Ethereum is not just the second biggest cryptocurrency from Bitcoin. It is so much more, with its own vision of transforming the world.
While Bitcoin effectively decentralised money, Ethereum seeks to decentralise everything else. It does this by providing a platform where a wide range of digital applications can run on a blockchain-based protocol.
In concept, this is simple and revolutionary. In practice, Ethereum gets very complicated and fascinating. This is why it’s surprising that Ethereum’s creator, Vitalik Buterin, was only 19 years old when he and a select team coded the basic Ethereum infrastructure.
What is Ethereum?
Ethereum is a blockchain-based platform designed to run complex decentralised applications (Dapps) on a large interconnected network of computers globally.
Ethereum is based on Bitcoin’s protocols for a trustless, peer-to-peer network of computers using a public blockchain ledger to keep track of transactions.
However, while Bitcoin is limited to the exchange of digital cash, Ethereum is designed to have much more functionality—more like a smartphone on which any app can run. In other words, Ethereum is a general-purpose blockchain platform that powers third-party apps of all kinds.
The computational power behind the platform comes from the many interconnected computers on the Ethereum network. These nodes carry out the work of verification (mining) on the Ethereum blockchain.
Read our guide on Ethereum.
What is Ether Currency?
Ether is the ethereum coin, the native cryptocurrency of the Ethereum blockchain. It is the second-biggest crypto in the world in terms of market capitalisation, growing to over $250 billion USD as of the second quarter of 2021.
The capitalised “Ethereum” is often used to refer to the Ethereum platform, while “ethereum” or Ether is used when referring to the cryptocurrency. At the time of writing, the ethereum price for one coin was about $2,300.
Ether is a form of digital currency and can be used to send money from one node to another on the network. However, it also plays a more important function on the blockchain as the mode of payment of gas fees.
As a cryptocurrency, Ether functions just like Bitcoin and is accepted as a mode of payment just like any other stablecoin. Its purpose on the Ethereum network, however, is a bit more complex.
Read our guide on Ether currency.
What is Gas in Ethereum?
Ethereum is, first and foremost, a large blockchain-based network of decentralised computers on which decentralised apps (Dapps) can run. Since the execution of all transactions and applications on the platform costs a certain amount of resources, every transaction comes with “gas fees” attached.
It’s just like having coins for a telephone call. For every transaction to be valid, it must specify how much it is willing to spend to be executed, as well as the maximum gas it will consume (maximum units of computation).
This gas price is specified in Ether (ETH) and is the reward for miners who actually execute the transactions and create the block on the chain.
The gas system dictates how the computational resources on the Ethereum platform are used and are central to how the system works.
Check out our article on gas limits.
How Does Ethereum Mining Work?
Ethereum is based largely on Bitcoin’s blockchain protocol. That means it also inherited its Proof of Work Consensus system, which requires mining.
Mining refers to the computational effort and resources (electricity, computer hardware) required to solve complex mathematical puzzles before a new block can be added to the chain. This is the way transactions are validated and new tokens are created.
The PoW protocol serves the double purpose of giving miners an incentive to do the work of maintaining the blockchain while making it very hard or impractical to hack the network.
However, the ongoing upgrade to Ethereum 2.0 will move the blockchain to a Proof of Stake consensus protocol and away from PoW. With the new ethereum technology, there will be no need for mining and the network will be more environmentally friendly. For more about PoW, PoS, and Ethereum mining.
How to Mine Ethereum
Unlike Bitcoin, Ethereum is optimised to be mined using graphics cards (GPUs) instead of CPUs. That’s because it uses a different cryptographic function (Ethash), which is memory-hard and thus resistant to specialised mining chips called ASICs. Deep dive further to learn what makes ethereum different from bitcoin.
A basic gaming rig with at least 3 GB of RAM is enough to start mining ethereum, but not profitably. To make money by mining Ether, you’ll need to build a mining rig with several GPUs, a motherboard, a monitor, and a power supply unit.
Once you have the rig set up, you can decide to be a solo miner or join a pool such as Nanopool. Depending on your choice, you will need to download the mining software, a mining OS, install an Ethereum wallet, and download the Ethereum blockchain.
It’s not so hard as it sounds, especially if you plan to join a popular ethereum mining pool.
How do Ethereum Smart Contracts Work?
The Ethereum blockchain is unique for its use of smart contracts. Smart Contracts are scripts that run when certain conditions are met, with no need for any third party to verify these conditions.
For example, a smart contract could specify that a certain person is to be paid on a specific date. You don’t need any third party to verify that the date has been reached, so a smart contract can be self-executing.
Even though Bitcoin’s blockchain protocol could be thought of as a basic smart contract, its language is very constricted and limited to cryptocurrency transactions.
Ethereum’s native language, Solidify, is much more flexible and allows all kinds of instructions and computations to be coded. It is a complex language that allows for complex functions with if>then>else conditions that define the relationship between contracts on the network.
Read our guide on Ethereum Smart Contracts.
How to Use Ethereum
We are yet to arrive at an age where cryptocurrencies are legal tender just like the Australian Dollar (AUD) or British Pound (GBP). However, stablecoins such as ethereum have become so popular that you can do a whole lot with them.
In order to use ethereum, you first have to buy the cryptocurrency and store it in a software or hardware wallet. Once you have some ether, you can proceed to:
- Buy stuff with it. Lots of websites today allow you to pay with ether, and you can also send it to other people online
- Buy other cryptocurrencies with your ether, and you can even participate in ICOs or invest in promising projects
- Conduct day trading to earn some profit, just like with forex trading
- Hold the ether until its value rises, then convert it back into a fiat currency for profit.
Acquiring and using ether is pretty easy once you know what you’re doing. Learn more here.
We are yet to arrive at an age where cryptocurrencies are legal tender just like the Australian Dollar (AUD) or British Pound (GBP). However, stablecoins such as ethereum have become so popular that you can do a whole lot with them.
In order to use ethereum, you first have to buy the cryptocurrency and store it in a software or hardware wallet. Once you have some ether, you can proceed to:
- Buy stuff with it. Lots of websites today allow you to pay with ether, and you can also send it to other people online
- Buy other cryptocurrencies with your ether, and you can even participate in ICOs or invest in promising projects
- Conduct day trading to earn some profit, just like with forex trading
- Hold the ether until its value rises, then convert it back into a fiat currency for profit.
Acquiring and using Ethereum is pretty easy once you know what you’re doing.
What is a DAO?
A decentralised autonomous organisation (DAO) is a community for and by the members. In other words, it is an online platform whose leadership and control is not centralised; rather, the members vote on new rules.
The Ethereum platform made DAOs possible thanks to its complex smart contracts. The rules of a DAO can be hardcoded into its script, and any changes afterwards would have to be agreed on by a majority of the users.
One of the first DAOs was a financial community where investors would pool funds, invest them as a community, and earn interest. Unfortunately, security bugs led to the famous DAO hack that led to a loss of about $60 million USD.
DAOs provide a decentralised way to interact with strangers online. They can be business ventures, social media platforms, charities, and all kinds of membership groups. Learn more on DAOs.
What is a Decentralised App (dApp)?
Vitalik Buterin, the founder of Ethereum, envisioned the platform to be a platform on which third-party applications could run. With the combined computing power of thousands of nodes, the Ethereum network becomes the Ethereum supercomputer on which programs can run.
These programs designed to run on the Ethereum blockchain are known as decentralised apps or dApps. They rely on the platform’s P2P network rather than the control of a central authority, just like BitTorrent or the Tor network.
Since Vitalik’s vision is to decentralise everything, these apps are the real “point of the spear” when it comes to functionality on the platform. Any third-party developer can learn Solidity, Ethereum’s native language, and create a dApp.
All the apps that need to run on the platform are gas fees for their use of resources. Here is the quick guide to dApps.
Who Created Ethereum?
While Vitalik Buterin is usually credited with founding Ethereum, there was a large team of developers behind his back who played a key role in the design and coding of the platform’s blockchain protocols.
The Russian-Canadian programmer certainly proposed the platform back n 2013 when he was only 19 years old. Some of the other names include the following, who is also known as the Initial Five:
- Anthony Di Iorio (financed the project)
- Charles Hoskinson
- Mihai Alisie
- Amir Chetrit
Other names associated with the development of Ethereum are Gavin Wood, Joseph Lubin, and Jeffrey Wilcke.
Vitalik remains the poster child of Ethereum. Born in 1994 in Russia, his father is Dmitry Buterin (a computer scientist) and his mother Natalia Ameline. The family later moved to Canada, where Vitalik was recognised early as a gifted child in mathematics, programming, and economics. Learn further on Ethereum creation.
Ethereum in Summary
This far, we can say that Ethereum is a blockchain-based software protocol that governs a wide network of nodes all over the world, thus creating a truly decentralised platform on which decentralised apps can run. These apps pay gas fees in the form of ether to be executed.
Thus, ethereum is not strictly a cryptocurrency. It is a very ambitious project that can do so much more than transfer money from one party to the other. There are lots of projects getting built onto the Ethereum platform, and only time will tell how revolutionary Vitalik Buterin’s creation will be.
