A Short Explanation of Ethereum

Explanation of Ethereum

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Ethereum logoEthereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.

These apps run on a custom built blockchain, an enormously powerful shared global infrastructure that can move value around and represent the ownership of property.”

Ethereum enables users to not just transfer value or currency (“Ether”) but also to conduct business over the Internet.

Smart contracts take blockchain based cryptocurrencies to the next level. Smart contracts offer users the ability to include meta data (i.e. “what”), not just quantity data (i.e. “how much”) in their transactions.

This additional layer of metadata “enables developers to create markets, store registries of debts or promises, move funds in accordance with instructions given long in the past (like a will or a futures contract) and many other things that have not been invented yet, all without a middleman or counterparty risk.

If Bitcoin is a 1st generation blockchain tech, founded by Satoshi Nakamoto in 2009, Ethereum is considered a 2nd generation blockchain platform. The Ethereum project “was bootstrapped via an ether presale in August 2014 by fans all around the world. It is developed by the Ethereum Foundation, a Swiss non-profit, with contributions from great minds across the globe.”

A new blockchain platform called Cardano, which is run by one of the co-founders of Ethereum, is positioning itself as a “3rd generation” blockchain platform.

What is a Blockchain?

A blockchain is a decentralized, electronic ledger. The ledger is maintained, not by a single, central authority, such as a bank or government, but operates autonomously as a distributed network of individual computers. All transactions on a blockchain are secured by cryptography and verified by every computer, or node, on the network.

How is Ethereum Different from Bitcoin?

Bitcoin is a cryptocurrency that uses blockchain technology to record financial transactions that are representations of monetary value, aka “Bitcoins”.

Like Bitcoin, Ethereum uses blockchain technology to store currency transaction data and transfer value in a decentralized, but verified, way…

Old way of transaction verification using third party, such as a bank.
Old way uses third party, such as a bank, to verify transactions.

Unlike Bitcoin, Ethereum also uses blockchain technology to store and process code with types of metadata.

The code and metadata allow the blockchain to run applications
smart contracts” between parties on the blockchain.

The blockchain makes it unnecessary to do things the “old way” (i.e. by using a trusted third party, such as a government or bank, to verify transactions.)

Smart contracts establish “consensus” for code and metadata the same way that Bitcoin transactions do, via the network of computers on the blockchain.

Each computer or node on the blockchain must verify a transaction as valid for it to be distributed, and added to the blockchain, across every node in the network.

By having built in consensus, the smart contracts do not need to be verified by a third party “middleman”.

Using Ethereum blockchain in decentralized computer configuration.
New way, using Ethereum blockchain to verify transactions using decentralized, distributed software.

What is “Gas”?

Smart contracts are executed on the Ethereum network using a form of energy called “gas“.

Gas represents a unit of computational power needed to process and complete a smart contract, or process a transaction, on the Ethereum network.

The cost of gas to complete a transaction is measured in a minimum number of gas units.

The greater the amount of computational power required to process a transaction, the greater the cost of gas.

Some calculations, such as agreeing that 1+1=2, use little processing power, thereby little gas… However, other more complex transactions, such as a futures contract, will use more processing power, thereby requiring more gas, to be paid for in Ether.

More transactions on Ethereum will require more processing power.
Completing more complex distributed applications and transactions on Ethereum will require more processing power, which will require more gas.

The price of gas is calculated in fractional amounts of the cryptocurrency called Ether (the tokens that run the Ethereum network).

Ether as a Cryptocurrency

The cryptocurrency on the Ethereum network is called “Ether“. Ether fluctuates in price from minute to minute, like Bitcoin, Litecoin and other cryptocurrencies.

Even though Ether is a cryptocurrency like Bitcoin, the original purpose of Ether was not to be used for everyday transactions, but to be used as a store of value to pay for gas needed to power transactions or distributed applications (aka “Dapps”) on the Ethereum network.

Ethereum is considered to be one of the “legitimate” cryptocurrencies available as it can be purchased using dollars and other fiat currencies on several exchanges, including the most popular exchange, Coinbase.