What is Ethereum? The open-source crypto platform explained

Update: While Bitcoin caps the number of “coins” in circulation to 21 million, in an attempt to manage supply and demand and regulate its price, Ethereum doesn’t apply such a limit for its own offering, Ether. As a result, the cryptocurrency has been increasing in number for months and finally tipped the 100 million mark earlier this week. 

This is a major milestone, one even Ethereum’s co-founder Vitalik Buterin didn’t believe would be reached this century. It’s indicative of the crypto surge, and hype, of recent months and is a cause of concern for investors. The more Ethereum there is in circulation, the less scarce it is means it loses value. This rise comes as the price of Bitcoin crashed more than 10% at the start of June, to its lowest price in two months, after a small crypto exchange in South Korea said it had been hacked. The crash takes the total amount wiped off Bitcoin’s market value to a staggering $120 billion.

Read on to learn more about Ethereum, the blockchain and Bitcoin

Most of us get the principle of cryptocurrency, but even the most tech-savvy may struggle with the specifics. One name that is often used when discussing this increasingly popular trend is Ethereum. 

Ethereum is an open-source platform that lets you build your own decentralised applications, and earn a tradeable cryptocurrency called Ether. These apps are all built using blockchain technology, and Ether can be used to pay for services on the network.

If that summary made no sense to you, fear not. Just keep reading.

In order to understand Ethereum, it’s best to start at a basic understanding of blockchain.

Blockchain

You are probably aware of blockchain, since the cryptocurrency Bitcoin has been around for years. Bitcoin is stored and balanced using an encrypted peer-to-peer network, the blockchain. 

In the most basic terms, a blockchain is a way to record data. It is essentially a digital ledger of transactions, agreements or contracts – anything you want to verify has happened. The technology works by distributing the ledger to thousands of computers across the world, the network.

READ MORE: How the blockchain works

The benefit of the blockchain is it can take away the middleman, like banks or financial institutions, in a transaction, while still allowing that transaction, contract or agreement to be secure and trusted. Let’s take the example of Bitcoin.

When a user wants to send bitcoins to someone else, they broadcast the details of the transaction – their public key, the recipient’s public key, and the bitcoin amount transferred – to the network of interlinked nodes.

Other computers in the network, similar to witnesses when someone is signing a contract, independently verify this transfer information.

These other nodes use a “digital signature” to authenticate a transaction, which they get after carrying out the encryption process. Once it’s been confirmed that the transaction message is genuine, the transaction data itself must be added to the blockchain to be considered “confirmed”. Because it’s distributed, it’s also harder to hack into.

But it’s not all about Bitcoin. Bitcoin laid the foundation for more complicated technologies, like Ethereum, to come about, which also use blockchains.

“Bitcoin is first and foremost a currency; this is one particular application of a blockchain,”said Dr Gavin Wood, Ethereum Co-Founder. “However, it is far from the only application. To take a past example of a similar situation, e-mail is one particular use of the internet, and for sure helped popularise it, but there are many others.”

Ethereum

Ethereum takes the idea of blockchain one step further. It is an open-source platform that allows its users to build their own ‘decentralised’ apps, or Dapps. Dapps are distributed and transparent applications that do not run entirely on one computer, instead they are distributed and controlled by everyone in the network. 

Before Ethereum was invented, in July 2015, blockchain-based technologies were forced to perform only a few, limited operations based on the kind of application they were. For example, Bitcoin and other cryptocurrencies were developed to operate exclusively as peer-to-peer digital currencies. 

“I thought [those in the Bitcoin community] weren’t approaching the problem in the right way,” said Vitalik Buterin, inventor of Ethereum. “I thought they were going after individual applications; they were trying to kind of explicitly support each [use case] in a sort of Swiss Army knife protocol.”  

Now, with Ethereum, someone wanting to develop a blockchain-based application does not have to start from scratch. They can use Ethereum’s software, which provides the code for the decentralisation. They only have to write their own ‘smart contract code’, to describe what their application does. 

The EVM and Ether

The biggest breakthrough that allowed Buterin to create Ethereum was developing the Ethereum Virtual Machine (EVM). This is a virtual machine on the Ethereum blockchain which can execute any script using an international network of computers. 

Apps built using Ethereum are based on the blockchain method of consensus, meaning a third party or just one member of the network cannot change them. They cannot go ‘down’ and cannot be switched off, and they are secure since they are distributed.

One of the easiest ways to create your own Ethereum application is to use its Mist browser. Users are provided with a digital wallet, in which they can trade and store ‘Ether’ and write smart contracts.

Ether is almost the Ethereum equivalent of Bitcoin, in that it is a cryptocurrency. Workers in the Ethereum blockchain work to mine Ether, in the same way you can mine Bitcoin. Ether is also tradeable, like Bitcoin, but it can additionally be used to pay for transaction fees and services on the network.

A few success stories from Ethereum include Uport, which is a secure way for people to keep control of their own personal information and identity, instead of relying on government institutions. Another is Weifund, a platform for crowdfunding using smart contracts.

In the future, there will be many more decentralised applications to come. ““If you think the internet has affected your life, Ethereum will have that same pervasive influence on our communications, on our entire information infrastructure,” said Joseph Lubin, CEO of Consensys. “It’s going impact all aspects of our existence.”