Ethereum — what is it and how does it work

What exactly is Ethereum?

Ethereum is a digital platform that extends the use of Bitcoin’s blockchain technology to a wide range of different applications. It should not be confused with Ether, the network’s underlying cryptocurrency, which is commonly referred to as Ethereum.

Read more: How to start trading cryptocurrency

Vitalik Buterin, a Toronto programmer, invented the Ethereum platform in 2015 as a vehicle for decentralized and collaborative apps. This app uses Ether (ETH) as a token for transactions. Ether, like bitcoin, is part of a decentralized peer-to-peer financial system that is free of government inspection and intervention. Ether, like Bitcoin, has risen in value dramatically in a short period of time.

In January 2016, the price of Ether was around $1. This price was above USD 290 in September 2017, although it was quite volatile, with regular intraday changes. While there are hundreds of cryptocurrencies, ether is one of the handful with a considerable market value, which includes its two main competitors, bitcoin and bitcoin cash.

What is the mechanism of ether?

Ether, like other cryptocurrencies, relies on a shared digital ledger to keep track of all transactions. It is open to the public, entirely transparent, and extremely difficult to change retrospectively.

It’s known as a blockchain, and it’s made possible through the mining process.

Miners are in charge of forming «blocks» out of clusters of Ether transactions and cryptographically securing them by solving difficult algorithms. These algorithms can be made more or less difficult in order to keep the block processing time consistent — about one every 14 seconds.

The new blocks are then linked to the previous blocks’ chain, and the miner receives a «block reward,» which is a specified quantity of ether tokens. This is now set at 5 Ether shares, but if the cryptocurrency grows, it may be reduced.

What is Ethereum’s mechanism?

The Ethereum blockchain is quite similar to the Bitcoin blockchain, but its programming language lets developers to design software that manages and automates certain outcomes through blockchain transactions. A smart contract is the name for this type of software.

A smart contract, unlike a regular contract, ensures that the terms of the relationship are met by writing it in code. It’s software that automatically performs an agreement after predefined circumstances are satisfied, saving time and money over manually executing one.

An Ethereum user, for example, may write a smart contract to transmit a certain quantity of Ether to a friend on a specific date. He’d put this code on the blockchain, and when the contract was finished – that is, when the agreed-upon date arrived – the ether would be released to the other party automatically.

This basic concept can be applied to a wide range of situations, and its potential is limitless. It has already been employed in insurance, real estate, financial services, law, and crowdfunding ventures.

Smart contracts have a variety of other advantages:

  • They do away with middlemen, offer the user complete control, and reduce additional expenditures.
  • They are recorded, encrypted, and duplicated on the public blockchain, making market action visible to all participants.
  • They save time and effort by eliminating the need to manually process papers.

Of all, smart contracts are still a relatively new technology with a lot of faults that must be addressed. The code is translated literally, and mistakes in the smart contract creation process can result in unintended consequences that cannot be reversed.

Smart contracts vs. DApps

Smart contracts and decentralized applications, or DApps, have some similarities, but there are a few important differences.

A DApp is an interface that connects a user to a provider’s service via a decentralized peer-to-peer network, similar to a smart contract. Smart contracts, on the other hand, need a certain number of parties to be participating in this connection, whereas DApps allow for an unlimited number of concurrent participants.

They are also not restricted to solely financial goals, as smart contracts are: a DApp can serve any function it can imagine.

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