Bitcoin is designed as a digital currency, with the specific purpose of exchanging money. All transactions are stored in the Bitcoin blockchain.
Ethereum also uses a blockchain, but it is designed as a platform to run decentralized applications.
An example of an application that can be built with Ethereum is a smart contract.
A smart contract is a contract for which the conditions are part of the code. A smart contract can self-execute when all conditions are met.
Here is a very simple example.
Let’s say you want to pay someone for a job, but you only want to release the money after 30 days. The other party doesn’t want to start the job if he’s not sure he will get paid. In the current world, you will make a paper contract stating the sum and date of payment and sign it. The other party will basically have to trust your signature and can try to enforce the contract through a court of law in case you don’t fulfill the contract. But this involves including a third party, probably lawyers will be involved that need to get paid. It will get even more complicated if both parties are situated in different countries because then it will become part of international laws and trade agreements between the 2 countries.
With a smart contract, you can basically set the date that the money will be released and the system guarantees the execution of the contract. The details of the contract are locked in the blockchain, meaning they can’t be changed once they are set. And the execution of the contract is guaranteed by the decentralized system. There is no single point of failure that can go down.
In other words, a smart contract is much more reliable than a paper contract.
In this simple example, the only condition set on the smart contract was a date. But imagine you can add other conditions to the contract that can be checked by a computer. This could be a proof of delivery by a delivery company or a more complex calculation.
Smart contracts can be used in real estate and online auctions (removing the need of escrow services), insurance, crowdfunding, and so on…
The Ethereum Virtual Machine
A core part of Ethereum is the Ethereum Virtual Machine (EVM). It’s a software that runs on the Ethereum network and can run programs. The EVM is probably the most revolutionary part of Ethereum.
Because the Ethereum network is based on thousands of nodes that are not managed by a centralized computer, the EVM makes it possible to run your applications on a decentralized network, removing the single point of failure of current centralized networks.
Some of you might point out that cloud computing also removes the single point of failure for network services, but there is a big difference between cloud computers and a decentralized network such as the Ethereum network.
You can run your software on Google, Amazon or Microsoft cloud services, but if for some reason they don’t like what you are doing, they can shut down your software at any point. It doesn’t have to be anything illegal either. If your software is a threat to their business model, they can just update their terms & conditions and ban your service.
When the US government wanted to silence Wikileaks, they talked to major credit card companies and to PayPal and from that point, Wikileaks was no longer able to collect funding online using these companies.
Other purposes of Ethereum
Design your own cryptocurrency
You can create your own coin on top of Ethereum. You can use the coin as a currency, a virtual share of a company, a proof of membership or whatever your heart desires. And you can fix the total amount of coins in circulation if you want to.
When you need funding for a new project, trust is always the biggest hurdle for finding funds. With Ethereum you can lock the conditions in the contract. For example, the money is only released to you when a certain goal is met, otherwise, the donations are returned to the donors. On top of that, you can reward donors with a token. The token can be exchanged for a reward at a given time (f.i. when the product is released), but donors could also trade or sell their token to others.
Cryptodemocracy is probably not a real word (yet). But the idea is that you can use Ethereum to create a trusted voting system. Any member of your organization could submit proposals and other members can vote for or against it. The software will either execute the proposal when there are enough positive votes or decline it.
Here is an example: let’s say you are a group of 10 people, spread across the globe, working towards a common cause. Each member is granted a token, which allows them to vote on proposals. One type of proposal could be to make an online purchase using ether (the coin behind ethereum). Only if a majority of the members vote in favor of this proposal, the money will be released. Another type of proposal could be to add a new member. Only if the majority of the members vote in favor, a new token can be created and assigned to the new member.
Yes, you can do all these things without the use of smart contracts, but by using Ethereum, the conditions are locked into a smart contract and cannot be changed by third parties.
Build decentralised applications
With Ethereum, you can build any type of application and run it on the Ethereum network. This allows for decentralised, secure and tamper-proof applications.
There are many examples today where we have the illusion of security and control, but we are really depending on a 3rd party that can steal our data, sell it, share with governments or just lose all our data by accident.
Many people nowadays use WhatsApp for communicating daily. There have been cases in the past where their servers went down. Today WhatsApp is owned by Facebook. If Facebook decides tomorrow to shut down the app in favor of Facebook Messenger, there is no-one that can stop them from doing so.
What about your data, photo’s, documents that you store with Dropbox, Google or other cloud services? They are all controlled by single corporations and in some cases, you even lose ownership of your data once you store it on their servers.
With Ethereum, you can build any kind of service that is not relying on a single server or a single corporation. You could build your own cloud storage system, messaging app, online editor or note-taking system, accounting system, CRM, …
The blockchain will allow your data to remain private and secure and the decentralized system will protect your app from being taken down by third parties.
Ethereum is a promising platform for building decentralized applications, but only the future can tell if it will be robust and fast enough to be used for real, meaningful solutions. But at least it is a step in the right direction, towards an internet economy that is not controlled by a few global corporations or governments.
Ethereum is still very young and there will be issues along the road. No software platform is perfect from the start. But as long as enough people believe in it, see it’s potential and help improve it, there is a good chance Ethereum can be an important part of the Internet economy in the future.
Still too complicated for you? Try reading: smart contracts for dummies.