What is Ethereum?
Ethereum is a decentralised smart contract platform. Like Bitcoin, the Ethereum network has a token (Ether), a blockchain, nodes and miners. However, unlike Bitcoin the blockchain maintains consensus for a ‘virtual computer’ dubbed the EVM (Ethereum Virtual Machine). Distributed Smart contracts can be created and deployed on the EVM.
What’s an Ether?
Ether is the native token on the Ethereum network. There are around 100 million ether on the network today and the token is used to incentivise miners to run their mining hardware (That helps keep the network decentralised).
The current inflation rate of Ether is around 10% a year but this is looking to go down to 1-2% with future network upgrades. To date, no hard cap has been placed on the Ether supply.
What can an Ether token be used for?
Ether tokens can be used for payments between users like Bitcoin, but it also can be used to power smart contracts. When running a smart contract, the Ether is turned into ‘gas’, to then power a smart contract on the EVM.
Think of this gas in the same way as gasoline you put in your car – you need a different amount of gas depending on how long your journey is or based on what type of road you are driving on. Smart contracts on the Ethereum EVM work in very much the same way.
Where did Ethereum come from?
The Ethereum network was proposed back in late 2013 by a developer named Vitalik Buterin. Initially, Vitalik wanted to run Ethereum on the Bitcoin blockchain but his proposals were rejected from the core developers and other influential members of the Bitcoin community.
Vitalik and other supporters then planned to build their own blockchain and conducted a crowd sale in late 2014 to fund the development costs. At the time of the crowd sale, they offered 2000 Ether for each Bitcoin contributed. In July 2015 the Ethereum blockchain and the network was launched.
What is a Smart Contract again?
Smart contract was a term originally coined by Nick Szabo back in 1994. Smart contracts are hard-coded, rules-based contracts enforced solely by code. Smart contracts can be public, which opens up the ability to prove functionality (eg self-contained provably fair gambling).
They typically have tokens to reward users for providing computing power or staking something towards the network. Today many dApps run on the Ethereum blockchain and you can monitor the transaction volume and popularity of these applications on a number of block scanners specifically for this ecosystem, stateofthedapps.com for example.
ERC20: The ERC stand for Ethereum Request for Comment and the 20 was the name of the standard proposed. This basic smart contract running on top of the EVM allows you to create a tradable token that can be sent and received between Ethereum wallets. Its most popular use case is to launch ICOs.
ICOs on Ethereum: By far the most common use of the Ethereum network has been running an ICO (Initial Coin Offering). It’s very simple to create and deploy an ICO on the Ethereum network using the ERC20 smart contract standard. Any project can quickly decide on their own ‘token economics’ and launch a funding campaign to raise funds in Ether that will be swapped in the ICO contract for a share of the project’s tokens.
Token economics: This relates to the supply, distribution, lock periods and other features of the token. However, as the token is hosted on the Ethereum network the project does not need to be concerned by other aspects of a native blockchain like running nodes or mining the blockchain.