manner to secure more than 85 million eth, currently worth $1.1 billion.
For now, as “mining” requires much upfront capital investment and has some inherent risks due to its zero-sum game function, most tend to directly purchase eth on exchanges such as Coinbase. Once purchased, the currency can be sent to anyone through ethereum’s decentralized network which uses a blockchain – a chain of transactions showing Alice paid you and was in turn paid by Bob, who, in turn, was paid by Carl and so on, until it reaches one of the many issuing miners that created the eth through the “digging” process.
Although the blockchain ledger is fully public, it contains no names. Instead, it is made of random letters and numbers called a public address. If ownership of the addresses is revealed, it is possible to see who is paying who, but the network itself does not reveal such ownership. It is therefore pseudo-anonymous, comparable to an online nickname. If people learn your nickname, they can attribute to you all the comments you have previously made, otherwise it is just a random person making comments online. Equally, if people learn your public eth address, they can see what transactions you have made, otherwise, it is a random address making transactions.
The Nakamoto Consensus
The final point in regards to the currency aspect is its decentralized nature which was previously thought to be impossible due to the double spending problem as anyone can copy and paste some code. Nakamoto proved eight years ago that a currency can be decentralized by ensuring such code could not be copied through the use of cryptography. There are three main elements, a private key that corresponds to a public key (address), proof of work which validates transactions in a non fakable manner and, most importantly, what we now call the Nakamoto consensus.
The Nakamoto consensus is a solution to a problem in computer science illustrated by the tale of the two byzantine generals. It tries to establish how agreement can be reached while communicating through potentially malicious and hostile network actors who may betray the generals and thus inform the king or enemy of their planned action, leading to failure. As far as the code itself is concerned, Nakamoto described the solution thus:
They use a proof-of-work chain to solve the problem. Once each general receives whatever attack time he hears first, he sets his computer to solve an extremely difficult proof-of-work problem that includes the attack time in its hash. The proof-of-work is so difficult, it’s expected to take 10 minutes [~17 seconds for eth] of them all working at once before one of them finds a solution. Once one of the generals finds a proof-of-work, he broadcasts it to the network, and everyone changes their current proof-of-work computation to include that proof-of-work in the hash they’re working on. If anyone was working on a different attack time, they switch to this one, because its proof-of-work chain is now longer.
The above describes how the code itself works, simplified to 51% of miners decide, but it is limited to only protecting from double spending and other malicious or objectively dishonest behavior. It does not assist in circumstances where there is a genuine requirement to upgrade the network and thus change the rules.
In those situations, everyone often agrees because of clear benefits – say, it allows you to download the node faster with no downtime – but, sometimes, there is a genuine dispute on whether an upgrade should or should not occur – say whether to prevent a massive theft. Here, Nakamoto’s consensus does not assist because it is only concerned with preventing double spending.