BC Gateways Decrypts: the Ethereum ecosystem

Updated: May 31, 2019

A blockchain pioneer

This edition of BC Gateways Decrypts takes a closer look at the Ethereum ecosystem. As interest in blockchain and cryptocurrencies soared in the past few years, Ethereum established itself as the one-stop shop for early adopters of the technology.

With its own programming language Solidity, the Ethereum platform marked the introduction of a more accessible market for developers. As a result, it took blockchain technology far beyond the financial transaction use case and created a new world of innovative decentralised applications supported by smart contracts and custom tokens.

Ethereum origin story

The idea for Ethereum was first proposed by Vitalik Buterin in 2013, then 19 years old, and it quickly caught on as the platform proposed unprecedented capabilities to blockchain developers. After its 2014 crowd sale during which the Ethereum Foundation sold 60 million tokens, the platform was launched in 2015 and quickly gained traction in the crypto community as it democratised access to blockchain projects and custom token creation for both fundraising purposes and in-app capabilities.

Both the platform and its native Ether token saw massive buy-in in 2017 when interest in cryptocurrencies surged and the Initial Coin Offering (ICO) market was booming. At the time, there was talk and anticipation of The Flippening: the possible event when Ethereum would overtake bitcoin to become the most valuable cryptocurrency in terms of market cap and most actively used blockchain.

Yet despite the absence of the flip, Ethereum remains a pioneer in the blockchain space as the world’s first complete blockchain development platform due to its mass adoption and Turing-complete capabilities.

This is signified by the creation and operations of the Enterprise Ethereum Alliance, the industry’s first global standards organisation which aims to deliver standards-based architecture and specification to accelerate adoption of Ethereum. The organisation’s members include JP Morgan, BNY Mellon, Banco Santander, Accenture, Consensys AG, Microsoft, Samsung, and the CME Group.

How Ether works

The Ethereum ecosystem is fuelled by its native Ether token which functions both to make transactions and to facilitate network operations, which is when the token is referred to as ‘gas’.

ETH currently still operates on a Proof of Work (PoW) consensus algorithm which provides mining rewards similar to bitcoin. However, Vitalik Buterin and his development team have been working towards switching to a Proof of Stake (PoS) model. Compared to PoW, the PoS model is more energy efficient and further limits the possibility of a 51% attack on the Ethereum network.

Ether does not have a hard cap, but it is expected that the switch to PoS combined with more dApps and transactions on the network, will result in a burn rate that matches the generation rate. Effectively creating a soft cap by reaching an equilibrium.

Smart contracts as the building blocks

Smart contracts are self-executing contracts with the terms of agreement written into lines of code. They are perhaps better understood as programmes that execute actions once pre-set conditions are met, with the code contained across a distributed blockchain network using cryptography to protect the contents of the contract from being corrupted.

Ethereum did not invent the smart contract construct, Nick Szabo was the first to propose it in 1994. But the market wide take-up of the technology is largely accredited to the Ethereum platform as it allowed more developers to programme their own smart contracts supporting a much broader set of computational instructions.

Smart contracts enable trustless transactions to be conducted between disparate parties without relying on a central authority or external third party to effect or enforce the transaction. As such, smart contracts are the building blocks for decentralised applications.

What are decentralised applications?

Many of the applications available today that act as a third party to connect users with providers, such as AirBnb and Uber, can be built in a decentralised manner with Ethereum using smart contracts. Decentralisation makes transactions trustless by cutting out the middlemen and thereby eliminating single points of failure. External attacks or internal collusion is simply rendered impractical.

To illustrate the effect, hacking a centralised crypto exchange is like a bank robbery with a single honeypot holding all the funds whereas hacking a decentralised exchange is more like random pickpocketing – there is no major single point to exploit.

Decentralised applications have a wide range of use cases with active projects such as:

  • Identity: Decentralised identity management systems like uPort give users full control over their own data and grant access on their own terms. There is no centralised server that in anyway owns the data or can get hacked.

  • Computing power: Similar to renting out unused rooms on AirBnb, idle computing power can be rented out to other users through applications such as Golem.

  • Storage: Applications such as Storj provide decentralised cloud storage systems using end-to-end encryption for data contained across a distributed network of users, offering a more secure version of digital storage and data retrieval platforms such as Dropbox.

  • Social media: decentralised social media platforms have no centralised server or single party that has complete control over the content. Projects advocating freedom of speech rights such as Akasha are using the technology to provide platforms resistant to censorship. Another way these platforms benefit is by creating financial reward mechanisms driven by the community, such as the content publishing platform Steemit.

Essentially, Ethereum acts as Apple’s App Store or Google’s Play Store but it is very different in one crucial way: Google has control over what gets added to the store, Ethereum as a decentralised platform does not.

And just as some mobile game apps issue their own in-game coins for buying extra features or upgrades, developers of decentralised applications can create their own custom token on top of Ethereum for in-app use.

Custom ERC20 tokens

Anyone can create custom tokens based on Ethereum, following the ERC20 standard which describes a set of standard functions a token contract can implement. Essentially, ERC20 tokens are a subset of Ethereum tokens, and if compliant with the standard allow for seamless interaction with other smart contracts and decentralised applications on the Ethereum blockchain.

In terms of their utility, these custom tokens can be used to represent physical assets, gain access to a service or pay for in-app fees. Other properties such as a hard cap, constant inflation rate or supply determined by a monetary policy can all be tweaked to fit the intended use for the tokens.

The democratisation of tokenisation was one of the biggest driving forces that launched Ethereum into mainstream adoption with most of the Initial Coin Offerings (ICOs) during 2017 and 2018 promoting ERC20 tokens.

Some of the most successful Ethereum-based tokens in terms of market cap include Binance Coin (BNB), Maker (MKR), OmiseGO (OMG) 0x (ZRX) Basic Attention Token (BAT), Golem (GNT) and Augur (REP).

The utilities for these coins range from paying for transaction fees on an exchange, gaining access to a service such as stablecoin creation, and gaining voting rights for making community-powered business logic decisions.

Ethereum today

As popularity and adoption of the platform increased, the network has been facing scalability and latency issues. The challenges have long been acknowledged by Vitalik Buterin and other developers who are currently working on two major upgrades: the Raiden Network which is expected to reduce latency, and the Plasma upgrade which according to the whitepaper could boost the performance of Ethereum to support potentially billions of transactions per second.

While other blockchain development platforms have emerged, Ethereum is still considered one of the most reliable platforms. It is a reputation founded in legacy, having accelerated global innovative change by democratising access to the world of blockchain development to the point where creating decentralised applications and custom native tokens became accessible to everyone.