What is Ethereum cryptocurrency and how does it work?

By now, you probably know about Bitcoins which have been making all the news and is the biggest cryptocurrency so far. Likewise, we have other cryptocurrencies which are creating a lot of buzz, and one of them is Ethereum. If Bitcoin is the king of the cryptocurrency World, then Ethereum is the queen!

Ethereum cryptocurrency is currently the second most valuable Cryptocurrency on the market. It was launched two years ago, and it is believed, that in 2018 it will be the most talked about once the excitement around Bitcoins settles down.

So let us see what is Ethereum cryptocurrency, how it works and how it differs from Bitcoin.

What is Ethereum Cryptocurrency

“Ethereum is a decentralized platform that runs smart contracts” – this is the perfect explanation of it. If you compare them to Bitcoins, they’re both open-source platforms based on the Blockchain technology.

Ethereum Cryptocurrency

Ethereum is Blockchain based

Ethereum contains blocks of data that are transactions and smart contracts. The blocks are created or mined by some participants and distributed to other participants who validate them.

Ethereum like Bitcoin is a public, permissionless network. It means anyone can download or write software to connect to the network and start creating transactions and smart contracts, validating them, and mining blocks. There is no need to log in or sign up with any other organization. They both cut down the middle man (banks) in their financial transactions. No middleman also signifies reduced costs!

PoW (Proof of Work) of Ethereum

In both bitcoin and Ethereum, mining participants form a valid block during transactions by spending electricity to find solutions to a mathematical puzzle. But Ethash which is Ethereum’s PoW math challenge works a bit differently to Bitcoin’s. It allows common hardware to be used for mining.

In a future release of the Ethereum software called Serenity, there is a plan to move it from electricity-expensive Proof-of-Work mining to a more energy-efficient Proof-of-Stake protocol called Casper.

Ethereum offers decentralized computational platform

Unlike Bitcoin that uses blockchain technology for bitcoin payments, Ethereum uses decentralized computational platforms. Decentralization is important because it eliminates single points of failure or control. It is almost impractical to make internal collusion or external attacks. There are many applications that act as the third party to connect you with some other on the basis of some logic. Many of our centralized systems could be built on this decentralized platform making those transactions trustless.

Significance of ETHER

Ethereum’s token is called Ether, shortened to ETH. This is an Ethereum’s cryptocurrency that can be traded for other cryptocurrencies or other sovereign currencies, just like BTC. The ownership of Ethereum cryptocurrency token “Ether” is tracked on Ethereum blockchain similar to the bitcoin ownership being tracked on Bitcoin’s blockchain. Technically though, their ways of tracking are different.

Ethereum Virtual machine (EVM)

Each of the mining computer runs the smart contract on their computer using their Ethereum Virtual Machine (EVM) as part of the mining process, and come to a conclusion about the output. Theoretically, each computer on the Ethereum network will come to the same conclusion, if all goes smoothly because they are running the same contract code with the same supplied information.

When a block is mined, the winning miner will publish the block to the rest of the network. The other computers will validate that they get the same result, then add the block to their own blockchains. This is how the state of Ethereum’s blockchain gets updated.

What are Smart Contracts

The currency of Ethereum – Ether, runs on sophisticated smart contracts. Smart Contracts is just a phrase used to describe computer code that can facilitate the exchange of money, content, property, shares, or anything of value. On blockchain, these small contracts run like a self-operating computer program that automatically executes when specific conditions are met. They run in the same way as programmed without any possibility of censorship, downtime, fraud or third-party interference.

These smart contracts use an if:then system specifying that Ether can only be traded if specific conditions can be met. This is the reason why it is gaining such a huge momentum in such a short period of time. No doubt analysts are suggesting that its value will increase steadily in coming time.

How Smart Contracts aid to run Ethereum

Smart contracts are actually little computer programs that are stored on Ethereum’s blockchain. They can be activated, or run, by funding them with some ETH.

In Ethereum, a smart contract can be created by creating a new account with some code in it and then uploading it to the Ethereum blockchain in a transaction. Post upload, Ethereum blockchain becomes more like a jukebox. Whenever Ethereum needs to run, a transaction will be created containing a payment of ETH to the contract along with some more information if the contract needs it.

EVM is a Turing complete software that runs on the Ethereum network. It enables anyone to run any program, regardless of the programming language given enough time and memory. The process of creating blockchain applications have become more efficient and easier than before. Ethereum allows developing thousands of different applications on one single platform rather than building an entirely original blockchain for each new application.

Ethereum has smaller block time and shorter blocks

Ethereum has smaller block time of 14 seconds as compared to 10 minutes of bitcoin. This speeds up Ethereum transactions being recorded into Ethereum’s blockchain.

The block size in Bitcoin is in bytes while Ethereum’s block size is based on the complexity of contracts being run – it’s known as a Gas limit per block, and the maximum can vary slightly from block to block.

Data-wise, as of now, most Ethereum blocks are under 2 KB in size while bitcoin block size is currently 1 MB.

To conclude, it can be said that with a user-friendly platform Ethereum is offering the power of blockchain technology. It is speeding up the decentralization of the world economy. This decentralized applications can disrupt hundreds of industries including finance, real estate, academia, insurance, healthcare and the public sector amongst many others.

But, where there is Success, there lies a RISK too!

Disadvantages of Ethereum:

  • It is a platform and won’t be as effective as another cryptocurrency. It is not a ledger; instead, it acts as a ledger/supercomputer/smart contract generator/etc. for a lot more users. Though it gives the flexibility but makes it less optimized for one single use.
  • If the transition from Proof of Work to Proof of Stake doesn’t go well off, some critical issues may arise in the architecture that could even lead to the crash of the system.

Etherium has hit a high price of $900, but some say – there is still a bubble around Ethereum. Investing into it for long-term can be a risky play.

To know more about Ethereum, visit ethereum.org.

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Ankit Gupta is a writer by profession and has more than 7 years of global writing experience on technology and other areas. He follows technological developments and likes to write about Windows & IT security. He has a deep liking for wild life and has written a book on Top Tiger Parks of India.