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Cryptocurrency Explained: Ethereum

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Anyone looking to buy cryptocurrency should have a good understanding of what it is. With CoinFlip's *Cryptocurrency Explained* series, we break down the inner workings of blockchain technology, the different coins available, and more.

Bitcoinis a form of decentralized currency used in transactions that run on blockchain technology. The introduction of Bitcoin was revolutionary because it woke people up to the idea that individuals can trade money without intermediaries. This idea led many to wonder if the control of money can be decentralized, then what else?

Bitcoin is based on Blockchain technology. Think of it like Microsoft Word running on the Windows operating system. The cryptocurrency runs on a protocol that requires cryptography, proof of work, and a decentralized network of computers. This creates a system that makes decisions without any central authorities' control or guidance. However, Bitcoin is limited in that it can only carry out a small set of orders like who sent how much money to whom. Bitcoin’s implementation, using Blockchain technology, limits what it can do. To add additional capabilities, increase the speed of transactions or even decentralize something other than payments, programmers must use a different implementation of Blockchain technology. 

In the same way that there are alternatives to MS Word like Google Docs or LibreOffice’s Writer, you have Ethereum. Like Bitcoin, Ethereum is a peer-to-peer blockchain technology that allows you to quickly send cryptocurrency to anyone in the world for a small fee. Unlike Bitcoin, it is also a platform that allows for the creation of decentralized applications.

Ethereum was proposed in 2013 and launched in 2014 by Vitalik Buterin, a Russian-Canadian programmer and co-founder of Bitcoin Magazine. With Ethereum, Buterin intended to create a truly decentralized internet. In addition to being a cryptocurrency, it also provides a DIY platform for decentralized applications, commonly referred to as DApps. 

How does the Ethereum network work?

Ethereum has a coding language, Solidity, that enables programmers to write DApps and “smart contracts.” Think of smart contracts as a special type of DApp. A DApp or Decentralized Application is a software program that does not execute on any centralized machine. A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of the software’s code. The code controls the execution, and transactions are trackable and irreversible. Smart contracts permit trusted transactions and agreements to be carried out among disparate, anonymous parties without the need for a central authority, legal system, or external enforcement mechanism.

In the real world, a contract is a set of conditions and actions - like the agreement you have with your landlord that dictates how much money you need to pay to live in your apartment. With smart contracts on Ethereum, developers write the programs' conditions, and the network executes them. These contracts are smart because they deal with all aspects of the contract, like enforcement, management performance, and payment. So, if you used a smart contract for paying rent, the landlord wouldn't need to collect the money. The contract itself knows if you sent the money. 

Traditional apps rely on central authorities to store data and perform operations on that data. DApps use smart contracts on the Ethereum network to achieve decentralization. 

A smart contract on the Ethereum network is immutable, meaning no one can ever change it. The smart contracts cannot be tampered with or broken. Changing a contract is virtually impossible because you would have to convince the entire Ethereum network that a change is necessary. 

What is Ether (ETH)?

Ethereum is the blockchain, and ETH is the primary asset and cryptocurrency of Ethereum. On Ethereum, computers work together to execute the code that powers DApps. Maintaining these powerful computers can be costly. Ethereum's cryptocurrency ether (ETH) was created as an incentive for people to run the protocol on their computer, similar to how Bitcoin miners get paid in BTC. Like BTC, you can use ETH as a form of digital payment in addition to facilitating smart contracts and DApps.

Many often refer to Bitcoin as digital gold. Ether can be referred to as digital oil as it fuels the Ethereum network. Anyone looking to build software on Ethereum has to pay for the computing power and space required using ether. The necessary amount of ether for the fee is determined by a built-in pricing system called “gas.” Gas refers to the price needed to successfully process a transaction on Ethereum’s blockchain. 

Gas considers the computational difficulty, bandwidth, and space required to calculate the necessary fees to complete each transaction. Using gas, ether miners, or nodes as they commonly called, set a minimum price, they are willing to accept to process transactions. 

Bitcoin vs. Ethereum

Bitcoin and ether are similar as they both provide decentralized and immutable transaction ledgers that use cryptography and blockchain hashing processes. However, the two are different in some fundamental ways:

  • Cryptographically, Bitcoin uses a hash function called SHA-256 to encrypt blocks, while Ethereum uses ethash

  • Bitcoin is used for financial transactions like purchasing goods and services. Ethererum can be used for financial transactions and also support DApps and smart contracts.

  • Currently, Bitcoin carries significantly more value per coin than Ethereum. 

  • Bitcoin was created to compete against gold and fiat currencies, while Ethereum was developed to be a platform that allows developers to build blockchain applications. 

  • Bitcoin transaction speed is counted in minutes, while Ethereum transactions take only seconds. 

  • The total amount of bitcoin to ever be created will be capped at 21 million, while there currently no cap in place for ether.

Why Buy Ethereum?

Ethereum has continuously maintained its place as the second-largest currency by market capitalization. With this level of popularity, many merchants that accept cryptocurrency include ETH in their payment options. 

Using Ethereum is fast. With an average block processing time of 15 seconds, you can expect your transactions to be complete within seconds to minutes if you pay the standard gas price. It is important to note that senders can select any number as the transaction fee they are willing to pay, but miners are motivated by fees. The more gas fee you include in your transaction, the faster it is likely to be processed. Traditionally, Ethereum transactions have been relatively cheaper when compared to bitcoin.

Ethereum is currently working on upgrading its programming and infrastructure, called Ethereum 2.0. Developers are making these upgrades to bring Ethereum to the mainstream by making it more scalable, secure, and environmentally sustainable. The first addition in this upgrade will deploy on December 1, 2020, with additional upgrades coming in 2021 and 2022. 

Ethereum presents itself as a worthy investment due to how it is used to facilitate the creation of DApps—investing in ether is kind of like casting a vote for a more decentralized internet. 

Are you interested in buying into Ethereum? Head to your closest CoinFlip ATM today!