Vitalik Buterin, the creator of Ethereum, has the very ambitious vision of wanting to take the underlying technology of Bitcoin (the blockchain) and use that to decentralise the internet.
Decentralised applications, or DApps, are the core pillar to the philosophy of Ethereum and these can run on the Ethereum virtual machine. This Ethereum virtual machine is known as the “world computer”.
One of the caveats of a centralised system is that they suffer from single points of failure. If an application on a centralised system goes down and there are no backups, you would suffer severe downtime and potentially lose data that is critical to your business. DApps run on a decentralised block chain and make use of data that is scattered across all users of Ethereum. The data is encrypted so it is not viewable to everyone but everyone can validate and verify the integrity of the data and the transaction.
There are many DApps that have been developed already, from online gambling to prediction markets. Some social platforms also run on top of Ethereum.
Smart contracts are an important part of how Ethereum works. Contracts are created by users and these have rules and triggers. The contract executes when a trigger occurs as long as all the rules have been adhered to.
The Decentralized Autonomous Organisation (DAO) was a smart contract that supported a decentralised venture capital fund with the objective of providing funding for all the future DApp development. People investing in DAO could decide (via voting) which DApps got funding and which didn’t. The DAO turned out to be a huge success, accumulating around $150 million worth of ETH. However, the DAO was hacked. Most people in the Ethereum community decided to hold the money taken by the hacker and return all the money to those that invested in the DAO. There was another group that disagreed with this since it went against the philosophy of a blockchain being “immutable” or unchangeable and should not be changed by the users.
The code was forked and the blockchain was reset. The individuals in the Ethereum community that were against “rewinding” what the hacker had done broke away and formed Ethereum Classic.
Ethereum has seen excellent growth playing second to Bitcoin (at time of writing) in terms of market capitalisation. Interestingly, there is no limit on the Ether coin supply.
Pros
- Lower transaction fees than Bitcoin
- Faster transaction times than Bitcoin
- Allows the creation of decentralised apps (DApps)
- Can be used to create new cryptocurrencies which means they will have a dependency on the Ether platform
- Pioneered the concept of smart contracts on the blockchain
Cons
- Network congestion can cause a delay in the processing of transactions
- There are other blockchain development platforms out there that are starting to compete with Ethereum