Ethereum

Ethereum is Bitcoin’s biggest competitor and the second biggest cryptocurrency. This cryptocurrency is also an open source software and use Blockchain technology like Bitcoin. bitcoin and ethereum

Development of Ethereum

A Russian-canadian programmer Vitalik Butterin proposed the idea of Ethereum in his white paper in 2013. He came up with the idea of Ehereum when he was working on Bitcoin magazine as he saw the potential of extending Bitcoin Blockchain to accomplish more than just a digital payment system.
Ethereum was merged with the idea of:
1. Smart contract
2. Decentralized automatic organizations (DAO)
3. Decentralized applications (DAPP)
It is considered an open source worldwide computer with its own programming language Solidity allowing developers to build literally anything. Solidity is used to build smart contracts which are explained next.

You can explore ethereum/learn solidity by going to Ethereum Official wesbsite

Smart Contract

Smart contracts are piece of code and this code comprises of “if” statements. These "if" statements wait for an action to be triggered to do certain tasks.
If {something happens} {
Do this
}
It can be considered a translation of a written contract into code. These contracts can replace the traditional system of doing businesses by executing everything on their own.

Example of a real smart contract

Smart contract explained

If someone wants to rent an apartment, the smart contract is programmed in a way that

if {one pays a certain amount of money under a certain period} {
should be provided with a digital key,
}
if {the key is not provided} {
then refund the money
}
or
if {money is not paid} {
than do not provide the digital key

}

The example explained does not show the actual code written in solidity but provides a general explanation how smart contract is coded with if statements to execute functions by the trigger of an action.
Another good example will be buying a car using a smart contract. If a car is bought in a traditional way then it takes a lot of time. First of all, the buyer will have to go the person who is selling the car. Then both have to agree on a price. After that in some way the buyer has to pay and then a lot of paper work needs to be done. While using a smart contract a buyer will see a car and pay the price in cryptocurrency and instantly has the ownership as the automated code will do everything for the buyer and seller. They do not have to go anywhere or trust each other. The transaction will be updated on the public ledger. Now everybody is aware that car has been sold and the buyer now has the ownership of the car.

Benefits of smart contract

This technology cuts the cost and hassle of middleman allowing parties to directly perform the transaction.
Smart contract works with Blockchain. Therefore, the transactions are on a public ledger so no one can cheat.
Parties do not have to trust each other as the trust is put in the smart contract technology. All the documents are on shared ledger and encrypted. As all the nodes on the network has a copy or record of the documents so there is no chance of saying someone has lost it.
Since, all the documents are on all the network nodes. It ensures that there is a strong backup of the documents.
All the documents are encrypted. An extremely smart hacker would be able to hack all the nodes of system and it will require a great effort to do so. Therefore, chances of hacking are very less.
Smart contracts provide speedy and efficient way of doing business. Everything is automated and coded. There is no need of manual entries of data saving time and energy.
Human make errors during manual entries and processing of documents but smart contracts ensure accuracy as systems do not make mistakes unless humans make bugs in the code.

Decentralized autonomous organization (DAO)

An Ethereum application that represents a virtual organization is called DAO. Initially these DAOs were built to raise funds. A person can make their own DAO on their Ethereum wallet by deploying smart contract and invite other people to participate. This is how a virtual entity can be built to do certain business by organizers. The nature of the governance in such organizations is dependent on the organizer what they want to govern.

Decentralized applications (DAPPs)

DAPPs are decentralized applications made to manage digital assets and DAOs without a centralized authority. For instance, if an example of rental services and apps is considered, these apps can replace rental services such as Airbnb, Uber and Lyft. The issues with the apps of these services are:

A trusted third party is needed.
These applications require user information affecting user’s privacy.
Security is a big issue.

DAPPs solves these issues by using smart contracts. For example, a tangible object can be rented using a DAPP. If client requests to rent an object, required funds will be transferred to smart contract and when the duration of rent expires, the rental object is assigned back to the owner, charges are calculated and sent to the owner and if there is any money remaining, it is sent back to the renter. Everything is managed by the smart contract autonomously. Users are identified by their public keys in this system.

Difference between Bitcoin and Ethereum

Bitcoin	Ethereum
Bitcoin Blockchain is called “Blockchain”	Ethereum Blockchain is called “Ethereum” and is a different protocol to Bitcoin
Bitcoin cryptocurrency is called Bitcoin	Ethereum has a different cryptocurrency called “Ether”
Bitcoin drives on “Proof of work”	Ethereum currently works on proof of work but due to electricity cost of mining, Ethereum is planned to move to Proof of stake. Proof of stake means that the creator of next block is chosen on the basis of wealth or stake. There is no reward for block but a transaction fee is paid.
The founder of Bitcoin named as Satoshi Nakamoto is unknown	Ethereum’ founder and other real people who run the cryptocurrency are known. Therefore, they can be accessed to talk about Ethereum.
Bitcoin just replaces a traditional payment system	Ethereum has smart contract that has a lot of real world applications
Bitcoin is considered a gold currency as it is a good source of storing value.	Ethereum is not considered for storing value but for its decentralized applications and smart contracts.
Bitcoin is not scalable because of its size	Ethereum is a platform that developers can use to build other decentralized applications
No Bitcoins are needed to mine	Ether is needed to run the smart contract

Proof of stake

In proof of stake the creator of the next block is chosen by the algorithm or protocol on based of their wealth or stake.

HISTORY OF POS

The idea of POS was presented in 2011 on “bitcointalk” forum and Peercoin was the first currency to use POS in 2012.

WHY POS?

The proof of work consensus requires a lot of energy. The electricity consumed by one bitcoin transaction is equal to powering 1.57 American households for a day. A research shows that it is estimated by researchers that by 2020 bitcoin transactions will consume the same amount of electricity as Denmark. Therefore, POS is considered a better, environment friendly and cheaper way of verifying transactions as compare to proof of work.

ETHEREUM’S PROOF OF STAKE

Ethereum is expected to move from proof of work to proof of stake in 2017 by doing a hard fork. The creator of the block in an Ethereum POS is called forger/validator. There is no reward for creating a block however the validator will get a transaction fee.

HOW FORGERS WILL BE SELECTED IN ETHEREUM PROOF OF STAKE?

The POS protocol of Ethereum is called Casper. On the implementation of Casper, a validator pool will be created. Anyone can join the validator pool who wants to be a forger. The forger or validator will have to make a deposit to participate. To increase the security of the system the Casper ensures if a validator makes an invalid block they will lose their deposit they made and will no longer be part of the validator pool. In this way, they will be losing more than gaining making deception worthless .

Author

Iqra Bakhtiyaar

Contact me

IB279@live.mdx.ac.uk

Supervisor

Prof. Raja Nagarajan