While working with the Mastercoin team (now called Omni) in Israel in 2013 Vitalik suggested some improvements to the project to make the protocol more generalized to support more contracts. Moreover, he saw a major flaw in its scripting language which was not Turing complete.
Although appreciated, his suggestions weren’t implemented by the Mastercoin team, which left Vitalik to envision the Ethereum Virtual Machine:
“What this project intends to do is to take cryptocurrency 2.0, and generalize it - create a fully fledged, Turing-complete (but heavily fee-regulated) cryptographic ledger that allows participants to encode arbitrarily complex contracts, autonomous agents and relationships that will be mediated entirely by the blockchain.” - Vitalik Buterin, 2013
After sketching his ideas for a new cryptocurrency on Bitcoin Talk and other cryptocurrency forums, Vitalik was soon joined by other programmers wanting to contribute to the project, among them Charles Hoskinson, the founder of Cardano, Jeffrey Wilcke and Gavin Wood who can claim to be among the co-founders of Ethereum.
Vitalik has said “Gavin can also be largely credited for the subtle change in vision from viewing Ethereum as a platform for building programmable money, with blockchain-based contracts that can hold digital assets and transfer them according to pre-set rules, to a general-purpose computing platform.”
For months the project survived literally in the ether of emails between contributors — until January 2014, when the team met for the first time in a Miami beach house where they were staying for the North American Bitcoin Conference. This is when the team decided they were ready to unveil their project to the world. None had any expectation of how it would be received but Vitalik was given a “Mick Jagger-like rock star” ovation after his presentation, Hoskinson recalled.
“Vitalik was mobbed by people and it took an hour to pull him out of a crowd wanting to ask him questions.” - Charles Hoskinson
After the Miami conference the fledgling Ethereum team had to decide whether the venture was going to be, as Hoskinson puts it, crypto Mozilla (non-profit) or crypto Google (for profit). The vote was a unanimous 8-0 in favor of crypto Google. The team went to Zug, known as the 'Crypto Valley' of Switzerland, and learned the intricacies of establishing the non-profit Ethereum Foundation to raise funds for the for-profit venture.
Joe Lubin, one of the early developers described the Ethereum Foundation as a "nonpartisan industry body, made up of [a cross-section of] industry players. It [is intended to] make sure the Ethereum infrastructure works fairly and independently ... like ICANN for the Internet."
However, in June 2014, the decision was reversed to go down the Mozilla route and establish the Ethereum project as an entirely non-profit venture. Disputes followed, with some of the core developers leaving the project, including Hoskinson.
Ethereum democratizes fundraising with ERC20 token
Ethereum fundraised for its ether (ETH) token between July and August 2014, issuing 11.4 million pre-mined ETH out of a total supply of 100 million, and raising almost $11m at the time the ICO ended.
Although a successful fundraising, at this early stage in crypto issuing an ICO was an arduous affair that required building a cryptocurrency almost from scratch.
By the end of 2015, however, the ERC20 token became a standardized smart contract in the Ethereum eco-system, which set out common rules that all Ethereum contracts would follow. With the ERC20 anyone could take that smart contract, issue as many tokens as they wish and sell them for Ether.
Described by Charles Hoskinson as “crowdfunding on steroids” the ERC20 has revolutionized fundraising and disintermediated banks, venture capital and crowdfunding platforms like Kickstarter with true peer-to-peer funding.
It has levelled the playing field for startup funding which once used to be the domain of VC investors in very specific areas like Hong Kong, Tokyo, California or New York. Now people who have never met from other parts of the world could essentially donate to a project. The informal nature of ICOs has also been a poisoned chalice, however, with the 2016 hack of ICO funds raised for the Decentralised Autonomous Organisation (DAO) leading to a schism in the community and the creation of Ethereum Classic.
Scalability hindering roll out of Web 3.0
Ethereum has suffered from scalability issues since its inception and is capable of handling just 14 transactions per second — compared to Visa’s 24,000 per second. The result is network congestion and last year one of the most popular DApps, Cryptokitties, infamously crashed the network.
Ethereum is preparing to hard fork from Ethereum Metropolis (version 3.0) to Constantinople (version 3.1) by October which will make transactions more efficient and reduce fees. Several scaling solutions are also in the works, including sharding the network (breaking the ledger into smaller chunks) and a Layer 2 solution called Plasma, that would function in a similar way to the Lightning Network for Bitcoin.
There are over 700 DApps listed on Dappradar and over 1,700 listed on community website State of the DApps, though a majority of these are inactive. If Ethereum is to become the ‘Blockchain 2.0’ there is an urgent need for the network to scale to thousands of transactions per second before it is usurped by a superior technology that can.
Nicolas Gilot, Co-CEO of blockchain-powered gaming distribution platform Ultra believes smart contracts have the power to revolutionize the video game industry but “this year, Ethereum will need to prove that it can scale and evolve to proof-of-stake. 2018 is also the year of competition for smart contract blockchains including the likes of EOS, Tezos, and Zilliqa.”
Although it hasn’t gone live yet, Hadera Hashgraph has thrown down the gauntlet as ‘Blockchain 4.0’ to bypass even the younger Ethereum upstarts EOS and NEO. The much anticipated but beleaguered Tezos launched its beta net this month, which is also an Ethereum challenger as a network for decentralized apps.
Moving to proof-of-stake
Sharding and migration from a proof-of-work protocol to proof-of-stake are the imminent priorities for Ethereum. According to Ethereum researcher Justin Drake, the two goals have been merged into one project instead of being worked on separately, with the move to the PoS Casper protocol slated for 2019 and sharding implemented in two phases over 2020 and 2021.
“The Casper and Sharding merger is an exciting prospect and it will be interesting to see that unfold,” Ultra’s Gilot said.
At the suggestion of Charles Hoskinson, Ethereum has been using a proof-of-work mining algorithm similar to Bitcoin’s SHA256, the newer SHA3, before it removes mining altogether with a proof-of-stake algorithm. This migration will be done during the “Ethereum Ice Age” — a period in which the PoW mining difficulty is exponentially raised to a point where it becomes unviable to mine and is expected to kick in sometime in 2020.
Ethereum is also in a race to move to a PoS protocol before ASIC chips (processors purposely built to mine ETH) overwhelm the hash rate of the network, making it susceptible to attacks — the threat of which some believe the development team isn’t taking seriously enough.
Hedge funds are also reportedly starting to take short positions in ETH due to the slow progress in improvements.
Ethereum empowering users
It is often pointed out the most successful Ethereum DApp to date is Cryptokitties which doesn’t say much for the blockchain’s progress and though many companies claim to have pioneered the first smart contract implementation in their industry it is difficult to point to many practical uses.
But with 17,000 nodes running the network globally and a community of around 250,000 members, the network effect of Ethereum could reach a critical mass before it is undercut by a competitor.
“Ethereum has been wonderfully stable now for years and this is the greatest credit that can go to its authors, Vitalik Buterin, Gavin Wood and others. It’s this stability which makes it so hard for other smart contracting blockchain challengers, even those which promise some brilliant features, to take Ethereum on,” said Henri Pihkalak, CEO and Founder of Streamr, a data platform running on smart contracts.
“As for Vitalik, he’s an amazing ambassador for the underlying socio-economic struggle of decentralization — to return control of technology to ordinary people. There are few others in this space who remain so focussed on those deeper political ends as he is.”