The fundamentals of cryptocurrency Ethereum explained by Sia Partners

16 August 2017 7 min. read

Cryptocurrencies are not just booming but also diversifying, with today over 1,000 different currencies available in the marketplace. Nye Gordon, a Senior Consultant at Sia Partners, reflects on the rise and fundamentals of Ethereum, after Bitcoin one of the most known cryptocurrency variants.

What is Ethereum?

Ether, which is the cryptocurrency of Ethereum, functions as any other cryptocurrency. It can be used as an anonymous method of making purchases, being spent directly at any online store that accepts it, or it can be sold on an exchange and redeemed in another currency. Cryptocurrencies remain secure by utilising blockchain technology, through which an entire network of members validate each transaction. If any member tries to make a change to a block, everyone else can see where the change happened and decide whether to authorise it.

However, Ethereum is also a network of computers that can transmit data and support the execution of apps or programs. It is built on the same blockchain technology, but instead of just keeping track of payments, you can track computer programs. This is where Ethereum differs from current technology. 

The key difference between Ethereum and the way the internet works today, is that currently, apps and databases are stored on a single server, where, if that server or database is damaged, the data and the web page will be lost. With the blockchain technology that underpins Ethereum, the database is public and distributed across the network. Any machine connected to the network can be used to determine the result of a transaction. The result of this is that Ethereum’s DApps (distributed apps) cannot “go down” due to a single point of failure. With enough computers connected to the network, all DApps built on Ethereum will persist and remain secure, transparent and valid. 

The fundamentals of cryptocurrency Ethereum

How does Ethereum work?

Ethereum’s network differentiates from that of Bitcoin by utilising ‘Smart Contracts’. These smart contracts enable the distributed network by removing the need for a central authority for verification purposes. With these contracts executing what has been agreed to, the traditional role of a middleman is bypassed, and the opportunity for a peer-to-peer based network is clear. 

So, why is having apps built on a distributed platform so important?

  • No central point of failure – With no central authority, there is no vulnerability to DDoS (Distributed denial of service) attacks where a targeted system is flooded with traffic to gain access.
  • Highly reliable – Because the rules of Ethereum are so simple and secure, attackers, malfunctioning computers and even the person who made the app cannot break the rules they agreed to.
  • Cost effective – With no need for centralised servers or data warehouses, costs and fees can be reduced for services built on the Ethereum network.

What can Ethereum be used for?

At this point in time, it is hard to say what Ethereum will be used for, because it can be used for anything that you can write a computer program to do. At the date of writing this, Ether has a market cap of approximately $22 billion, 60% of the market cap of Bitcoin (around $44 billion), with a strong possibility of becoming the largest cryptocurrency over the coming months (an event coined the ‘The Flippening’ among the Ethereum community) as excitement about the technology increases. This excitement comes from the possibilities that Ethereum can provide. DApps can be created to provide a more secure, reliable version of a currently existing website, however the real innovation lies in decentralising existing services. For example, let’s take Uber’s business model:

Uber’s business model

The example above is just one of many where Ethereum’s technology could be applied. Some other examples include disruptive concepts that are already being realised on the Ethereum platform:

Aventus – Aventus is an Ethereum based economic model that eliminates uncontrolled resale and counterfeit tickets in the events industry. In the Aventus system, each ticket would have a unique identifier on the Ethereum blockchain, making counterfeits impossible, pushing down event management costs and enabling price controls on the resale of tickets. In a recent discussion with Alan Vey, one of the founding partners of Aventus, he told Sia Partners that: 

BitNation – The world’s first operational decentralised nation. BitNation provides the same services that traditional governments provide; identification, dispute resolution, insurance etc, but without requiring geographical borders. Since its founding in 2014, BitNation has performed marriages, created land titles and notarised birth certificates through Blockchain. 

Augur – Augur is a prediction market platform that rewards correctly predicted real world events. The accuracy of Augur’s predictions is built on the ‘Wisdom of the Crowd’, the concept that the average prediction of a group will be more accurate than that made by any individual in that group. Being based on a decentralised network, Augur offers users the possibility of creating your own markets, secure from reporting mistakes or outside manipulation.

Golem – Golem is a global, open sourced, decentralised computer. It offers up the combined power of user’s machines to compute any program you can think of. By renting out the computing power of the network, Golem has been used to render CGI, make stock market predictions, research DNA and teach an AI how to play chess.

Enterprise Ethereum Alliance

Ethereum uptake will continue to increase organically as we’ve seen from the increase in both the price of Ether, and the number of ICOs (Initial Coin Offering – how Ethereum-based DApps raise capital for development) that have taken place. However, what has exponentially increased the amount of attention that Ethereum has received, including from the mainstream media, is the EEA – the Enterprise Ethereum Alliance. The EEA, launched in February this year, is made up of Fortune 500 companies, leading consulting firms, start-ups, academics and technology vendors who are working together to build on what they describe as “the only smart contract supporting blockchain currently running in real world production – Ethereum”.

On the 18th of July, the EEA announced that an additional 34 organisations had joined including Mastercard, Cisco and Scotiabank. With this sort of backing, the growing attention Ethereum, and Blockchain in general, is receiving, seems to be more than justified. I, like many others, am looking forward to seeing what comes in the near future.