Ethereum (ETH) is considered the second most important cryptocurrency in terms of market capitalization. What is Ethereum?
The cryptocurrency system created in 2014 is like Bitcoin but not a pure cryptocurrency. The Ethereum Blockchain creates the basis for Smart Contracts and DApps.
Ethereum works like any other cryptocurrency and runs as a decentralized system on its own Blockchain.
But Ethereum is not only a cryptocurrency. It’s also a kind of operating system that takes place decentrally on the Blockchain and that enables the creation, administration and execution of decentralized programs.
What is Ethereum?
The direct comparison with Bitcoin helps for a better understanding. Bitcoin claims to be a payment system. The Bitcoin Blockchain is therefore used to calculate and display the payments and money amounts of participants. One could imagine the Bitcoin Blockchain as a pocket calculator. If the Bitcoin system is a calculator, then Ethereum is a computer.
This computer comes with some pre-installed programs, but offers the possibility to install additional programs. These programs, which can be used in the Ethereum network, are also called Decentralized Apps, or DApps for short. These DApps can have many functions and represent new, decentralized versions of application areas, for example from the financial world, short message systems, or also data exchange, like music or films.
Just like Bitcoin, the Ethereum network offers the ability to exchange and update informations directly between two parties without a third party (e.g. the amount of crypto currency units of each participant), but extends this to other programs and thus offers new application possibilities. Vitalik Buterin, one of the two inventors of the Ethereum code, has summed this up appropriately: “What Bitcoin does for payments, Ethereum can do for anything that can be programmed”.
These new types of programs, or DApps, that the Ethereum system makes possible, operate through so-called Smart Contracts. These intelligent contracts consist of pre-defined conditions, mostly built with “if, then” rules. They are fully automated.
- A practical example:
… is suitable to illustrate this. It is already widely used in the crypto world: money raising for company start-ups.
Crowdfunding platforms are among the methods used so far to obtain capital for setting up a company. Such platforms are used by entrepreneurs to present their ideas in order to attract money from potential investors. However, up to now this has required a provider who operates the crowdfunding platform, which has resulted in costs that the company has to deduct from its newly acquired capital.
With the help of the Ethereum Blockchain, companies looking for investors can set up their own smart contracts. For example, such a smart contract can specify that a certain amount of money must be raised in order to become effective. If there are not enough investors and the required amount is not reached, the contract automatically expires and the participants automatically receive a refund of their invested amount.
However, if the required amount has been successfully raised, the full amount will be added to the company’s digital purse. In return, the investors receive tokens from the company, which also run through the Ethereum blockchain. These tokens can have predefined, unique features, such as voting rights within the company, or shares in the company’s profits.
- Another, so far theoretical example:
Someone wants to make his car available to other people and places his offer on the Internet.
His Ethereum address is included in the Smart Contract that has been created for renting the car. An interested party who wants to use the car for a certain period of time responds to the offer. His Ethereum address is linked to the provider via a Smart Contract.
The use of the vehicle costs a fixed amount of money per hour. As soon as the interested party has paid this amount of money, a code is automatically sent to him with which he can open the vehicle and use it for the paid period.
The fuel on which these contracts run is called Ether. Ether is the bitcoin of the Ethereum network and is used as a payment method for the Smart Contracts. Unlike Bitcoin, Ether has no maximum amount and can always be generated.
The Ethereum network also allows anyone to create additional currencies called tokens. An example are the already mentioned tokens that can be obtained as an investor when founding a company. Tokens are mostly used as “company shares” and ether (ETH) as means of payment.
Ether, like Bitcoin, is generated by Proof of Work. The creation of blocks is much faster: Every 15 seconds a new block is created in the Ethereum blockchain. Thus the transaction speed in the Ethereum network is much faster than in the Bitcoin network. Furthermore, there is no decreasing reward for mining. 5 ethers are constantly generated per block. This results in 10 million new Ethers per year.
The developers have announced that they will change the process for producing new ethers. In the future, the so-called Proof of Stake technology will be used.
- The Ethereum project is more than its crypto currency ether. Ethereum offers the possibility to realize services and applications decentralized and without third party through Dapps. The technology offers a counter approach to monopolistic companies like Google or Amazon.
- Data processing is much faster than with Bitcoin, for example. New blocks can be created much faster.
- The technology can create completely new business areas and existing services can be implemented much more cost-efficiently.
- The price of ethereum is very volatile and therefore difficult to use as a stable currency.
- The more decentralized apps are implemented on the Ethereum blockchain, the fuller and more cumbersome it becomes. It is possible that the speed of the data transfer is slowed down by more and more Dapps.
- The ability to perform services decentrally and automatically is a potential threat to many Jobs. General application may require restructuring of our society.
What is Ethereum?
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