One of the most popular cryptocurrencies, Ethereum has more tricks than just cash value up its sleeve: it’s also fuel for building computer applications.
Cryptocurrency: It’s a word that anyone who spends any time online is sure to have heard of by now. Decentralized digital cash like Bitcoin has made cryptocurrency, and by extension the blockchain, a hot topic for discussion, and the cryptocurrency known as Ethereum is one of the hottest.
But Ethereum isn’t technically just another cryptocurrency—it’s a whole decentralized computer network powered by a cryptocurrency called Ether. Instead of just being an alternative to the dollar, euro or pound, Ether has a specific application.
Ether can be traded for its cash value, and it is one of the most highly valued cryptocurrencies. But to simply call it a cash alternative misses out on a lot of what it’s actually for.
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What is Ethereum, and how does it differ from Ether cryptocurrency?
Despite their often interchangeable usage, Ethereum and Ether are technically two different things. Ethereum is a decentralized computer network that runs applications, and Ether is the cryptocurrency that fuels it. For the sake of consistency, we’ll use those specific terms throughout this guide.
There are basically three layers to Ethereum: The Ethereum Virtual Machine (EVM), the cryptocurrency Ether and gas, which is the actual EVM “fuel” that Ether translates to.
The EVM is a decentralized runtime environment for building and operating smart contracts, also called decentralized applications (DApps). The definition of what DApps are is up for debate, but at its most basic level a decentralized application is one that has no central point of failure. Ethereum’s developer pages do add a bit of insight into how Ethereum defines a DApp, which it classifies as “an application built on a decentralized network that combines a smart contract and a frontend user interface.”
EVM DApps eliminate failure points because the apps are built on the back of the Ethereum blockchain, which spreads out the code, assets and management of applications over the entire EVM network.
Creating a shared network the size of the EVM isn’t cheap, and that’s where the Ether cryptocurrency comes in. Ether is the part of the Ethereum network that has actual, relatable, real-world value, and it in turn can become gas to fuel the EVM. Here’s where things get a bit confusing.
Gas is a way of describing the amount of work being done by the EVM, similar to kilowatt hours being a measure of expenditure and not an actual unit of energy. Much in the same way that a kWh will cost a certain amount on your electricity bill, gas has an Ether cost that anyone using the EVM has to pay in order to commit a change to the Ethereum blockchain.
Also like a kWh, the cost of gas isn’t fixed to a certain amount of Ethereum—it can be adjusted so that EVM operational costs don’t become prohibitively high or so cheap that the network is flooded with junk transactions.
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Ether is paid to miners who work to process changes to the blockchain as a way to incentivize their work, much in the way Bitcoin fees are paid (there are some differences, however). Here’s the catch: The person requesting the transaction has the ability to set the amount of Ether they’re willing to commit to the sale. The more they commit, the greater the incentive and the faster the transaction will likely be processed.
Getting the ratio of Ether to gas just right is important when a user wants to submit a change to a DApp, either as the programmer or a user. Try to go cheap by cutting back on the amount of Ether (and thus gas) that you’re willing to pay, and the transaction may never get processed; Plus, you’re still out the money you fronted as the transaction fails.
In short, Ethereum is a decentralized virtual machine that runs on blockchain technology. It uses the cryptocurrency Ether to pay for the costs of operating decentralized applications since committing changes to the DApps by users or programmers requires mining done by other users.
What can you do with Ethereum?
Ethereum is built to run smart contracts, which the Ethereum Foundation says are “applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.”
Don’t let the name contract fool you into thinking the EVM can only be used to operate transaction-based apps like e-commerce, currency exchanges or identity verification. There are countless other things being done with the EVM, with smart contracts only being the foundation on which they’re built.
Some of the things being built with the EVM are:
If you’re wondering what you can do with Ether, the cryptocurrency used by the EVM, it can be traded like any other cryptocurrency, turned into fiat currency (government issued) or used to operate DApps as a user (everything you do in a DApp costs some amount of gas).
In early 2021 a new use for cryptocurrencies and blockchains found a home in the Ethereum network: Non-fungible tokens, or NFTs. Like blockchains and cryptocurrency, NFTs are another confusing concept involving “ownership” of non-physical items, with people paying arguably absurd prices to be able to claim they own the bits making up the very first Twitter tweet, memes, digital art, gifs and other digital items.
Ethereum has become the de facto home for NFTs because of its ERC-721 NFT token standard, which sets rules for establishing unique smart contract tokens on the Ethereum blockchain. ERC-721 tokens allow a person minting an NFT to attach specific data to it that makes a token permanently linked to the digital asset it is connected to. If someone were to look at the Ethereum blockchain for that token they would be able to find a record of purchase, sale and ownership that would directly link a token to the buyer.
Think of NFT ownership as owning an original Picasso: It’s worth money, it’s unique, but there could be hundreds of thousands of prints, posters and replicas out there which you have no right to limit or make money from.
How is Ether different from other cryptocurrencies?
Aside from its biggest difference—that it’s an entire virtual machine network and not just a currency—there are a lot of ways in which Ether, the cryptocurrency that powers Ethereum, is different from other currencies.
Ethereum was heavily influenced by Bitcoin. Ethereum’s designer, Vitalik Buterin, was involved in the Bitcoin community and wanted to use the Bitcoin blockchain to build decentralized applications, later creating Ethereum to develop his theory.
First off, the speed at which a block of transactions can be solved and added to the blockchain, called block time, is much faster for Ethereum. While a Bitcoin block can be mined in an average of 10 minutes, the Ethereum block time averages around 10 to 20 seconds. That means more transactions are added to the Ethereum blockchain in less time.
Another major difference between the two is the reward for solving blocks: The Bitcoin reward halves approximately every four years, while Ether mining rewards remain largely consistent. This is largely due to the fact that Ether won’t reach a hard cap like Bitcoin, of which there will never be more than 21 million.
Ether, on the other hand, has a cap of 18 million per year; the cap is designed to create a consistent regeneration of Ether to offset coins lost to misuse, key loss and other errors. An upcoming Ether shift from the current proof-of-work model to a proof-of-stake one called Casper is likely to greatly lower reward amounts due to less need for mining subsidy, making the 18 million cap unlikely to be reached.
Casper’s proof-of-stake model shifts the value generation for Ether from miners to stakeholders, who vote on blocks instead of mining for hashes. Each stakeholder gets a proportion of votes based on the stake (in Ether) that they’ve invested. As of early 2021, proof-of-stake has launched with the creation of the Ethereum 2.0 Beacon Chain, but most Ethereum traffic still happens on the energy-intensive, proof-of-work Ethereum blockchain.
Another major difference between Bitcoin and Ethereum is how each treats stale blocks. Stale blocks occur when two separate miners arrive at a solution for the same hash but because of inherent lag times sending block changes from one node to another, one of the miners submits the transaction first.
In the Bitcoin world, the second miner is simply out of luck: Their stale block goes unrewarded, and the time and computing resources invested is lost. Ethereum, on the other hand, provides a partial reward to stale blocks, which it calls Uncle Blocks, so no one spending time and resources is out of…