Ethereum, ETH 2, and What Are Smart Contracts? | Part 5

Ethereum is a digital currency that was launched in 2015 and created by Vitalik Buterin when he was just 21 years old. Millions of developers work on Ethereum and thousands of decentralized applications run on the blockchain. Ethereum is used to create hundreds of new cryptocurrencies and is gaining widespread adoption. 

Smart contracts

During the development of Ethereum, Vitalik proposed a network that would run on decentralized smart contracts. To understand digital smart contracts, let’s first look at how many apps and services currently work. Right now many apps and services are centralized, meaning if you want to do a transaction, you need to go through a third party like Lyft or Ebay. These companies take a fee for facilitating transactions.

On Ethereum, programmers are creating apps to automate real contracts so centralized parties like eBay or Lyft don’t need to be involved to execute the transactions. Smart contracts have conditions that need to be met and as long as those requirements are fulfilled, the transaction will be automatically facilitated by the network without the need of a third party. 

Let’s take an example of someone who wants to fundraise using a smart contract. Donors could send their funds to the smart contract and the money will be held there until the fundraising requirements are met. Once the project is fully funded, the money would automatically be sent to the intended project recipient. But if the project fails to meet the goal, the money would automatically be re distributed back to the supporters. No one person or organization is in control of the money. 

The smart contract is immutable, meaning once it is created, it can never be changed again and no one can tamper with the contract’s code. A smart contract is also distributed, meaning the output of the contract is validated by everyone in the network. This means that a single person can’t force the contract to release the funds because other people in the network can spot this and reject the transaction. 

Here are some examples of how smart contracts can be applied in different industries. Smart contracts can automate insurance claims, data sharing in clinical trials, financial trading activity, and supply chain management. 

Ethereum 2.0 (ETH2)

ETH2 is a set of interconnected upgrades to the Ethereum network that attempts to make it more scalable, sustainable, and secure. These upgrades will be rolled out in phases. 

In terms of scalability, the current network supports 15 transactions per second, which is limiting to onboard millions of new users and launching more decentralized applications. ETH2 plans to support thousands of transactions per second. 

Right now, as of 2021, the Ethereum network runs on the Proof of Work consensus model which uses a lot of computing power and energy to validate transactions. ETH2 will use Proof of Stake, which requires much less energy. The Proof of Stake consensus model uses validators who stake their ETH and for every transaction processed, they receive a block reward and a portion of transaction fees. To discourage validators from making fraudulent transactions, Proof of Stake implements a mechanism called slashing where they lose part of their staked ETH if they act dishonestly.

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