This is a beginner’s guide to the ethereum cryptocurrency. Some explanations might be simplified, but crypto beginners will have a better understanding of what is ethereum after reading this blog.
Additionally, our article about the blockchain technology: What Is Blockchain Technology and How Does It Work, can help you comprehend the topic of ethereum a bit better.
Let’s start with answering the question of what is ethereum.
Ethereum is a decentralised blockchain platform proposed and co-founded by Vitalik Buterin. It was crowdfunded in 2014 from people all over the world.
Ethereum is used for running smart contracts. They are applications that have little to no possibility of censorship, fraud, third party interference or downtime. Like bitcoin, ethereum is an open-source project that is not owned or manipulated by a single person. This means that everyone can get this code and see how it works. One difference here is that Vitalik Buterin is still very much an active member of the community while bitcoin’s Satoshi Nakamoto remains a mystery (and will probably remain so in the future). This means that ethereum still has some sort of an ideological or a philosophical leadership.
The currency that allows this system to function is called ether.
Okay, that’s the textbook explanation, but some of the mentioned terms might be a bit confusing to new readers, so we’re gonna explain what is ethereum in more detail in the following chapters. But we do expect the readers of this article to at least be familiar with the basics of the blockchain technology and ICOs.
What Are Ethereum Smart Contracts?
An ethereum smart contract is a computer code that runs on the blockchain and can facilitate the exchange of money, content, property, shares, or anything of value. It automatically executes when specific conditions are met. Think of ethereum smart contracts like advanced vending machines. They can take coins and dispense a product according to the displayed price.
A Real-World Example of Ethereum Smart Contract Use
Let’s say that we want to sell our apartment. This can often be a long and complex project, involving other third parties (lawyers, notaries), which ultimately increases costs. We need:
- a real estate broker or a lawyer who will prepare a sales contract,
- a notary who will prepare a notarial record and verify the contract,
- the bank through which you will conduct a transaction between the buyer and the seller,
- the court that makes the registration of the owner or the change of ownership in the land register.
Ethereum can speed up and simplify this process
Ethereum allows us to use smart contracts where the terms of the contract are written in a few lines of code. The contract is integrated into the Ethereum blockchain and cannot be altered later on.
When both parties — the seller and the buyer — agree to the terms of the contract and all the conditions are fulfilled, the transaction is executed. With such a contract:
- we don’t need a real estate broker or a lawyer because the contract is part of the service,
- we don’t need a notary because the contract is valid as soon as all the conditions are fulfilled,
- we don’t need banks as the purchase price is part of the terms of the contract. There is also little to no waiting time for a deposit as the transaction is carried out in the Ether cryptocurrency which is transferred in minutes from the buyer’s to the seller’s wallet,
- we don’t need the courts because all the information about the new owner is written into the blockchain.
The Ethereum Virtual Machine
The concept of the Ethereum Virtual Machine (EVM) might be a bit too advanced for some readers, but nevertheless, we should cover all aspects of the Ethereum platform.
In short, the EVM is the runtime environment for smart contracts in Ethereum. It is completely isolated from the main network, so it can also be thought of as some sort of a testing environment for developers. A smart contract on the EVM won’t affect the operations of the main blockchain.
You can read more about it here.
Ether is the name of the currency used within Ethereum. The currency is often mistakingly referred to as Ethereum.
Ether cryptocurrency is listed under the code ETH and is traded on cryptocurrency exchanges. It is primarily used as a payment mechanism for transaction fees and computational services on the Ethereum platform. It is also often used as a funding currency of the ICOs that are built on the Ethereum platform.
In 2017 the price of ethereum or ether cryptocurrency has risen from around 7 EUR at the start of the year to a staggering 700 EUR at the end of the year.
How to Get Ether?
In order to obtain the ether cryptocurrency, your main two options are to either:
- become an Ethereum miner or
- trade other currencies for ether using regulated exchanges, like Kriptomat.
The Ethereum blockchain is in many ways similar to the Bitcoin blockchain. It does have some differences that are probably outside the scope of this article, but it is enough to know that the ethereum mining is similar to bitcoin mining.
The word mining originates in the context of the gold analogy for crypto currencies. Gold or precious metals are scarce, so are digital tokens, and the only way to increase the total volume is through mining. This is appropriate to the extent that in Ethereum too, the only mode of issuance post launch is via mining. Unlike these examples however, mining is also the way to secure the network by creating, verifying, publishing and propagating blocks in the blockchain. – An excerpt from http://ethdocs.org/en/latest/mining.html
In short, people can use their own home computers for ethereum mining by essentially selling their computing power to keep the blockchain up and running. You may have seen pictures of the so-called mining farms with thousands of commercially available graphics cards.
The miner that successfully adds a new block to the blockchain will receive exactly 5 ETH. But due to a high number of miners around the world, no one miner will ever be able to receive this reward all for themselves. That’s why people gather in so-called mining pools where the mining revenue is fairly distributed based on the mining power of participating miners.
The mining pool submits blocks with proof of work from a central account and redistributes the reward to participants in proportion to their contributed mining power. – An excerpt from http://ethdocs.org/en/latest/mining.html
Check out the following video about one of the largest ethereum mining farms in the world.
Ethereum in Summary
The ethereum blockchain can be used to automatically transfer ownership without intermediaries or third parties. There are countless unexplored applications of this relatively new technology.
Because ethereum is a fully open network, anyone can use it to build their own applications. Similarly to how the TCP/IP protocol enabled the internet and consequently the development of a huge number of businesses and web applications, the blockchain enabled the bitcoin and ethereum protocols.
The number of programmers who develop new decentralised applications on the ethereum network is still growing every day.
The text is informative in nature and does not count as an investment recommendation. It does not express the personal opinion of the author or service. Any investment or trading is risky, past returns are not a guarantee for future returns – risk only those assets that you are willing to lose.
If you are interested in purchasing ether, you can use Kriptomat. A regulated and licensed platform which is fast, safe and easy to use.