Ethereum is currently ranked second in terms of cryptocurrency value, with a price of over $1000 USD per Ether at the time of writing. As a result, many people are curious whether an early investment in Ethereum will reap the same benefits that Bitcoin did not long ago. With the surge of interest in cryptocurrencies following Bitcoin's meteoric rise, several investors have turned their attention to upcoming cryptocurrencies in pursuit of the next big thing.
However, as anyone who has followed the industry for a while knows, there are no assurances. The cryptocurrency market, while more mature than it was only a few years ago, is still as chaotic as the worst whitewater rapids — exciting, risky, and (potentially) rewarding.
What is Ethereum?
Here are all the essential bits to know about Ethereum.
Not Just a Cryptocurrency
Before we go any further, it's vital to understand the difference between Ethereum and Ether, a cryptocurrency built on the Ethereum Blockchain. The latter is a cryptocurrency close to Bitcoin that rewards people who contribute computing power to the Ethereum network. Those who contribute their computational power to the decentralized network and help in the proof-of-work phase needed to connect to the Blockchain are compensated with Ether and another currency, Gas, which is mined similarly to Bitcoin.
A Different Kind of Internet
When Bitcoin first came into being, it merged three pre-existing concepts: decentralized network architecture, high-level cryptography, and the Proof of Works principle to form the blockchain.
The Blockchain is the underlying technology that protects the Bitcoin network's transparency and protection by enabling users to validate transactions in ways that prevent them from being abused in the future. Ethereum expands the use of this technology beyond cryptocurrencies.
Ethereum's main objective is to build an open network that can serve as a simpler, more accessible version of the internet on which applications and apps can operate without any third-party acting as a middle man between users, spurred on by an increasing surge of privacy concerns. All user data is usually stored on a single server that is run and operated by a single entity.
The data on this server could be lost or stolen if it is hacked, destroyed, or otherwise compromised. It also opens the door to malicious or immoral conduct on the part of those who store the data, such as selling it or using it for other sinister purposes to which you would not willingly consent.
Ethereum distributes data through the entire network of machines contributing to the Ethereum blockchain, rather than storing it on centralized servers. When constructed correctly, this not only protects the data from a “all your eggs in one basket” situation, but it also makes it virtually impossible to exploit.
As a consequence, rather than thinking of Ethereum as a cryptocurrency like Bitcoin, consider it as a truly decentralized Internet.
How Does Ethereum Work?
What Is Ethereum and How Does It Work?
Now that we've covered the broad strokes of what Ethereum seeks to achieve — offering an open, stable, and decentralized platform for users to build and host apps — we can get into the details of how Ethereum accomplishes this.
Smart Contracts
What Is Ethereum and How Does It Work?
The smart contract is the cornerstone of Ethereum: a blockchain-based program programmed to perform specific functions when certain requirements are met. The smart contract's beauty is that it can't be tampered with after it's been coded, and, more importantly, it removes the middleman between individuals. One of Ethereum's key selling points, as well as the idea of decentralization in general, is the latter.
Consider a company that allows people to rent their own bicycles as e-bikes, which are secured by a digital lock developed by the company. You must trust the company that mediates the transaction and pay a fee for the service unless you are the owner of the company that sells the locks. The renter trusts the company to open the digital lock for them once they've paid their dues, and you entrust the company with the protection of your bike and the money from the renter.
If this works, it is a win-win situation for all three parties. The issue is that it is fraught with risk on a systemic basis. The E bike company handles and stores all of your user data on a server. Not only are you putting your confidence in the company to never mishandle your info, but you're also putting your trust in them to keep it safe at all times. And corporations do not always thrive.
Equifax, a credit-scoring firm, was the victim of a major cyberattack in 2017 that revealed the personal details of tens of millions of Americans, including Social Security numbers. Dates of birth, addresses, and, in some cases, credit card numbers are all collected.
Although none of the data seems to have been used for financial fraud, the fact that it may have been a state-sponsored cyberattack by the Chinese military searching for useful information rather than an effort to steal real money is seen as a silver lining.
What Is Ethereum and How Does It Work?
Ethereum software distributes data across the network in a fully decentralized manner. Since there is no single server for attackers to hack into and the data is distributed through a network of individual computers contributing to the blockchain, no single entity has control over the information. This makes it much safer than a single-entity-run and-operated centralized server.
Participants of smart contracts are often shielded from each other. This is because a smart contract's "terms" are simply If/Then statements that are automated and impossible to modify once agreed upon, preventing any party from breaching the agreement.
If you're renting out a car with a digital lock, for example, you can enter into a smart contract with your prospective renter that says something like: If Renter pays Rentee X dollars, Renter gets access to the car. Automatically, in fact. The smart contract unlocks the car for the renter as soon as you collect payment from them.
You, as the renter, have no right to refuse them access as long as they have paid you their rent. Similarly, if the renter fails to make the necessary payments, the car will be automatically locked out.
All is subject to the smart contract's terms, and only the smart contract's terms. There is no third-party between them that may be a point of failure, neither party can back out of their agreements, and the smart contract is permanent within the blockchain.
Decentralization is at the core of the Ethereum network, with these smart contracts acting as its base. To put it another way,
Ether
What Is Ethereum and How Does It Work?
As previously mentioned, Ethereum is a network of computers that work together to create a decentralized supercomputer that manages the blockchain and handles network transactions. However, each of the network's individual nodes is expensive.
In order to contribute the computing power the network requires, hardware must be acquired, equipment must be run, and servers must be maintained. Users will incentivize blockchain additions and the computational effort needed to do so through buying Ether.
Gas
What Is Ethereum and How Does It Work?
Gas is a separate digital currency that is used as part of the Ethereum network's incentivization strategy. Computing capacity is a limited resource within the network, so it is subject to supply and demand rules. Contributors must be compensated in order to use some of the computing resources to execute smart contracts and link them to the blockchain.
Users must pay a certain amount of "gas" for each smart contract in order to finance the technical effort needed to add it to the blockchain. The amount of gas required by your code is proportional to the amount of code added – incentivizing cleaner, more effective code for Ethereum-based applications. This helps make the whole network run more efficiently.
What Is Hosted on Ethereum?
What Is Ethereum and How Does It Work?
We've gone over how the Ethereum network operates and the advantages it aims to offer its users in terms of privacy and protection, but what does the Ethereum network's actual landscape look like? Is there something especially interesting or appealing to mainstream users on this form of alternative Internet, and how does it use the blockchain?
D-Apps
What Is Ethereum and How Does It Work?
The dApps, or "decentralized apps," that live on the Ethereum network are its most prominent feature. While dApps can appear to the end user to be identical to any other app or mainstream software package, they vary in a few key ways.
The primary distinction between a dApp and an app is that a dApp, as the name indicates, is run on a decentralized network and stores its data on the blockchain. This makes dApps more safe than conventional apps for the same purpose that a smart contract is secure: dApps don't store their data on a centralized server that cybercriminals can single-handedly attack.
E-Commerce
On Ethereum, there are a number of e-commerce platforms ranging from art, fashion, and exclusive digital collectibles to a decentralized music streaming platform. The removal of the middleman makes hosting a digital marketplace on Ethereum safer and more stable for users, as well as more advantageous to buyers and sellers. It's presented as if Amazon did everything for free and didn't hold any user data, which sounds awesome.
Games
Right now you can play numerous decentralized games completely powered by the Ethereum network. There’s a voxel-based mash-up of Minecraft and Second Life, a Pokémon-like collectible creature game whose creatures can sell for hundreds of dollars, and even a trading card game that plays like a decentralized Hearthstone and more. Yeah, there’s a lot to be excited about and we highly encourage any crypto-enthusiast to take a look.
Finance Tools
Financial markets, both crypto and conventional, are the subject of the largest number of dApps currently available. Users may communicate with lenders and borrowers, as well as use a number of development tools and crypto-specific features such as token swaps and other utilities.
Should You Use Ethereum dAPPS?
The response to whether you can use Ethereum is the same as it is with every other more conventional App: if you want to. The majority of the Ethereum-hosted dApps cater to those who respect their privacy and believe in the protection of blockchain-based technology. They operate within a framework ostensibly designed to facilitate lean and productive coding and are, by definition, unregulated and uncensored.
Aside from your own user experience, investing your time and money in Ethereum-based apps as a consumer could be worthwhile if you believe in the platform's ultimate objective of achieving a fully decentralized internet. For the time being, you have a basic understanding of how Ethereum functions and what it strives to provide its users.
We suggest that you play with what Ethereum has to offer and form your own opinions armed with this knowledge.
Do you have any more Ethereum questions? We're not shocked by this. It's a daunting crypto-rabbit hole at first, but it's a fascinating one nevertheless. Please contact us in the comments section below if you need assistance.
