When Bitcoin went live in January of 2009, it seemed that the peer-to-peer payment system had grasped the full potential of blockchain. After all, for the first time, Bitcoin allowed for a decentralized payment system free from any third party interference or control. It was only a short four years later (in 2013) however, when the young Vitalik Buterin proposed the Ethereum project in its whitepaper.
Ethereum, unlike Bitcoin, strived to broaden the scope of what a blockchain could be used for. The core component of Ethereum, that made such a feat possible, was the fact that Ethereum was considered “Turing-Complete”. Unlike Bitcoin, Ethereum was developed with its own fully functioning programming language (solidity). As such, Ethereum as a decentralized system allows programmers to write code and commands into the Ethereum blockchain. This in turn allowed for the creation of applications on top of the Ethereum blockchain.
{See Bitcoin and Ethereum Compared}
The second core component of Ethereum that goes along with its Turing-Completeness is that one can also program in smart contract to execute commands automatically. As explained in some of the literature on Blockchain, Smart Contracts are exceptional, insofar as they provide 1) Autonomy, 2) Self-Sufficiency, and 3) Decentralization. What this means is that Smart Contracts function without any external agent, they execute what they are programmed to execute, and they are registered and recorded on the blockchain throughout the duration of their existence.
Ultimately, then one could say that Ethereum is a decentralized platform for building applications on the blockchain, and to program applications with the use of smart contracts. That at least, was the original vision. Where, however, is Ethereum today: 5 years since the publication of the whitepaper? Has much changed? What is the future outlook of Ethereum?
The DAO and the Hardfork:
Perhaps the first major innovation involving Ethereum, and also the larger Digital Currency space, began in 2015 with the launch of the Ethereum blockchain. Thanks to the open source nature of the project, any programmer capable of learning Solidity, could program applications and smart contracts on top of the Ethereum platform. While this opened a world of new blockchain solutions, it also came at a cost.
In May of 2016, the DAO was announced by members of the Ethereum community. DAO, standing for Decentralized Autonomous Organization, was a semi-decentralized application built on top of the Ethereum blockchain for the use of venture capital. The basic idea was this: Ethereum owners could send their Ethereum to the DAO in exchange for DAO tokens. The DAO tokens in turn, gave voting rights to decide where the funds in the DAO should be spent. Thus the DAO originally began as a kind of investors’ pool for new blockchain projects – those who invested would be able to help create new applications and eco-systems while also profiting from them. Near it’s peak, the DAO held close to 250 million dollars.
Shortly after the launch of the DAO however (June 2016), members of Ethereum became aware of an ongoing hack of the DAO. The hacker was able to successfully steal over 80 million dollars through manipulating a hole in the DAO programming.
As a consequence of this hack, the Ethereum community voted to hardfork the Ethereum blockchain. By splitting Ethereum into a new chain – Ethereum, from its old chain – Ethereum Classic, members of the community would be able to get a refund for the stolen money, and limit the hacker’s ability to spend his stolen tokens. Thus, what many consider to be Ethereum today, in 2018, is in fact the result of the hard-fork, from back in 2016.
The Rise of the ERC-20 Tokens:
Since the Ethereum hard-fork in the summer of 2016, new and better opportunities have come to the Ethereum blockchain. Inspired by the open source nature of the project, many eager developers and project managers decided to create and launch their own tokens on top of the Ethereum blockchain. ERC-20 tokens (Ethereum Request for Comment #20) concern the smart contracts that tokens on the Ethereum blockchain use to store value and move between addresses.
The original price rise of Ethereum and the subsequent creation of hundreds of utility tokens on the Ethereum blockchain began in late 2016 and into 2017. This phase led to the creation of projects like Bancor, EOS, VeChain, UnikoinGold and Ambrosus. While many projects begin on the Ethereum protocol, they often migrate onto their own blockchain over time.
Nevertheless, the usage of the Ethereum platform, much more so than the usage of Bitcoin, has contributed to the spectacular popularity of cryptocurrencies, as well as well over a hundred different types of decentralized applications and eco-systems built through Ethereum and with the use of smart contracts.
Casper Protocol and the Sharding Solution
Finally, we come to the most recent changes that the Ethereum network will be undergoing. While Casper and Sharding may appear to be large and complicated words, they can be explained relatively simply:
When the Ethereum blockchain began onboarding applications and new tokens, it used a Proof of Work consensus mechanism similar to Bitcoin. What this ultimately meant, was that in order for a transaction to be processed, consensus had to be achieved by all of the various miners on the network. While this remained secure, as more and more people began to use the Ethereum network, long transaction times became a problem: After all, if more and more people are waiting for every single miner to reach a consensus about what happened on the blockchain, then it takes more and more time, to validate everyone’s transaction. Thus, the problem that Ethereum has run into concerns its ability to scale.
While the solution to the Ethereum scaling problem is quite complicated, the basic answer to the problem is twofold: Firstly, Ethereum will switch from a Proof of Work consensus mechanism, to a Proof of Stake mechanism. This as proposed by Vlad Zamfir, is known as Ethereum’s Casper Protocol. Slightly different from normal Proof of Stake, Casper protocol will also have a penalty function built into it, where those who default on their duty to secure the blockchain will be punished.
Secondly, with a Proof of Stake system in place, the Ethereum blockchain will be able to begin to shard the transactions on their network. Ultimately, what this means is that the way the data on the blockchain will be stored will be altered, to allow for a more compact and easy manner of consensus between nodes.
All in all, the ultimate goal of the Casper Protocol and the Sharding Solution concerns Ethereum’s ability to scale: by switching to a Proof of Stake consensus mechanism, the Ethereum blockchain will be able to process many more transactions per second. This in turn, will lead to increased network usage, and quite possibly a rise in the cost of Ether (as more people will be using it). While this should not be taken as investment advice, it should be taken to be a positive outlook for the future of Ethereum. After overcoming a hack, a hardfork, and the mid-2017 crypto boom, Ethereum stands at a pivotal point in their project’s development. Should Ethereum prove capable of scaling through the Casper Protocol and the Sharding Solution, the future of Cryptocurrency will undoubtedly involve Ethereum as a bedrock of decentralized applications and smart contracts.
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