In a nutshell, Ethereum is a new innovation in computing built from technologies and concepts originally pioneered in Bitcoin. Bitcoin is widely understood as a system for generating a shared world ledger that securely records bitcoin balances. Ethereum uses many of the same systems (such as blockchains and peer-to-peer networking) in order to generate a shared world computing platform that can flexibly but securely run any application users want to code (shared ledgers like Bitcoin included). To better understand what that means, let’s first go back to the beginning.
Satoshi Nakamoto’s development of Bitcoin in 2009 has often been hailed as a radical development in money and currency, being the first example of a digital asset that simultaneously has no backing or “intrinsic value” and no centralized issuer or controller. However, another, arguably more important, part of the Bitcoin experiment is the underlying blockchain technology as a tool of distributed consensus, and attention has already greatly shifted to this piece of the puzzle. Commonly cited alternative applications of blockchain technology include using on-blockchain digital assets to represent custom currencies and financial instruments (“colored coins”), the ownership of an underlying physical device (“smart property”), non-fungible assets such as domain names (“Namecoin”), as well as more complex applications involving having digital assets being directly controlled by a piece of code implementing arbitrary rules (“smart contracts”) or even blockchain-based “decentralized autonomous organizations” (DAOs).
Prior to Ethereum, there were already many projects that were trying to use blockchain technology for some of these applications. However, they were all very limited, restricting themselves to supporting only one or a few specific applications. The core idea behind Ethereum that allowed it to get past those limitations was this: instead of having many blockchain protocols, each supporting a few applications, or even one blockchain protocol supporting a large list of applications, we can have a blockchain protocol with a built-in programming language, allowing any application to be written on top, and its rules enforced by the blockchain. This way, the protocol can not only support all of the applications that have been developed so far, but also newer ones that will be created in the future that we have not yet imagined – allowing developers to innovate on top of blockchain technology with far less effort and far more speed than was possible before.
Whereas Bitcoin is sometimes described as a “world wide ledger”, albeit restricted to recording the balances of one specific currency, Ethereum can be viewed as a “world computer”: a place where anyone can upload and run programs that are guaranteed to be executed exactly as written on a highly robust and decentralized consensus network consisting of thousands of computers around the world. The same blockchain technology as in Bitcoin and other systems is used as the base, and the security of the computation is guaranteed by the same kinds of cryptography and economic incentives, but the ability to execute code opens to developers a much larger world of possibilities.
To give a specific example, consider the case of someone using Slock, an Ethereum-enabled internet-of-things platform, in order to rent their bicycle. The owner would put a Slock (“smart lock”) on their bicycle, and register a smart contract (a kind of computer program) to the Ethereum blockchain. After that point, anyone could send some amount of cryptocurrency to the contract, and the contract would automatically forward the coins to the owner and register a record stating that the sender is allowed to access the lock for, say, three hours. The user would then be able to send a cryptographically signed message to the lock with their smartphone, opening the lock—at least for the duration for which the record on the blockchain remains valid. This is all done without involving any centralized payment processors, servers or other third parties, including the Slock company itself. So, someone using such a lock can be confident that it will keep working even if the manufacturer shuts down, that it will not suddenly start charging very high fees, and that their private transaction details are not all in the hands of one party.
Other applications include financial contracts of various kinds, ranging from simple digitization of real world assets (gold, stocks, etc.) to various forms of derivatives, more secure replacements for internet infrastructure (such as DNS and certificate authorities), methods for managing one’s online identity without relying on a centralized provider that effectively has the “backdoor keys” to your online life, and much more. Alongside over 100 applications in all of these areas that are being built by startups around the world, Ethereum technology is also being actively explored by financial institutions, banking consortia such as R3, as well as firms such as Samsung, Deloitte, RWE and IBM, with applications ranging from simplifying and automating trade finance to tracking merchant loyalty points and gift cards to creating decentralized markets for electricity trading in mind.
Effectively, Ethereum aims to take the promise of decentralization, openness and security that is at the core of blockchain technology and bring it to almost anything that can be computed.
Vitalik Buterin is the creator of Ethereum, co-founder of Bitcoin Magazine, and longstanding developer and researcher of cryptocurrencies and blockchain technologies.