If you want to understand what Ethereum is, stop thinking about cryptocurrency for a minute. While the Ethereum blockchain traces its roots to the Bitcoin blockchain, and while it’s associated with a cryptocurrency called Ether, Ethereum is quite different, not because of Ether’s value as a cryptocurrency but because of the Ethereum blockchain’s ability to run distributed applications and execute smart contracts.
Let’s back up a bit. A blockchain is a distributed ledger, or record of transactions. Identical copies of the information this ledger contains are stored on numerous computers, called nodes, all over the world: that’s why it’s called a distributed ledger. Since the information is distributed instead of existing on a central server, it can’t be stolen, changed, corrupted, or crashed. As a result blockchain is a highly secure way to store information.
In the case of the Bitcoin blockchain, that information pertains to Bitcoin transactions: X sent 3.2 bitcoins to Y at a certain date and time. The Ethereum blockchain can do much more.
When it comes to the taxonomy of the two cryptocurrencies, Bitcoin is considered a “Payment Cryptographic Asset”, while Ethereum is considered a “Platform Cryptographic Asset”, which is what sets it apart from bitcoin in terms of its possible use cases. Other platform cryptocurrencies include EOS, NEO, Stellar and Cardano to name a few.
As a platform, the Ethereum blockchain keeps track of its currency, Ether, but is also used to build decentralized applications (dApps) and to execute smart contracts. The Ethereum blockchain’s greatest value lies in these uses, and Ether’s main value lies in allowing its holders to use dApps and smart contracts.
dApps, unlike traditional apps, exist simultaneously on every node (independent computer) running the Ethereum blockchain. Decentralization makes these apps, and the user information stored within them, much more secure as there is not central point of failure for hackers to exploit.
Most of these applications are still in development, but there’s a lot of potential. One that’s already up and running is called CryptoKitties, and it lets players collect and “breed” cartoonish digital cats. Does it sound frivolous? Yes, but there’s a serious intention behind it. It’s more than a fun game: it’s also a way to introduce the broader world to the potential of Ethereum and teach them how to use it without a formal lesson. In addition, it introduces users to purchasing cryptocurrency and using a cryptocurrency wallet, since you must have Ether to play. And it shows people how both dApps and smart contracts work; smart contracts (explained below) are used when breeding cats. Users can also sell CryptoKitties to other users of the app, which gives participants a way to earn Ether. (You can explore all the dApp projects underway at StateoftheDApps.com.)
Other decentralized apps in the making have a slightly more serious focus. We already have a curated and fact-checked news service called Decentralized News Network (DNN) that rewards writers for the quality of their content as determined by readers. We might someday see a decentralized social network that allows users to maintain control over their privacy and personal data. There’s no Ethereum, Inc., that can read, store, and sell your information. And no one can hack into Ethereum, Inc., and learn everything about you.
That’s because there is no Ethereum, Inc. There are just a bunch of separate nodes that make the Ethereum blockchain run. What’s more, all that information on all of those computers is protected by cryptography. The system is set up so that hacking the blockchain is cost prohibitive. A hacker wouldn’t want to spend the time and resources necessary to attack nodes one at a time or to attempt to rewrite the blockchain.
Who owns these nodes? Why have they chosen to join together to form the Ethereum Virtual Machine (EVM) or “world computer,” as it’s sometimes called? There’s both an ideological component and a financial component. The ideology has to do with wanting to decentralize the Internet and reclaim its power for individuals rather than large corporations. The financial component is that in exchange for constantly toiling to keep the Ethereum blockchain accurate and up-to-date, storing records of past transactions and validating new ones, participating computers, called “miners,” earn Ether.
The other big innovation that Ethereum introduced is the smart contract. Through code logic, this contract will automatically execute when certain conditions are met, without the use of an intermediary. No intermediary is needed because the contract, once created, cannot be altered, and its terms are stored on the distributed ledger that is the Ethereum blockchain. Because the contract is stored on the blockchain, where it can’t be tampered with or changed once written, two parties who don’t know each other and don’t trust each other can do business. No third party gets paid to facilitate the transaction or learns the details of the transaction, which the participants might prefer to keep private. The only cost of the transaction is the Ether the parties must pay to cover the computing power used to execute their contract.
Bitcoin vs. Ethereum
Let’s return to bitcoin for a moment. Ether does have several similarities to Bitcoin. Both are digitally mined. Both can be traded through cryptocurrency exchanges and have fluctuating dollar values. At the time of writing (June 2, 2018), 1 Bitcoin is worth $7,621, and 1 Ether (or 1 Ethereum, as it’s often incorrectly called) is worth $590. From an investment perspective, both are volatile and speculative.
Both also need to be stored in a secure place, called a wallet. That wallet can either be online with a wallet service or an exchange, or offline in hardware wallets like Trezor, or on a piece of paper. The only way to access and use these cryptocurrencies is by knowing their private keys; those keys are what are stored in wallets. Storing your keys offline can keep them safe from hackers, but if you lose them, they’re gone forever, which means you’re out the value of the cryptocurrency those keys unlocked.
Another key difference is that unlike Bitcoin’s creator, who used the psuedonym Satoshi Nakamoto, Ethereum’s primary creator didn’t choose anonymity. His name is Vitalik Buterin, and he’s a 24-year-old who was born in Russia, raised in Canada, and now lives in San Francisco. He has long been into gaming and got interested in Bitcoin in his late teenage years. He soon saw the potential to improve upon the Bitcoin blockchain, and in 2013, he released his Ethereum whitepaper describing how the technology would work and the problems it aimed to solve. The whitepaper was so well received in the tech community that Ethereum’s development took off right away and the first version was released in 2015.
If you want to understand why people are so enthusiastic about the potential of the blockchain, it’s helpful to understand how Ethereum and ether work and how platform cryptocurrencies and tokens are both similar, but different in their use cases than the Bitcoin blockchain and other non-platform cryptocurrencies and tokens. The potential for a more secure, more private, intermediary-free future may lie in the dApps and smart contracts built on the Ethereum blockchain and other blockchain platforms and cryptographic assets like it.
The information in this article is for informational and educational purposes only. Investing in cryptocurrencies and tokens is highly speculative, and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.