What is Ethereum (Smart Contracts)?

What is Ethereum (Smart Contracts)

Ethereum is a decentralized, blockchain-based cryptocurrency platform created by Vitalik Buterin. Currently, it is second only to Bitcoin in terms of market capitalization.

He redefined much of the crypto industry with the introduction of smart contracts. The best way to understand Ethereum is to first compare it to Bitcoin.

Ethereum vs Bitcoin

Ethereum vs Bitcoin

Although Ethereum and Bitcoin share many similarities, ultimately these are two separate projects with different goals.

However, let's first examine the characteristics they have in common. Both are decentralized systems, which means that there is no single entity that controls them.

Instead, their systems run on a global network of computers provided by volunteer participants called About (nodes). In other words, both rely on blockchain technology to record data or transactions in a safe and public manner.

However, their differences become apparent in terms of the long-term goals each has for this technology.

Bitcoin is the first cryptocurrency or money transfer system registered in a distributed public ledger, while Ethereum is a cross-functional platform.

While it has its own digital currency, Ether (ETH), this is just one component of its overall system. Ethereum has significantly expanded Bitcoin's core technology to provide a network that allows for the creation and deployment of other decentralized applications (DApps).

These applications can be entirely new concepts or new versions of existing ones. For example, decentralized finance or DeFi is one of the most popular fields currently being developed on the Ethereum network.

These are traditional financial services reinvented and rebuilt without the need for third-party intermediaries. Imagine being able to lend or borrow money on a global scale, but without a bank or business receiving a large percentage of the fees.

Instead, all interest generated and transaction fees go straight to the creditors. It is a true peer-to-peer system in which all interaction takes place directly between users.

Even if we only compare the cryptocurrency component of Ethereum with Bitcoin, there are still some significant differences. The maximum total supply of bitcoins is limited to 21 million.

Ether, on the other hand, has no limit. Ethereum also aims to have its blocks mined at an average of 12 seconds per block, much faster than the 10 minutes Bitcoin takes.

Finally, bitcoin mining consumes a lot more resources, requiring custom dedicated machines that few can afford. In contrast, it is much easier for the general public to participate in ETH mining, thus encouraging more decentralization.

Ethereum: What are Smart Contracts?

What are Smart Contracts

Smart contracts are the unique new feature introduced by Ethereum that has become a catalyst for the development of countless new decentralized applications. Like their physical counterparts, these can be understood as binding agreements between two parties.

However, in the physical world, signing a contract does not guarantee the expected result. In fact, contracts are broken or ignored all the time. These paper documents are often mere impediments, the strength of which depends on the enforcement capacity of the legal and governmental institutions that support them.

A smart contract doesn't have these weaknesses. It is represented by computer code that runs exactly as intended on the Ethereum blockchain.

Once deployed, it is automatic and cannot be censored or tampered with. It facilitates transactions or exchanges of money, data, content or anything of value.

Smart contracts are autonomouss, which means your code is designed to perform specific actions once certain conditions are met.

Let's illustrate the power of smart contracts with a simple example.

Imagine you want to buy a digital book from someone on the other side of the world. Your main problem will be trust. If you transfer the money to that person first, what guarantee do you have that the seller will actually ship the product to you? On the other hand, the seller also runs the risk of not receiving any payment if they ship the book first.

A solution is a trusted intermediary or escrow service that withholds payment and releases it only after proof that the product has been delivered. Obviously, the escrow company will likely charge fees in exchange for their services.

However, even in this situation, you must still trust and expect the intermediary to act in good faith, as he, too, can choose to keep your money and run away.

Employing a smart contract on the Ethereum network eliminates all these worries. A code that automatically sends you a copy of the book once a certain amount of funds has been transferred to a target account is a much more effective solution.

Aside from the buyer and seller, no additional parts are required, no extra fees are charged, and everything happens automatically with verifiable public transaction records ​​no blockchain.

Developers can leverage these smart contracts to build far more complex applications, limited only by their imagination. All these new services would share the characteristics of decentralization, automation and transparency and that is exactly what is happening with the current one. DeFi.

All different types of traditional financial and banking services are being recreated on the Ethereum network with the use of smart contracts. However, the financial sector is not the only sector that can be decentralized. Voting systems, social networks and even games have the potential to be revolutionized.

Ethereum: Disadvantages of ETH

While it is very promising, Ethereum's smart contract feature has a potential critical flaw, human error. The uneditable code of a smart contract is only as good as the person who wrote it.

If a mistake has been made or an oversight has left an exploitable bug, it's only a matter of time before a malicious agent takes advantage of it. Once they do, there's practically nothing that can be done to reverse the damage.

Of course, a new and improved version of the contract can be written, but any transactions that took place using the previous contract have already been recorded and made permanent in the blockchain.

The only way to change that would be through a general consensus to roll back the transaction and rewrite the underlying code, a move that goes against the core philosophy of a ledger immutable.

Whenever these mistakes happen, and they certainly did, trust in the Ethereum network erodes and the value of ETH drops significantly. Despite this, this exciting field is still young and has so far managed to bounce back and regain investor confidence several times.

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