Everything You Need to Know About Ethereum

  • 2021-05-19

On 17 April, NSA whistleblower Edward Snowden officially added ‘artist’ to his multifaceted resume when sold an artwork that he created for $ 5.4 million. This transaction was made possible by Ethereum, the blockchain based technology that is taking over the cryptocurrency world.

Most people have at least heard of Bitcoin by now, even if they are not familiar with the world of cryptocurrency. Ethereum works on a similar principle—it is a decentralized blockchain technology that removes the middleman out of the equation. What this means is that financial transactions can be conducted directly between individuals or parties without the need of banks and other similar financial institutions. Banks basically play the role of a trusted, centralized third party. Each time you conduct a transaction through your bank account, the bank does the job of validating your identity as a financial player, while also recording that particular transaction, to store it in a centralized ledger for future reference. This is how a record is maintained of how much money you have, and where it is going. Note that the bank is simply another institution, and your choice to authorize them to handle financial transactions in turn gives them credibility, to make them a trusted third party. And for this, banks charge you, even as they take control of your money.

Blockchain technologies subtract the need for this third party. Each transaction is recorded into code, and the ledger is essentially an open-source program. The ledger, moreover, is distributed across the entire chain (spread out over computers worldwide), so that no single party (like a bank) has exclusive access to it. This also makes it a more trustworthy operation, given that no one, not even you, can fake a transaction or tamper with the ledger. And this is why it entirely eliminates the need for a third party to validate the players in a financial transaction. It’s a win-win situation.

A Brief History of Ethereum

At the time that Ethereum was created, cryptocurrency was already an established player in the financial market. Ethereum was conceptualized by 19 yr old Canadian-Russian programmer, Vitalik Buterin, to address some of the loopholes in Bitcoin, which was the only major cryptocurrency at the time. Buterin recognized that computer code could be used to do so much more than what Bitcoin was doing. Buterin imagined/conceptualized a system in which the program code does not only simply record a transaction between X and Y, but also gives the power to customize and generate specific types of contracts (or financial agreements) between the two parties. This is extra information, which in turn creates and controls value itself. This is something that the BItcoin blockchain cannot do—all it does is to record the transaction between X and Y, thereby qualifying the variable which it will then use to authorize further transactions from that wallet.

The uses of ethereum far extend those of a simple cryptocurrency like bitcoin. Ethereum allows users to bypass digital networks that store data, transfer mortgages and keep track of complex financial instruments, for instance, allowing an value-driven transaction to stay between the parties involved in the transaction. This is what is called a smart contract, and it operates within the blockchain network, making it immutable and secure, just like a cryptocurrency.

One of the most popular kinds of transactions that Ethereum has made possible today, for instance, is the exchange of Non-fungible tokens (NFT). An NFT is a piece of data or information stored on the blockchain that identifies an asset to be unique. So, for instance, if you created a piece of art, and translated it into an NFT, you can sell it to anyone digitally without fear of it ever being plagiarized. The NFT’s function here would be to ascertain the artwork’s originality without doubt, and therefore keep its essential value.

 

ERC20 Tokens:

Tokens is the name given for the kind of digital assets that one can own and exchange within the blockchain system. Each token basically represents an asset that can range from tangible objects in the real world (commodities like sneakers, paintings), to fully virtual entities like a piece of music or a voucher, or even financial documents like IOUs.

While Ether is the Ethereum equivalent of a Bitcoin, and can be used as digital currency, another kind of token, the ERC20 is perhaps most crucial to the Ethereum blockchain, and central to understanding how this multifaceted blockchain works. The ERC20 runs on the Ethereum blockchain. In appearance, it is similar to cryptocurrencies like Bitcoin. Technically, however, it is a protocol and not a straightforward digital currency (which is basically comparable to money). What the ERC20 does is specify a set of standards that all ethereum-based tokens must ideally follow, to be credible and suitable enough to exchange value with. So the ERC20 is more like a meta-token, in that sense, kind of like a hallmark that identifies any Ethereum token as viable. Considering that the Ethereum blockchain makes countless unique types of transactions possible, the ERC20 is vital to an efficient transaction within this blockchain network. The ERC20 standard is also what allows Ethereum transactions to integrate with other wallets, contracts and even the mainstream market.

It is similar to cryptocurrency like Bitcoin in the sense that it holds value, given its essential functions (like validation).

 

ICO: Digital Crowdfunding is the Future of the Market

We have extensively discussed how cryptocurrencies are gaining ground as functional alternatives to the cash-run financial market, but how do these digital currencies really fit into the stock market?

Companies enter the stock market by issuing public shares, to attract public funding from investors. To do this, a company lists its securities in a public exchange, and potential investors can examine them and make a decision. This is now the standard strategy followed by companies to attract capital for growth and operations. A company’s first offering of its shares is done through a stock market launch or IPO (Initial Public Offering), which is scripted and handled by investment banks. This process allows the monetization of the company’s assets, so that its investors (who will become shareholders after purchasing shares) are able to use their investments to easily trade.

An ICO or Initial Coin Offering is the cryptocurrency industry’s equivalent of the IPO. A digital-based company looking to create a new service, application or currency can launch an ICO to attract investment. In simple terms, it is what a digital startup employing blockchain technology can offer to investors for the purpose of fundraising. Note that ICOs are based on the premise of some returns on investments, unlike crowdfunding campaigns.

The development and public launch of Ethereum was made possible by ICO. Since 2017, moreover, several ICOs have taken the crypto community by storm and raised billions for a variety of blockchain-based projects. ICO distributions typically (but not always) follow ERC20 standards. Consequently, the majority of ICOs have been conducted on the Ethereum network.

Decentralization: A Vision of the Future

Ethereum is a progressive and highly dynamic blockchain network with its own protocols and program codes, which open up endless possibilities for the transaction of value. What we are looking at here is the possibility of transcending the tyranny of currency exchange itself! And welcome newer and more personalized ways of exchange between people.

Cover image by Nick Chong

 

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