First proposed by Vitalik Buterin in 2013, Ethereum is a blockchain-based computing platform that enables users to create applications and transfer value around the globe. The project was conceived as a solution to flaws that have dogged the internet since its inception.
It may not seem like it, but the worldwide web is centralized. The cloud lets
people collaborate across distances, but their work, emails, and family photos
are stored on servers, which have physical locations and are administered by
governments or private companies. Administrators can censor users, and if a
hacker cracks a server, they have access to all the data housed therein.
Ethereum, which refers to itself as a world computer, seeks to improve on this
design by replacing centralized control with a decentralized network of nodes.
Each node, or network participant, has an updated version of the blockchain on
which the network runs. If an outsider tries to censor or adulterate an entry,
the other nodes will notice and reject the change.
Decentralization brings impressive benefits, but it also presents a problem.
Each version of the blockchain must first be agreed to by actors who neither
know nor trust one another. Users of cloud-based applications can place their
trust in the central administrator. With decentralized apps, agreement must be
reached in other ways.
To reach agreement, Ethereum uses a consensus mechanism known as Proof-of-Work
(PoW), which pays participants to solve complex mathematical puzzles to validate
blocks of transactions. Once a puzzle is solved, the associated block is added
to the chain. Each node is updated more or less instantly, and the finder of the
solution is rewarded in Ether (ETH), the token that buys goods and services on
the Ethereum network.
PoW is energy-intensive and ill-suited to scaling to millions of users. As of
this writing, Ethereum is planning on switching to Proof-of-Stake, a modern
mechanism that is more efficient.