15/09/2022
What is Ethereum?
Ethereum is a decentralized computing platform. You can think of it like a laptop or PC, but it doesn't run on a single device. Instead, it simultaneously runs on thousands of machines around the world, meaning that it has no owner.
Ethereum, like Bitcoin and other cryptocurrencies, allows you to transfer digital money. However, it’s capable of a lot more – you can deploy your own code, and interact with applications created by other users. Because it’s so flexible, all sorts of sophisticated programs can be launched on Ethereum.
Simply put, the main idea behind Ethereum is that developers can create and launch code which runs across a distributed network instead of existing on a centralized server. This means that, in theory, these applications can’t be shut down or censored.
What’s the difference between Ethereum and ether (ETH)?
It might be unintuitive, but the units used in Ethereum are not called Ethereum or Ethereums. Ethereum is the protocol itself, but the currency that powers it is simply known as ether (or ETH).
Ether coins bouncing
What makes Ethereum valuable?
We touched on the idea that Ethereum can run code across a distributed system. As such, programs can’t be tampered with by external parties. They’re added to Ethereum’s database (i.e., the blockchain), and can be programmed so that the code can’t be edited. In addition, the database is visible to everyone, so users can audit code before interacting with it.
What this means is that anyone, anywhere, can launch applications that can’t be taken offline. More interestingly, because its native unit – ether – stores value, these applications can set conditions on how value is transferred. We call the programs that make up applications smart contracts. In most cases, they can be set to operate without human intervention.
Understandably, the idea of “programmable money” has captivated users, developers, and businesses around the globe.
Sneak a peek at the latest ETHER prices right now.
What is the blockchain?
The blockchain lies at the heart of Ethereum – it’s the database that holds the information used by the protocol. If you’ve read our article What Is Bitcoin?, you’ll have a basic understanding of how a blockchain works. The Ethereum blockchain is similar to Bitcoin’s, although the data it stores – and the way it stores it – is different.
It helps to think of Ethereum’s blockchain as a book that you keep adding pages to. Each page is called a block, and it’s filled with information about transactions. When we want to add a new page, we need to include a special value at the top of the page. This value should allow anyone to see that the new page was added after the previous page, and not just inserted into the book randomly.
In essence, it’s a bit like a page number that references the previous page. By looking at the new page, we can say with certainty that it follows from the previous one. To do this, we use a process called hashing.
Hashing takes a piece of data – in this case, everything on our page – and returns a unique identifier (our hash). The odds of two pieces of data giving us the same hash are astronomically low. It’s a one-way process, too: you can easily calculate a hash, but it’s virtually impossible for you to reverse the hash to get the information used to create it. We’ll get into why this is important for mining in a later chapter.
Now, we have a mechanism to link our pages together in the correct order. Any attempt to change the order or remove pages will make it apparent that our book has been tampered with.
Want to learn more about blockchains? Be sure to check our beginner’s guide to blockchain technology.
Ethereum vs. Bitcoin – what’s the difference?
Bitcoin relies on blockchain technology and financial incentives to create a global digital cash system. It has introduced a few key innovations that allow the coordination of users around the globe without the need for a central party. By having each participant run a program on their computer, Bitcoin made it possible for users to agree upon the state of a financial database in a trustless, decentralized environment.
Bitcoin is often referred to as a first-generation blockchain. It wasn’t created as an overly complex system, and that’s a strength when it comes to security. It’s kept intentionally inflexible to prioritize security at its base layer. Indeed, the smart contract language in Bitcoin is extremely constrained, and it doesn’t accommodate applications outside of transactions very well.
The second generation of blockchains, by contrast, is capable of more. On top of financial transactions, these platforms enable a greater degree of programmability. Ethereum provides developers with much more freedom to experiment with their own code and create what we call Decentralized Applications (DApps).
Ethereum was the first of the second-generation wave of blockchains and remains the most prominent one to date. It bears similarities to Bitcoin and can perform many of the same functions. Under the hood, however, the two are very different, and each has its own advantages over the other.
How does Ethereum work?
We could define Ethereum as a state machine. All this means is that, at any given time, you have a snapshot of all the account balances and smart contracts as they currently look. Certain actions will cause the state to be updated, meaning that all of the nodes update their own snapshot to reflect the change.
Transaction sheet displaying erin sending 5 eth to alice.
A transition in Ethereum’s state.
The smart contracts that run on Ethereum are triggered by transactions (either from users or other contracts). When a user sends a transaction to a contract, every node on the network runs the contract’s code and records the output. It does this by using the Ethereum Virtual Machine (EVM), which converts the smart contracts into instructions the computer can read.
