In our “Cryptopedia”, you will find a reference for learning about a broad range of cryptocurrencies. After looking at Bitcoin, it’s time to look at the next biggest crypto; Ethereum.
When it comes to cryptocurrencies, everyone has heard of Bitcoin. It’s pretty much the household name of cryptocurrencies. But there’s another network that is almost as well-known and respected: Ethereum.
What’s the difference with Ethereum?
Ethereum is a network that uses a cryptocurrency called Ether, which works like gas in a motor. Ether powers the Ethereum network and keeps the whole blockchain moving.
The big difference with the Ethereum network is that it is used to run all kinds of applications. Whatever programmers can imagine can be programmed to run on the network. These applications, running on the blockchain, are decentralised, meaning, they do not run on a single machine in a single place, but all on the Ethereum blockchain network. In a simple analogy, think of Ethereum being like the Internet, and the applications like all the websites on the Internet. All of these Ethereum-based applications are called decentralised apps, or dApps, for short.
In the traditional business world, a new product or company would need investors with big pocketbooks ready to dole out their funds for the next big thing, à la reality show “Shark Tank”. Big business honchos would deliberate and negotiate for a share of a new company and choose where to invest their money, hoping for a big return if the business succeeds.
With Ethereum, dApps developers could instead issue tokens that run on the Ethereum blockchain. The tokens can be sold to anyone interested in investing to generate funds to begin projects. So a group of people with a cool business idea can get support from anyone in the world interested in buying their tokens.
Most of these tokens are sold through events called ICO’s, or Initial Coin Offerings. Buyers use Ether to purchase the tokens in order to have their share of value and utility in the new application. This has resulted in some hugely successful ventures that would not have been possible in the traditional business world. It has also resulted in some unmitigated failures where investors lost all of the Ether they invested in exchange for now-worthless tokens. A huge factor in the boom and bust cycle of cryptocurrency markets from 2017 to 2018 can be attributed to the ICO frenzy and the subsequent widespread failure of many over-hyped and ill-conceived projects. For this reason, some countries have moved to ban ICO’s to protect casual investors from losing a great deal of money to scams or poorly planned projects.
Ether, the “gas” of the Ethereum network, and tokens can be used to complete certain tasks on the network, depending on what the programmers decide to do with something called a smart contract.
Smart contracts are clever bits of tech on the Ethereum network, following steps assigned to them automatically. If a certain condition is met, then the next step is taken, and the next, and so forth, until all the steps in the smart contract are completed. The beauty of this is that no person is needed to make this work once it is set up. It runs all by itself on the blockchain, simply by following the steps given in the smart contract.
Here is a simply analogy. You go to a store to buy an item. You walk up to the cashier with the item you want to buy. If you have enough money, you pay for the item and the cashier gives you the item to freely take home for your own personal use.
This could all be executed without a cashier but instead with a smart contract. Instead of paying a cashier, the transaction is completed on the blockchain when conditions are met, such as successful payment, and the item is delivered to you automatically, without any middleman.
Of course, in this particular simple case, you might say, “Vending machines already do this anyway.”
It’s true, but there are far more complex tasks that smart contracts can complete. Smart contracts could be used for legal agreements, property purchases and sales, identity proofs, and a huge range of utilities in a much more efficient and automated manner than is currently used, all running on the Ethereum network.
Much like Bitcoin, Ethereum is constantly evolving and changing. It is adapting to handle the immense growth in utility of its network, which has, at times, caused the network to run slowly and to struggle with its own popularity. As time goes on, Ethereum will continue to change and improve to handle growth in scale and speed.