What is Ethereum?

If you are at all interested in cryptocurrencies, you’ve probably heard about Ethereum, but what is it exactly?

Ethereum is a blockchain based distributed computing system designed to run a whole host of decentralised applications. That might sound like a whole wall of techno-babble right out of an episode of Star Trek, but bear with us as we break it down for you.

What is a blockchain?

A blockchain, simply put, is a record of transactions shared across a whole network of computers. Each time that you buy some Bitcoin, for example, that is recorded on the blockchain, publicly and anonymously. Then when you spend your Bitcoin, the record is checked. This ensures that you own what you say you do, and that you haven’t already spent it.

Because every transaction is added onto the increasingly long blockchain, one after another, in order to commit fraud and claim that you owned something you didn’t, you’d have to change the whole blockchain, on all the different, independent computers it’s stored on. This is basically impossible, without a tremendous amount of computing power. Therefore, making blockchain technology  less vulnerable to certain types of crime than centralized payment records, like a traditional banks.

Source: WIRED (Facebook)

Ethereum: A distributed computer network

Bitcoin uses the blockchain to create an electronic currency and payment system. Although, that is only one of a whole host of potential uses of the technology. Ethereum uses the blockchain to create a distributed computing system, effectively linking a whole host of computers together to act as a single giant computer. This allows users to run applications across the network.

Ethereum’s network of computers should allow users to design and run applications of almost any type, from online shops to games. This includes the popular CryptoKitties game, that actually resulted in the Ethereum network being congested in 2017. Because these apps are distributed across the Ethereum network, they don’t require users to own a server, and there isn’t any ‘downtime’ from power outages or the like.

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Smart Contracts

However, one of the main uses of Ethereum’s super computer network is to run so-called Smart Contracts.  Smart Contracts are an automated program that can conduct transactions without human interference. For example, you could write a Smart Contract with a seller to buy shares off them. The contract would dictate that you only get the shares when you pay the seller, and the seller only receives payment when the shares are transferred. If you submit your payment before the shares are transferred, your money will sit in escrow, waiting until the contract has been fulfilled. Because the transaction is on the blockchain, everyone can see if you and the seller have fulfilled  the contract, even though they won’t know exactly who you are.

Another possible use is in hiring a rental car. Here the Smart Contract waits until you deposit payment for the car, and then sends you a digital code to unlock the door. These contracts can all be undertaken without a middleman having oversight, helping to reduce costs. Be aware though, that the absence of any regulator in the middle of the transaction does mean that you are responsible for making sure the deal is fair and equitable.

Ethereum’s cryptocurrency

While a Smart Contract is cheaper to enact than a standard contract, it isn’t free. In order to incentivise people to process the blockchain transactions, Ethereum has its own cryptocurrency, Ether. Ether operates similarly to Bitcoin. Both are mined with people processing the blockchain receiving an amount of Ether in proportion to the computational power they provide. It can also be bought and sold on exchanges like any other cryptocurrency.  However, a potential benefit of Ethereum is that it can be used to develop other cryptocurrencies, raising funds through an initial coin offering and receiving Ether in exchange.

Ethereum is sort of a blank slate, limited by people’s imagination and willingness to experiment. Who knows what lies ahead for Ethereum?

For more on cryptocurrencies, and other investment topics, make sure to check out Investor Hub.

Cover image source: Ponderful Pictures

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