Bitcoin introduced blockchain technology to the world. With this, a transparent and immutable distributed register is achieved, perfect for a peer-to-peer value transfer method without the need for intermediaries. Some time later, Vitalik Buterin, a Russian-Canadian programmer who understood that this technology offers many more possibilities than just money, conceived the idea of Ethereum.
Ethereum is a free and public platform that allows the creation and execution of decentralized applications (dApp) by independent developers on their own blockchain. The main functionality of Ethereum is the creation of smart contracts, which run on decentralized applications and those that allow ERC-20 tokens to exist .
Let’s go in parts …
First of all, Ethereum has a blockchain in which its currency called ether is also mined(ETH) The ether is present in all transactions and processes within Ethereum. It is important not to confuse the ether with the “gas”. The gas in Ethereum is the price of carrying out a transaction or executing a smart contract based on the real computational capabilities of the nodes. For example, if someone wants to run an application that involves many processes and can execute many transactions, payments, or charges, the price of gas increases. This helps prevent excessive use and abuse of Ethereum network resources, resembling reality where nothing is free. The ether is the engine of operations in Ethereum, gas is the cost of transaction and execution within the platform, which is paid in ether. Unlike bitcoin,there is no predefined limit of ethers to exist and 5 new ethers are created per block.
Now we continue with smart contracts. A smart contract is like a “normal” contract, only digitized. It is a way to exchange money, property, shares, or any type of value and information transparently, but with the characteristic of not needing intervention from a third party or intermediary. Remember that decentralization is the name of the game in the crypto ecosystem. Decentralization allows us to remove intermediaries and streamline processes, both monetarily and in time.
A smart contract can agree both a transaction or series of money transactions, such as a purchase and sale of goods, the acquisition of a property, an electoral process, a treaty, a declaration between two parties, the rent or loan of a service, an employment contract, etc. Everything we can think of. A smart contract is backed by a blockchain, in this case that of Ethereum. As we know, in blockchain there is only one version of an event, and everyone shares the same version because a consensus was made. This creates a climate of transparency, trust and avoids interference from external factors to enforce a contract.
A smart contract can be programmed all the conditions, specifications, parameters, variables and values that are desired. You can also schedule the temporality, that is, it works in certain periods the way you want, and in other periods it works differently. Like a computer that operates on its own. There are no limits to schedule a smart contract, nor is there in the number of processes you want to be executed.
A smart contract can move funds from one wallet to another when it “already touches”, that is, fortnightly day. You can enable digital products at the beginning of each month. You can take inventories of a maquiladora, for example, when a part or parts for the manufacture of a product is about to run out, make an immediate order based on the recent activity of that piece, and automatically transfers the funds to the supplier. If a company is not doing well in one period, a smart contract can cushion the impact of that company on another without creating friction in between. Today much of this is already done, but behind closed doors. The scalability and transparency that the global blockchain has and the cryptocurrency’s trust model itself, they can solve trust problems between two or more companies (for or without profit), and even between people. All this if programmed correctly.
Let’s move to decentralized applications or dApps. Let’s understand that these are like any application that we download to our cell phone or computer, but that is not controlled by any company or organization and is free to run as you indicate. In a simple way, a decentralized application is a program that works by running smart contracts. To see the dApps that have been and are being developed on the Ethereum blockchain, you can visit the State of dApps page. To take advantage of these, first add the Metamask extension to your browser, available for Chrome, Firefox, Opera or Brave. No, Internet Explorer does not. Metamask, is the bridge of your browser to Ethereum, besides being an ether wallet and other ERC-20 tokens.
We already cover what is Ethereum, its currency, a smart contract, its applications and some examples. Now we will see one of the main uses of Ethereum today, using the just explained. In Ethereum, other cryptocurrencies can be created. Through the standard of token ERC-20, typical of Ethereum, one can create his own token and program the desired characteristics of the currency, such as its issuance, the parameters, to which smart contracts are subject, etc. This is gigantic. Imagine, it is programmable money. Money that does not deal with the intervention of the central bank to modify the money supply and control inflation, this is done automatically as scheduled.
The ERC-20 standard is a set of features and rules that the cryptocurrency created on Ethereum must comply with when launched. It’s like telling developers “Your token must have these characteristics and we want you to specify them in this way in the same way that everyone who wants to make their token in Ethereum will do.” A standard is a requirement that is met to build trust and to be able to use the Ethereum blockchain, instead of having to independently create a blockchain for each token (which is unthinkable). The standard allows the ether to back up a token and also allows it to be interoperable, that is, two tokens of the ERC-20 standard can be exchanged with each other. They can be exchanged for ether, and then exchange ethers to bitcoins, in the same way that our currencies are exchanged (only to do it from the comfort of your computer, without having to travel or having to visit many exchange houses or banks). Some examples of ERC-20 tokens are MANA and BAT, Golem, TUSD listed in Bitso.
As you learned, Ethereum and its ether, break with the paradigm that cryptocurrencies only work as a value transfer. Ethereum opens the possibility of tokenizing what we want and putting something from the “physical” world to the digital world. With this technology, we can keep track of anything in a 100% transparent, reliable and decentralized manner. Ethereum makes us realize that there are no limits on blockchain and cryptocurrency technology.