What is Ethereum and how does it work?

what is ethereum
what is ethereum

Ethereum is often considered the second most popular cryptocurrency, after Bitcoin. But unlike Bitcoin - and most other virtual currencies - Ethereum is meant to be more than just a medium of exchange. Instead, Ethereum is a decentralized computer network managed by a community of users and built on the blockchain technology.

Let's find out what this means exactly.

Ethereum, what is it?

First of all, Ethereum is a decentralized system, which means that it is not controlled by any single government entity.

Ethereum, being a decentralized system, is completely autonomous and is not controlled by any person. It has no central point of failure, because it is managed from thousands of computers of volunteers around the world.

In addition, the personal information of users remains on their own computers, while the contents, such as applications, videos, etc., remain under the full control of its creators without having to obey the rules imposed by the services of hosting such as the App Store, Play Store or even YouTube.

Ethereum explained to my grandmother

For simplicity, Ethereum is an independent network of computers that are spread around the world, owned by people like you and me, and each computer does a little math work.

Each participating computer is paid for this work not with euros but with an asset called ether.

This computer network is always on, it is very secure, and anything that is done using this computer network is public.

To connect to this network, you have to install a special program called Mist.

How can I use this ether?

To be able to run applications (also known as smart contracts) on the Ethereum network, developers need ether and want to exchange it for euros.

Some examples of applications

Apps are 'open-source' software that use blockchain technology. Unlike traditional applications, they do not require an intermediary to operate.

Here are 5 examples of applications:

  • Gnosis - A decentralized prediction marketplace that allows users to vote on anything from weather to election results.
  • EtherTweet - This app derives its functionality from Twitter, providing users with a completely uncensored communication platform.
  • Origin - The project aims to create an open and accessible information framework allowing consumers to make informed decisions about their purchases. This is done by tracing the origins and histories of the products.
  • Augur - An open-source prediction and forecast marketplace that rewards correct predictions.
  • etheria - It looks and looks a lot like Minecraft, but exists entirely on the Ethereum blockchain.

What is the value of these ethers?

What gives value to these ethers, besides that they can be exchanged for euros on a market platform, is that they are exchangeable for fuel, which is necessary to run applications.

When you run an app, it costs you a fraction of Ether to match the cost of fuel. Thus, the execution of an application needs to have ether, and to have ethers you must either join the network or buy some from the participants, who run the applications. The circle is complete.

How to buy Ethereum?

Be aware that you are not buying Ethereum itself. But, you buy ether, then you use it on the Ethereum network. Given the popularity of Ethereum, it is very easy to buy Ether on a crypto currency platform. Bitstamp is one of those oldest platforms on the market that allows you to purchase Ethereum with a credit card.

Ethereum is it like Bitcoin?

Ethereum and Bitcoin are two completely different projects with totally different goals.

  • Bitcoin is the very first cryptocurrency and money transfer system, built and supported by distributed public ledger technology called Blockchain.
  • Ethereum has taken the technology behind Bitcoin and significantly expanded its capabilities. It's a whole network, with its own Internet browser, coding language and payment system. Most importantly, it allows users to build decentralized applications on the Ethereum Blockchain.

How it works Ethereum?

Ethereum works on the basis of a blockchain network. A blockchain is a decentralized and distributed public ledger where all transactions are verified and recorded.

The entire Ethereum system is supported by a global system of so-called “nodes”. Nodes are volunteers who download the entire Ethereum blockchain to their desktops and fully enforce all system consensus rules, and receiving rewards in return.

As it was mentioned earlier, Ethereum is based on the Bitcoin protocol and its Blockchain design, but is tweaked so that applications beyond monetary systems can be supported.

The only similarity of the two Blockchains is that they store entire transaction histories of their respective networks, but Ethereum's Blockchain does much more than that.

Ethereum processes transactions faster. New blocks are posted to the Bitcoin network once every 10 minutes while new blocks are posted to the Ethereum network once every 12 seconds.

Finally, there is no limit to the number of potential Ether tokens, while Bitcoin will not release more than 21 million coins.