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what is ethereumLooking into the world of cryptocurrency, one simply cannot miss Ethereum.

The second largest in terms of market cap, Ethereum is quite different from bitcoin and is intended to have uses far beyond being a currency.

In 2014, Vitalik Buterin and a team of developers announced the release of Ethereum to the public and this marked the birth of an interesting new form of blockchain technology. Ethereum is backed by a thriving and vibrant community and aims to offer a host of transformative features.

So, what is Ethereum? Read on as we demystify this amazing new technology and cryptocurrency.

Ethereum vs Bitcoin

ethereum vs bitcoinPeople new to the crypto-space might think that Ethereum is just another cryptocurrency like bitcoin. However, Ethereum could be thought of as a super-charged version of bitcoin (see: bitcoin explained simply).

Although both these assets use the blockchain technology to record the transactions made, they work in very different ways and are designed for very different purposes.

Bitcoin was introduced as a way to solve the global payment system whereas Ethereum aims to revolutionize the global app ecosystem.

The Ethereum network is fueled by its native currency, which is called Ether, and is what is used to pay for services on the network.

Even though the Ethereum currency is officially called Ether, nearly everyone refers to both the platform and currency as Ethereum. Because this is now the accepted convention, we will abide by this here as well.

What is Ethereum?

Bitcoin introduced the concept of using technology to send money directly from one person to another, cutting out the middleman: the bank.

Ethereum took it a step further and introduced us to the concept of using software to replace middlemen for all kinds of different services.

Another way to put it is that the Ethereum network eliminates the need for many types of inefficient and unnecessary middlemen.

The way this is done is by providing a platform for something called smart contracts.

What Are Ethereum Smart Contracts?

what is ethereum smart contractSmart contracts are essentially software that is like programmable money.

This can be confusing, so a few examples might help you to understand this more clearly.

A simple example would be to use Ethereum to send your child some money. Let’s say they’re in college and you want to ensure that they always have enough to live off of.

Perhaps you decide to start by giving them 5 Ethereum. And then you set things up so that every time their account balance falls below 1 Ethereum, 5 more Ethereum is automatically transferred from your Ethereum wallet into theirs.

In this instance, you would set it and forget it. You wouldn’t need to check on their account and you would always know how much Ethereum they have. They wouldn’t need to ever tell you they need more money and you wouldn’t have to take time from your busy life to initiate a transaction.

The smart contract is smart in the sense that it knows in advance when to do something and only does it when certain conditions have been met.

Programmable money…get it?

what is ethereum blockchain

And, in addition to being programmable to automatically execute, it is direct from one person to another. This contrasts with Venmo or PayPal which many people perceive as being done through their phone. But Venmo and PayPal are just moving money from your bank account to the other person’s account.

Ethereuem and cryptocurrencies are direct peer-to-peer transactions.

There is another reason why smart contracts are are truly smart. Not only are they programmable and peer-to-peer, but they are also unbiased.

Smart contracts can settle any transaction in an unbiased manner without any human intervention. Since there is no human intervention, there is no room for corruption or unjust decisions to be made.

ethereum smart contract explained

But Ethereum can do so much more than that first example illustrates. Here’s another example.

Imagine using an Ethereum smart contract for escrow services.

For instance, let’s say you want to buy my house. Typically we would use a trusted third party to hold the money while you make sure that you can obtain the deed and I make sure I can receive your money.

This middleman ensures that you and I don’t have to worry about things like if you hand over the money and don’t get the deed or if I hand over the deed and don’t get the money.

With a smart contract, however, when certain conditions are met and both you and I are ready to go ahead with the transaction, the smart contract would initiate and, simultaneously, the deed would be transferred into your name and I would receive your payment.

Pretty cool, huh? How awesome would it be if you no longer needed that middleman?

The software to do this already exists.

This all can be done with Etheruem’s smart contracts, which could make the escrow safer, faster, and cheaper. Also, it would be recorded on an immutable and permanent ledger.

As another example, you could imagine a peer-to-peer online marketplace. It would be like eBay, but without the central authority, just a huge decentralized network of buyers and sellers that are using this built-in program of trust.

ethereum explained

The internet has done much already to eliminate middlemen who take a cut of every transaction. And now the Internet of Things is further connecting everything and everyone and extending the reach of the internet.

Now, combining smart contracts with the Internet of Things could lead to even more transformational technologies.

Imagine, for example, an Uber of the future with a taxi fleet that can send you a car on demand and you can pay for it automatically and not have any third party facilitate that transaction or take a cut of it.

Or, imagine a government’s entire tax system being set up on smart contracts.

The tax laws would be programmed in so that you never even had to deal with taxes. Your taxes were simply sent to the government in the exact right amount at the exact time.

No more estimating taxes, doing tax returns, issuing tax returns, overpaying or underpaying. And the tax authority would no longer need to waste millions of hours analyzing and dealing with tax returns, for it would all be automated and accurate.

Even though this is a very new technology, there’s already a lot of interesting things that are being built on Ethereum right now.

One of the most interesting is something called CryptoKitties, which are digital collectible cats which can be traded directly, peer-to-peer.

CryptoKitties was so popular upon its launch that it nearly ground the Ethereum network to a halt!

what are ethereum cryptokitties

Where bitcoin introduced money that could be traded digitally, Ethereum is enabling people to trade all sorts of other digital assets, such as digital collectibles like CryptoKitties, because it enables you to create a unique, one-of-a-kind digital item that cannot be copied.

And it is very easy to trade them because all you need is some Ether.

And if you think this is just some cute little game that crazy cat ladies play in their free time, think again. Some of the CryptoKitties have sold for over $100,000!

I don’t know of any real kitties that have been sold for that much…

More Features of Ethereum – Getting Into the Details

Ethereum is a platform and cryptocurrency that mainly focuses on decentralized applications using smart contracts. Unlike traditional apps which have a single point of failure, decentralized apps are run on many computers called nodes.

Because of this, the applications don’t have any downtime.

Anyone can build a decentralized application and run it on the Ethereum blockchain using a global operating system called the Ethereum Virtual Machine (which is also run on the blockchain).

Ethereum might not have been around in the crypto-world for a long time but it has certainly caught the attention of many people. The core team behind the project is actively contributing and working on implementing changes to improve the whole network and reduce the cost of transactions at the same time.

Ethereum is also a boon for start-ups and entrepreneurs.

To collect funds for a start-up, an entrepreneur usually needs to share a part of his or her company with the investors. However, Ethereum has come up with something called an Initial Coin Offering feature (ICO).

Basically this allows a start-up to release a cryptocurrency token on the Ethereum network and, if people believe in the start-up they can choose to purchase the tokens and their investment will go to the start-up directly.

ICOs on the Ethereum network allow anyone to become an early stage angel investor.

The purchasers of the token are able to contribute to any project they like and in return, they receive a crypto-asset of that project. As the project gains momentum and becomes successful, the value of the token may increase.

The entrepreneur gets to keep full ownership of the company and at the same time, the investors are rewarded by means of tokens.

What is Ethereum Mining?

what is ethereum miningSimilar to bitcoin mining, new Ethereum tokens are created, or brought into existence by the software, through a process called mining.

Both bitcoin and Ethereum use blockchain technology that relies on this mining process. For an understanding of blockchain see our guide: what is blockchain

Essentially, in Ethereum mining there are people all over the world using their computers and servers to do computational work that requires a lot of processing power.

All the miners together are able to create a block that includes recent information of what has happened on the Ethereum blockchain.

A new block is linked to the previous block with some fancy software and math magic, and all blocks are linked in a chain back to the very first block.

Hence the name blockchain.

In exchange for their computer processing power, the miners are rewarded with some Ethereum tokens. In this process, they are also verifying the transactions and ensuring the security of the network.

The Ethereum community is currently considering a change in the way this is done, but currently this is how Ethereum is mined.

How to Buy Ethereum?

Because of the explosive growth of and interest in Ethereum, it is available on all major cryptocurrency exchanges, such as Coinbase and Binance.

On some exchanges like Binance, you will need Bitcoin to buy Ethereum. However, you can buy Ethereum directly using fiat money on Coinbase.

Coinbase is the easiest and safest place to buy Ethereum for beginners. Here is a step by step guide on how to buy Ethereum.

The Ethereum price and value is set by the supply and demand. The Ethereum currency is represented by the abbreviation ETH.

Ethereum Wallet

Ethereum is stored and kept in something called an Ethereum wallet. For details on the best Ethereum wallet see our guide on how to buy Ethereum.

Ethereum is Here to Stay

Even though it is a young platform and cryptocurrency, it has really turned some heads and has now become one of the most traded cryptocurrencies in the world.

Ethereum is often considered to be the closest competitor to overtake Bitcoin and take the number 1 spot as the world’s dominant and most valuable cryptocurrency. Many people have predicted this to occur sometime in 2018.

Do you have experience buying, selling or using Ethereum? If so, share in the comments below to help others in the cryptocurrency community.

Richard has developed and ran multiple online websites and communities with tens of millions of monthly visitors. He first discovered bitcoin and blockchain in 2012 and has been helping to educate others on its potential since then. Richard is very passionate about the crypto community. Read his inspiring story into cryptocurrency here.

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