Decentralization of value is the potential of users to access to financial solutions and take control of their economy. One of the most significant aspects of Ethereum is the network’s ability to build decentralized services on top of its structure to make this possible. To delve deeper into this decentralization of value, it is very important that we can understand the basic fundamentals about the Ethereum network, its characteristics and its disruptive potential. What is value decentralization?
Origin of Ethereum What is value decentralization?
In 2008, an unknown developer (or group of developers) published the Bitcoin whitepaper under the pseudonym Satoshi Nakamoto. This event would irreversibly transform the digital currency ecosystem. A few years later, in 2013, a young programmer named Vitalik Buterin conceived a way to further develop the idea of decentralization and translate it to any type of application. Buterin was an active programmer and member of the crypto community who was convinced that Bitcoin needed a programming language to develop applications on top of the blockchain. Vitalik would describe the idea of a Turing-complete blockchain – a decentralized computer that, given enough resources and time, could run any type of application.
As his proposal to modify Bitcoin was not adopted, Vitalik decided to create a new platform. In 2014 he announced the Ethereum project and soon after began development together with four other people, with whom he created a foundation in Switzerland. The main objective of this working group was to build a system that would allow the creation of programmable smart contracts that upon an input order would return an output order, and that being written on the blockchain would be immutable, i.e. they could not be modified. Ethereum aims to expand the limits of blockchain technology to the maximum, beyond the design limitations of Bitcoin. This development provided the necessary elements for the creation of decentralized applications, also known as DApps. What is value decentralization?
How did Ethereum get funded?
Ethereum launched an ICO (Initial Coin Offering) or online public crowdsale in 2014. In this ICO users could buy the Ethereum token (Ether) at a very low price and, if the project worked, make a profit. Ethereum raised $18 million and, not only did it raise the necessary funds to continue its development, but it also made possible a wide variety of projects that adopted this form of financing.
In 2015, the first Ethereum block was mined in just 20 seconds, as opposed to the 10 minutes it takes to mine a Bitcoin block. Another big difference is that while Bitcoin’s fees and issuance rules do not change, Ethereum’s are flexible and can vary according to the needs of the network.
Differences between Bitcoin and Ethereum networks
Bitcoin has been the pioneer in introducing a number of key innovations that enable the coordination of users across the world, without the need for a central representative, relying on blockchain technology and financial incentives. Bitcoin allows users to agree on the status of a database in a decentralized environment without intermediaries.
Bitcoin is often referred to as a first-generation blockchain, as it was not created as an overly complex system, and that is one of its strengths in terms of security. Bitcoin has been kept inflexible in a systematic way, thus prioritizing security in its base layer. However, this also means that in Bitcoin, the smart contract language is limited in an extreme way.
The Bitcoin network is very secure and reliable, but leaving aside transactions and BTC as a store of value, it is not suited to smart contract applications. Second generation blockchains, on the other hand, are capable of much more. In addition to financial transactions, such platforms allow for a greater degree of programmability. Ethereum gives developers much more freedom to experiment with their own code and create decentralized applications (Dapps). These fundamental differences divide the waters over both projects and their potential to scale. While Bitcoin advocates argue that it is more robust, Ethereum enthusiasts point to its limited ability to add new services beyond the transfer of value.
Ethereum was the first second-generation blockchain, and to this day remains the most prominent.
How does Ethereum work?
At all times, users have at their disposal a snapshot of all account balances and smart contracts. Certain actions (e.g. transactions) will trigger a status update, meaning that all nodes will update this snapshot to reflect the change. Smart contracts running on Ethereum are triggered by transactions (sent by users or other contracts). When a user submits a transaction to a contract, each node in the network executes the code for that contract and records the output. This is done using the Ethereum Virtual Machine (EVM), which converts the smart contracts into instructions that the computer can interpret.
Ethereum tokens are created from mined blocks, similar to Bitcoin. For each mined block, the network creates 2 ETH which it gives to miners in the form of remuneration. Mining is used to update the status. Mining is carried out using a Proof of Work (POW) algorithm, very similar to Bitcoin. Mining is the technology that makes decentralized record keeping possible. Ethereum’s mining process is very similar to Bitcoin’s. Miners compete to solve a mathematical puzzle that, if correct, will allow the block to be validated, added to the blockchain and transmitted to the rest of the network. If the miner finds a solution to the problem, he or she will be awarded the reward in ETH and the block will be transmitted across the network for each node to add to its own copy of the record.
The validation time for a block in Ethereum is between 12 and 15 seconds. If miners manage to solve the puzzles faster or slower, automatically the algorithm resets the difficulty of the problem to bring miners back to the approximate solution time of 12 seconds.
Ethereum’s value proposition
As we have discussed above, Ethereum is capable of executing code through a distributed system. This implies that programs cannot be manipulated by external agents, but are added to the Ethereum blockchain and can be programmed so that the code is not modifiable. In addition, everyone can access the database, then users can audit the code before interacting with it. Anyone anywhere will have the ability to launch applications that cannot be disconnected from the network. ETH as a store of value, meanwhile, is the second most important cryptocurrency if market capitalization is taken into account. What is value decentralization?
Ethereum is considered one of the most outstanding crypto projects, given the possibilities it allows as a platform: by functioning as an online and decentralized digital computer, it enables the creation of a very wide range of distributed applications. In addition to a platform for value transfers, it is also a marketplace for financial services, video games, creation of other cryptocurrencies and much more. Prominent projects within the ecosystem such as DAI, USDC, TrueUSD and GUSD run on Ethereum technology. There are also games like Decentraland, Cryptokitties and Gods Unchained, pioneers in the creation of collectible digital assets or NFTs.
Decentralized finance (DeFi) has become crucial to the ecosystem and has multiplied the network’s profits. Decentralization allows the creation and maintenance of a network whose access is not filtered by any company, organization or government. This results in an ecosystem full of projects whose only filter to be approved and be able to function is public acceptance. Today, the Ethereum blockchain concentrates the largest number of innovations and searches for the creation of new services, and therefore occupies a leading role in the crypto world. Undoubtedly, it will continue to evolve by leaps and bounds as it has been doing so far, and more and better projects will emerge within the network. We will continue to deepen about Ethereum in the next Latamex articles. Don’t miss them!