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What is Ethereum, and how does Ethereum work?”.

What is Ethereum, and how does Ethereum work?”.

What is Ethereum: A Brief History

In 2012, aged 17, Vitalik Buterin was introduced to Bitcoin by his father and became very interested in its technology. Vitalik began writing for Bitcoin what-is-ethereumMagazine and suggested improvements to the Bitcoin platform. When these improvements weren’t made, he decided to make his own cryptocurrency instead.

His idea was Ethereum, and it went live in 2015. Since it started, Ethereum’s price has gone up a lot and it now has a ‘market cap’ of $44.7bn (that’s the total value of all Ethereum currency in the world today). So, why is Ethereum going up?

Ethereum technology has real potential to change the world. What is Ethereum tech and what makes it so special, you ask? Let’s find out!

Ethereum For Newbies

Things we liked:

  • + Very secure
  • + Much more scalable than Bitcoin
  • + Smart contracts, dApps
  • + Revolutionary blockchain technology
  • + Strong team of developers behind the project

Things we didn’t like:

  •  Volatile
  •  Expensive “gas” (transaction) prices

It’s easier to answer, “what is Ethereum?” if we first ask, “what is Ethereum trying to replace?” Let’s see an example:

Matthew writes tutorials using Google Docs. He can edit his work and share it with whoever he wants. One day Google Docs is hacked, or the government bans it, so Matthew loses all his work.

Now Matthew decides that he will only use the word processor on his computer, so his work will be safe. But it isn’t safe, is it? Matthew’s computer can be lost, broken, or hacked into.

Matthew is desperate now, so he decides to sell his laptop and buy a pencil, a notepad, and some stamps instead. Job done!

Matthew’s problem here is that he wants the convenience and speed of the internet, but with the control and safety of his pencil and paper. But what is Ethereum going to do about it?

Ethereum offers a way to use the power of the internet without trusting apps like FacebookGoogle, or your online bank with your personal information.

Apps like Facebook and Google collect and store the information of their millions of users in servers. This means that user data is kept at a very small number of locations (this is called centralization). If one of these locations is hacked into, we’re all in big trouble!

How Ethereum works is by removing the need to trust lots of apps with private information. It does this with decentralization using ‘blockchain’ technology.

Blockchain Basics

Ethereum’s version of the internet is one where servers and clouds are replaced with a network of systems called nodes. The nodes store and maintain a shared database called a blockchain.

There are thousands of nodes in the network, all storing the entire blockchain. The more nodes there are, the safer the network and its data become. The information that you enter into this record can only be controlled by you. It isn’t stored on your computer, or in a central server — it is stored across the entire network of nodes.

The information held on the blockchain is verified by ‘consensus’. This means that more than half of the nodes must agree that information is correct before it is allowed onto the blockchain.

Hacking this kind of system is near impossible, as you would need to control more than half of the network to force a consensus. Even if you did control more than half of the network, it would cost you so much money to complete the attack, that it wouldn’t be worth it.

As I mentioned earlier, Ethereum didn’t invent the blockchain technology, Bitcoin did, but it is using and improving it in some incredible ways. So, what is Ethereum blockchain?

Ethereum Explained: Blockchain 2.0 and its Uses

The Ethereum blockchain (or ‘Blockchain 2.0,’ as it is sometimes called) uses similar technology to Bitcoin, but it is more advanced. It can do much more than the Bitcoin blockchain. It does this in two main ways.

Smart Contracts

The Ethereum blockchain is designed so that transactions can only take place when certain conditions are met. The rules deciding these conditions are called ‘smart contracts’. It’s an essential part of the what is Ethereum question.

For example, imagine a vending machine. If Peter wants a candy bar from a vending machine, he needs enough money to pay for it. If he doesn’t have enough money, he won’t get his candy bar. A smart contract for this transaction might look like this:

IF Peter puts $1 in the vending machine THEN the vending machine will give Peter a candy bar.

Once one of these contracts is written, it can’t be changed. That’s why they are called ‘trustless’ transactions. You don’t need to trust individuals on the network — if the conditions of the contract aren’t met, then it won’t happen.

Imagine that! A trustless global network that never goes offline!

dApps

What is Ethereum: Centralized and decentralized applications.

Decentralized applications (or ‘dApps’) are simply applications that do not run on a traditional central server. Instead, they run on a blockchain — using it to decentralize their server.

dApps are at the core of Ethereum’s design and its beliefs. Ethereum’s founders want users to learn Ethereum and build on it. So another part of what is the Ethereum question is definitely dApps.

Ethereum has its own coding language called Solidity. Solidity is used to build dApps. Because Solidity is like JavaScript (one of the most common programming languages), it encourages developers to create new and exciting dApps.

These dApps could soon be competing with (or replacing) centralized apps, in industries like social mediae-commerceemail, and online banking. There are endless possibilities for building dApps on Ethereum’s blockchain.

A Quick Recap

Let’s quickly revisit the first part of that question we asked earlier: what is Ethereum?

What have we learned so far?

Put simply, we’ve learned that Ethereum is a blockchain that allows the user to build smart contracts and dApps — it has the potential to change the internet forever.

Without any further delay, and having a pretty clear idea of what is Ethereum, let’s have a look at the second part of that question: how does Ethereum work?

A Little More Detail: How Does Ethereum Work?

Ether is the currency of Ethereum. Sometimes, the two are confused but it’s simpler if you try to remember that Ethereum is the system and Ether is its currency.

If you want to get anything done on the system, you’ll need some Ether. Ether fuels the Ethereum system, and it’s often referred to as ‘gas’ for this reason. Each transaction on Ethereum needs a certain amount of ‘gas’ to get the job done. The bigger the job, the more gas you need.

The question of what is Ethereum and how does it work is often accompanied by the Ethereum VS Bitcoin question. As people often compare Ether to Bitcoin, so we’ll take a moment to explain the main differences.

Bitcoin

  • Bitcoin is digital money. Its blockchain allows manual peer-to-peer transfers of digital money. If Peter wants to pay Paul 10BTC (Bitcoin) to paint his house, without using a bank, he can use Bitcoin. It looks like this; Peter sends 10BTC (Bitcoin) to Paul.
  • There is a cap on how many Bitcoin can exist (21 million), so it could become a reliable store of value, like gold or diamonds.
  • The average time for a confirmed Bitcoin transaction is, although they can be as quick as 10 minutes.

Ether

  • Going back to what is Ethereum and its currency: Ether is digital fuel for the automated smart contracts of the Ethereum network. If Peter wants to pay Paul 10ETH to paint his house, he can use an Ethereum smart contract. The transaction would look like this; IF Paul paints Peter’s house THEN 10 ETH will be sent to Paul. So, as you can see, Ether can be used very similarly to Bitcoin. The only difference is that with smart contract technology, Peter won’t pay Paul until Paul has painted Peter’s house. Paul won’t get paid if he doesn’t paint Peter’s house, so he can’t cheat! This same system can be used to guide transactions of all kinds, from emails to how a company pays its staff.
  • There is no cap on how much Ether can exist. Although, the amount of Ether probably won’t go above 100,000,000 for a very, very long time.
  •  The Ethereum transaction time is very quick — Ether-fueled smart transactions just take seconds.

What is Ethereum Doing Now?

A lot of dApps are being created on Ethereum’s blockchain and a kind of fundraising called an ICO is being used to pay for them. So, knowing what is Ethereum doing now is pretty useful.

Initial coin offerings (ICOs) allow developers to sell the idea of their product to pay for its creation — it’s like Kickstarter, but for dApps.

Check out some of the dApps being developed (or that have already been developed) on Ethereum with ICOs:

Golem is a dApp which allows users to rent the idle power of their computers to each other. It’s like being able to rent your car to other drivers when you’re not using it!

EtherTweet is a communications platform that is very similar to a famous social media app except it’s on the blockchain so there is no central authorityThat’s right, it’s a dApp version of Twitter, and it is completely uncensored!

Etheroll is an online casino that uses Ethereum’s blockchain to create fair online dice games. Although, all this new technology might already be enough of a gamble for most people!

With all this good stuff going on, it’s easy to forget that Ethereum is still very newand still has a few issues.

Some critics think that the platform is too complicated for most users. This complexity could mean that experienced users might be able to scam newbies if they wanted to. Ethereum has been compared to DOS, because DOS needs Windows to make it user-friendly. So, maybe there will be something released later on that will make Ethereum more user-friendly!

Having a pretty clear idea about what is Ethereum doing now, we can talk about one more issue – the Ethereum ‘fork’. Put simply, this was a disagreement in the Ethereum community which split the platform in two. This is a possible flaw in how its community operates. When you run something with voting, not everyone will agree — it’s normal!

What is Ethereum Going to be Doing In the Future?

Imagine all the different transactions that occur in everyday life. Buying or selling a carrenting an apartmentplacing a bet on the World Cup Final. They all involve trusting strangers with your money and your information. Ethereum solves this issue, which means it has lots of potential for the future. So, now you not only know what is Ethereum but also how it works.

More and more real technology is connected to the internet every day — we call it the ‘Internet of Things’. Door locks, refrigerators, ovens, light bulbs, boilers, and TVs are all connected to the internet and they all need to be run safely and with clear instructions.

Now, imagine a world where smart contracts and dApps automatically guide those transactions and technologies, whilst an unbreakable record of it all is kept onlineforeverPretty cool, don’t you think?

If, after reading this guide, you’ve decided that you’d actually like to purchase some Ether, you can do so in one of the more trustworthy crypto exchange platforms – Atom Exchange

  •  If you plan on holding onto your Ether, though, do take the cold wallet route and invest in a Ledger Nano S or Trezor.

We asked a question at the beginning of this guide, what is Ethereum? Well, the real answer is, Ethereum is anything you want it to be. Whether you want to trade Ether or create a brand new dApp, the possibilities are endless! So, get started, learn Ethereum, and think big. The future starts now!

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