What is Ethereum, how does it work, and what is the purpose of the cryptocurrency for Blockchain and smart contracts?

Cryptocurrency Guide » What is Ethereum

Ethereum, what it is and how it works. Bitcoin was the first cryptocurrency, but it is not the only one. All cryptocurrencies that are alternatives to bitcoin are known as "altcoins" and among these projects, there is one that has stood out more than others: The Ethereum platform.

So much so, that international financial and technological entities such as JP Morgan, ING, Reuters, Intel or Microsoft have shown interest in it. Do you want to know why?

Next, you have a complete tutorial with everything you need to know to get started in Ethereum. We have tried to make it as comprehensive as possible, gathering everything about this cryptocurrency.

We will try to answer frequently asked questions about Ethereum for beginners, but we will also introduce more advanced concepts. We also try to keep it up to date, frequently updating it with new information about Ethereum.

Don't miss our article if you want to know what Ethereum is, how it works, and why experts believe it is the cryptocurrency of the future.

Ready to learn EVERYTHING about Ethereum?

What is Ethereum

Ethereum is not a cryptocurrency. It is a digital platform that adopts the blockchain technology developed by Bitcoin, but designed to create multiple applications on it.

The currency used by this network is called ether. However, it is common for the community to refer to the currency by the name of the platform, Ethereum.

The ability to run applications within a blockchain has multiple advantages over traditional cloud services, such as servers or databases.

1. It is a safer and more robust way to store information in the cloud. The data is encrypted on the Ethereum blockchain (using the Ethash security algorithm), making fraudulent queries very difficult. In addition, modifying the blockchain is virtually impossible, making it hacker-proof.

» Related article: Learn more about Blockchain.

2. It does not use intermediaries. Therefore, you will not be giving your data to big companies like Google, Amazon, or Microsoft; and if it manages to be fully implemented, it allows you to do away with other traditional services such as notaries or lawyers.
3. It is cheaper. To use the Ethereum blockchain, it is necessary to pay with its currency: Ether. However, the service is much more cost-effective than hiring the aforementioned companies: Amazon, Google, lawyers...

What does Ethereum mean?

The meaning of ethereum comes from the definition of the word ether:

Ether is a hypothetical invisible, weightless and elastic fluid, which was considered to fill all space and constitute the transmitting medium of all manifestations of energy.

In a similar way, Ethereum fills all digital space, distributed by a network of computers: The Ethereum blockchain; and is the transmitting medium for executing smart contracts, which we will talk about later.

History of Ethereum

Unlike Bitcoin, the goal of Ethereum wasn't to develop a cryptocurrency or payment system, but a platform capable of offering a service. According to the creator of ether, Ethereum is "a combination of a decentralized network for digital mining and a software development platform".

In other words, this cryptocurrency borrows the philosophy of bitcoin, of a secure and decentralized network that runs on the blockchain, and utilizes the computing power of the blockchain to run applications.

Who is the creator of Ethereum?

Ethereum was created by Vitalik Buterin, a Russian programmer and writer who immigrated to Canada, who developed the system at just 21 years old.

It is interesting how Ethereum was born, as the development of its platform was financed through crowdfunding, between July and August 2014. This was known as the Ethereum ICO and marked the first major success of a cryptocurrency ICO.

The system officially started operating on July 30, 2015, which was truly when Ethereum was born.

» Related article: What is a cryptocurrency ICO?.

The origin of Ethereum was to create a platform for decentralized and collaborative applications.

Similar to Bitcoin, Ethereum has enjoyed great popularity. Its value has multiplied several times in recent years.

At its market debut, ether could be acquired for less than €1. On January 13, 2018, it reached an exchange rate of €1,144. This popularity has made ether the second virtual currency in the market by capitalization, behind Bitcoin.

What is ether

Ether is the currency of Ethereum. It is a token that can be used in transactions using this software and it serves as payment for the execution of applications on the Ethereum blockchain. Therefore, we can say that ether is the cryptocurrency and Ethereum is the platform that allows the execution of applications.

In other words, to run an application or make any changes on the Ethereum network, we need to pay a transaction fee in Ether for the blockchain to process that change.

What is ETH

The Ethereum logo is usually represented with a kind of octahedron. Its symbol is E, although it is also possible to refer to it as the ethereum ticker, ETH. The ETH ticker is a stock code used to find the Ethereum currency, that is, ether, in the stock markets.

Who is behind Ethereum?

Although Vitalik Buterin was the one who created it, he is not the one who controls Ethereum. This cryptocurrency is a decentralized platform, so there is no central entity that manages it.

So, it is normal for you to wonder, who backs Ethereum? Cryptocurrencies, in general, are programmed in open source code and this is also the case with Ethereum.

Behind its code, there is a community of expert programmers who believe in the future of this cryptocurrency and who continuously collaborate to improve its programming.

In addition, its code is completely public and transparent, so it is constantly reviewed by these programmers, preventing any fraud or malicious fragment in its algorithm.

What is Ethereum used for?

Bitcoin was conceived as a decentralized, fast, and secure payment system. In contrast, Ethereum's goal was to design a platform for executing smart contracts and decentralized applications, known as Ethereum ÐApps.

The function of its currency, ether, is to operate within the network, execute the contracts, and create the applications.

Ethereum's smart contracts are applications that function exactly as they are programmed. There is no possibility of manipulation, fraud, or censorship. It even prevents third-party interference in the code.

Initially, these contracts were simple, designed to resolve agreements between individuals or simple events like bets. However, the Ethereum system is designed to offer flexibility to users.

As the platform develops, it will allow the development of numerous types of smart contracts within the system.

Examples of Ethereum smart contracts

Some examples of smart contracts that can be developed on the Ethereum platform are:

• Financial services: Loans, inheritance resolution, micro-insurances, crowdfunding, or payment automation.
• Health services: Electronic medical records or personal medical tracking through IoT (Internet of Things).
• Other services: Betting systems or voting systems.

» Related article: Smart contracts.

Ethereum as an investment

Currently, it also trades on stock markets, so another use of Ethereum is as an investment. Like other cryptocurrencies, its price has seen a significant increase since its creation. Initially, 1 ethereum was traded for approximately $0.30. In December 2017, it reached an exchange rate of almost $1,400 per ether.

How does Ethereum work?

Ether, like other cryptocurrencies, uses the blockchain. The blockchain is a shared digital ledger where all transactions are recorded.

The Ethereum blockchain is publicly accessible, transparent, and practically impossible to modify. Transactions can be viewed in real time on the internet. For example, at etherscan.io.

Every 16 seconds, a new block is created on the blockchain, where all transactions are recorded. Miners verify each of the blocks, similar to how it is done on the Bitcoin network.

A miner is essentially a computer connected to the network that contributes its resources to the operation of the blockchain. This requires power and consumes a lot of electricity. In return, they are rewarded with ether.

The mining system used by Ethereum is known as Proof of Work (PoW).

Below you can find the different features to understand how Ethereum works.

Ethereum Mining System

The work of the miner is to solve very complex algorithms that allow adding the block to the chain. Because this exercise requires a lot of electric energy (and therefore money), it prevents fraud and malicious activity. This security system is known as Proof of Work (PoW).

However, this poses a problem: The power consumption for cryptocurrency mining is very high.

For this reason, Ethereum is preparing to switch the system to the Proof of Stake model (PoS).

In this system, miners become validators. Instead of providing computing power, they temporarily stake an amount of ether in exchange for certifying a block. If the validator engages in any malicious activity, they would lose the ether. If the transaction is successful, the ether is returned to them.

Ethereum Algorithm

Similar to bitcoin, ethereum uses a security algorithm to encrypt each of the operations of the blockchain. These algorithms transform the information of each transaction (sender, receiver, date, amount...) into an alphanumeric chain.

This encrypted chain is called a hash. An example of a hash is the following:

The security algorithm used by Ethereum is known as Ethash. It is a mixture of SHA3 protocols, more powerful than the SHA2 used by bitcoin.

This means that mining ether requires more processing power. For this reason, ether is usually mined with GPUs or graphics cards.

It is important to note that Ethereum is not anonymous. Although the data is encrypted, information such as the sending and receiving wallets is public and can be consulted.

Although wallets are also a chain of alphanumeric characters, all operations are done through a device connected to the internet. This way, a wallet can be associated with an account or device and its owner can be identified.

Therefore, Ethereum cannot be used for illicit activities.

Characteristics of Ethereum's blockchain

Transactions are integrated by miners into a block. Once a block is created, miners confirm it, validate it, and add it to the blockchain.

Unlike Bitcoin, where blocks were generated every 10 minutes, Ethereum is much faster. The Ethereum algorithm is capable of creating a block every 16 seconds.

That is, when a transaction is made on the Bitcoin network, it usually takes a few minutes, while on Ethereum, it's almost instantaneous.

Each block stores the transactions made during the time it took to create them. While the Bitcoin network has to store data from the operations of the last 10 minutes, ethereum blocks only store 16 seconds of transactions.

The size of a Bitcoin block is limited to 1 Mb. In Ethereum, the maximum block size is not defined, but by only storing 16 seconds, it is much smaller than 1 Mb. Therefore, Ethereum blocks, and in general its blockchain, are lighter than those of Bitcoin.

Rewards of mining on the Ethereum network

Miners are responsible for verifying ether transactions. Every 16 seconds, they verify all transactions to form "blocks" and encode them by solving complex algorithms. These blocks are linked to the previous block within the blockchain. For this work, miners are rewarded.

In the Ethereum platform, miners receive two types of rewards: block rewards and gas rewards. This is an advantage of Ethereum mining compared to Bitcoin, as in the latter they only receive rewards for validating blocks.

Block Rewards

Each time a block is validated, the miner receives a reward in ether. At the beginning, in the origin of Ethereum, 5 ether were awarded per certified block. In the current stage, known as Metropolis, it has been reduced to 3 ether per block.

In the future, the reward will be given through PoS or Proof of Stake. This stage is called Serenity, although it is not yet operational.

Ethereum Gas Reward

To execute a transaction or a smart contract, parties must pay a fee known as "Gas". The Gas can be understood as a tip given to the miner.

Normally, when making a transaction, a Gas limit is established to be paid (the minimum is 21,000) and a price is given to each unit of Gas.

The price of Ethereum Gas is measured in Gigawei (Gwei), which is equal to 0.000000001 ether. Its value varies depending on how congested the Ethereum network is.

It is common to pay the SafeLow price. That is, the lowest price that ensures the completion of the transaction.

You can check the current Gas price at ethgasstation.info. It is also possible to pay a higher Gas price than the market price. This way, your transaction will be prioritized and resolved more quickly.

The final commission to be paid will be the Gas price x Gas used (which will be less than the chosen limit). Executing more complex operations, such as Ethereum smart contracts, requires more resources and therefore more Gas.

Characteristics of Ethereum

How many Ethereum are there?

Just like Bitcoin, Ethereum is a decentralized currency. It doesn't depend on any organization or government that can manipulate it. Its value will be determined solely by the market itself.

However, unlike Bitcoin, the currency Ethereum is an inflationary currency.

Ethereum does not have a maximum number of coins in circulation. Nor a defined date to stop the creation of new coins.

18 million new coins are created every year. This is because the function of ether is not to be a financial asset, but to provide a service. The Ethereum network will be developed to enable the execution of smart contracts.

Ether Decimals

The main unit of Ethereum is the currency Ether (ETH). It also has 18 decimals. Their names, in descending order, are: ether, finney, szabo, shannon, babbage, lovelaces, and wei.

Each unit is 1000 times larger than the next. In other words, 1 Ether is 1000 finney, 1 finney is 1000 szabo, and so on. Therefore, the minimum in Ethereum is 1 wei, which is equivalent to 0.000000000000000001 ether. Or in other words, 1 ether is 1 trillion wei.

Below, we show you a summary table with the units of measurement in Ethereum.

Ethereum Network Programming Language

Programming languages are the commands given to machines to perform certain processes. There are many languages that have been developed throughout the history of computer science. The Ethereum network uses the programming language known as "Turing complete".

In other words, the Ethereum network uses a language that has computational power equivalent to what is called a Universal Turing Machine.

Machines that use this type of language can perform any type of operation, provided they have unlimited resources.

Obviously, this concept is practically impossible, but the power of Ethereum network is much greater than the resources needed to perform its blockchain operations, so it closely resembles a Universal Turing Machine.

The Turing complete language gives Ethereum a much higher potential compared to other cryptocurrencies. For example, Bitcoin uses C++, which is a somewhat more limited language.

Advantages of Ethereum

The main advantage of the Ethereum platform is the ability to create smart contracts and ÐApps.

Traditional contracts described the terms of a relationship. In contrast, smart contracts ensure the fulfillment of the terms.

These contracts can be very simple, such as the payment of a specified amount of money on a specified date. But they can also be developed for more complex services as mentioned above.

The benefits provided by smart contracts are:

• No need for intermediaries. The user controls the contract and costs are minimized.
• Saves time and effort compared to manual processes.
• Transparent and secure. Contracts are encrypted and duplicated throughout the Ethereum network.

Currently, Ethereum is a new and still under development platform. Therefore, it may be relatively normal to still have errors.

However, its features promise great potential. So much so, that major companies already trust Ethereum, such as, for example, the banks BBVA and Santander.

Future of Ethereum

Ethereum has brought a twist to the use of blockchain by providing a secure and user-friendly system for running applications on the blockchain, which is accelerating the decentralization of the global economy.

In addition, this cryptocurrency has a very intelligent leader in its creator, Vitalik Buterin, and an established and clear roadmap, so many companies are adopting this technology and becoming part of the Ethereum Alliance.

All of this predicts great potential for decentralized applications developed on Ethereum to have an impact in multiple industries. From finance, real estate, education, insurance, healthcare, or the public sector, among many others.

What is the Ethereum prediction for 2020?

If you consult specialized websites and read expert opinions, most of them agree on a bright future for Ethereum.

It is easy to find predictions over $10,000 for 2020 (even higher). However, we do not like this type of forecasts.

The world of cryptocurrencies is very innovative and technology is constantly advancing. Who can guarantee that Ethereum will be the leading protocol for blockchain application development?

New cryptocurrencies constantly emerge that solve certain problems the ether has, some of which have become very popular, such as TRON, EOS, and Cardano. The reality is that no one knows the evolution of Ethereum.

Therefore, we recommend not trusting the advice of so-called experts that you find on the internet. It is very important to know each project and who is behind them, so that you can form your own criteria.

Differences between Ethereum and Bitcoin

Although Ethereum and Bitcoin are both cryptocurrencies, the truth is that they are completely different projects.

First of all, their purposes are completely different. Bitcoin is a digital crypto asset, while Ethereum is a platform where decentralized applications, smart contracts, and other tokens can run. So, they are not substitute projects, but compatible ones.

Next, we show you a Bitcoin vs Ethereum comparison. Hopefully, it will help you decide what to buy, Ethereum or Bitcoin.

A curiosity: The Ethereum cats

At the end of 2017, a fun game emerged: Cryptokitties. It consisted of collecting and taking care of cats in a similar way to other well-known games such as Tamagotchi or Pow.

The novelty was that the game was created on the Blockchain platform and operated based on smart contracts. Its main objective was to spread awareness about the functioning of Ethereum.

The online video game became a sensation on the internet. Its popularity grew considerably, becoming responsible for 15% of the contracts executed on the entire blockchain of this cryptocurrency. This was reflected in its price, .

Summary of concepts about the Ethereum Platform

The most important concepts to know what ethereum is are:

• It is a cryptocurrency created by Vitalik Buterin in 2015.
• Like bitcoin, Ethereum is a platform that uses blockchain technology.
• Its potential lies in the possibility of creating smart contracts and decentralized applications.
• The ether, its currency, is decentralized and inflationary.
• It uses the "Turing complete" programming language.
• The Ethereum security algorithm is SHA3.
• It is not an anonymous currency.
• The Ethereum mining system is Proof of Work (PoW). However, the platform is being developed to work on a Proof of Stake (PoS) mechanism, which is more efficient.
• The Ethereum system is secure.
• The cost of transactions varies according to the price of Ethereum Gas.

Still confused? Maybe watching this video about Ethereum for beginners can help you consolidate the concepts even more.

Perhaps this video about Ethereum for beginners can help you understand it better?

If you still have doubts about what Ethereum is or want to complete this tutorial, do not hesitate to leave us a comment. We would love to hear your opinions about Ethereum.