What Is Ethereum And How Does It Work?
Ethereum is often referred to as the second most popular cryptocurrency, after Bitcoin. But unlike Bitcoin — and most other virtual currencies — Ethereum is intended to be much more than simply a medium of exchange or a store of value. Instead, Ethereum calls itself a decentralized computing network built on blockchain technology. Let’s unpack what that means.
How Does Ethereum Work?
Like all cryptocurrencies, Ethereum works on the basis of a blockchain network. A blockchain is a decentralized, distributed public ledger where all transactions are verified and recorded.
It’s distributed in the sense that everyone participating in the Ethereum network holds an identical copy of this ledger, letting them see all past transactions. It’s decentralized in that the network isn’t operated or managed by any centralized entity — instead, it’s managed by all of the distributed ledger holders.
Blockchain transactions use cryptography to keep the network secure and verify transactions. People use computers to “mine,” or solve complex mathematical equations that confirm each transaction on the network and add new blocks to the blockchain that is at the heart of the system. Participants are rewarded with cryptocurrency tokens. For the Ethereum system, these tokens are called Ether (ETH).
Ether can be used to buy and sell goods and services, like Bitcoin. It’s also seen rapid gains in price over recent years, making it a de-facto speculative investment. But what’s unique about Ethereum is that users can build applications that “run” on the blockchain like software “runs” on a computer. These applications can store and transfer personal data or handle complex financial transactions.
“Ethereum is different from Bitcoin in that the network can perform computations as part of the mining process,” says Ken Fromm, director of education and development at the Enterprise Ethereum Alliance. “This basic computational capability turns a store of value and medium of exchange into a decentralized global computing engine and openly verifiable data store.”
- Large, existing network. “The benefits of Ethereum are a tried-and-true network that has been tested through years of operation and billions of value trading hands,” says Fromm. “It has a large and committed global community and the largest ecosystem in blockchain and cryptocurrency.”
2. Wide range of functions. Besides being used as a digital currency, Ethereum can also be used to process other types of financial transactions, execute smart contracts and store data for third-party applications.
3. Constant innovation. A large community ot Ethereum developers is constantly looking for new ways to improve the network and develop new applications. “Because of Ethereum’s popularity, it tends to be the preferred blockchain network for new and exciting (and sometimes risky) decentralized applications,” says Avital.
4. Avoids intermediaries. Ethereum’s decentralized network promises to let users leave behind third-party intermediaries, like lawyers who write and interpret contracts, banks that are intermediaries in financial transactions or third-party web hosting services.