What is Ethereum?

Understanding Ethereum and Ether

Ethereum is an open-source, public, blockchain-based, smart contract-based, decentralized and distributed computing system. The native cryptocurrency token on the Ethereum network is Ether (ETH).[1][2][3][4][5][6][7]

The Ethereum network is first and foremost a blockchain-based distributed computing system compromised of Ethereum’s software and a peer-to-peer network consisting of those who run the software.

This Ethereum network acts as a platform for computer applications and has a native economy based around the cryptocurrency Ether (ETH).

Ethereum: the World Computer. Ethereum as a world computer.

Ethereum Overview

The Ethereum software utilizes its own programming language called Solidity.

That language is used create types of programs called smart contracts.

Smart contracts and transactions done by those contracts are executed by “the Ethereum Virtual Machine (EVM)” (a machine that executes the code) and stored on the Ethereum blockchain (a database protocol for securely storing data).

This computing system can be used to settle financial contracts like Bitcoin, but unlike Bitcoin it can also be used to create and host apps and more.

Anything done on the Ethereum network costs “Gas.” Gas is a fee paid in its native cryptocurrency Ether (ETH).

Ethereum is commonly used to create “tokens” like the native Ether (ETH) and ICO tokens like KIN or ZRX, to create and host decentralized apps or DApps (apps with their backend hosted on the Ethereum platform) like CryptoKitties and Decentralized Exchanges (DEXs), to create DAOs (Democratic Autonomous Organizations; i.e. decentralized companies/groups), to crowdfund those ICOs and DAOs, and to store and execute smart contracts (computer programs that execute when conditions are met).

In other words, Ethereum does a lot more than just host the cryptocurrency everyone trades ETH. Where Bitcoin is like a decentralized and distributed mix between PayPal and an online bank account, Ethereum is like that plus an operating system / programming language… and thus there is a little more to explain here than there is with a more focused cryptocurrency like Bitcoin.

The Decentralized Web: Many DAaps use websites for the front facing part that users interact with and the Ethereum network for the backend. Using websites to access DAaps is browsing the decentralized web. Check out MetaMask or Coinbase Wallet for examples.

Ethereum 2.0: One problem Ethereum had in 2017 was speed. Luckily, Ethereum is software and software can be updated. The plan to take Ethereum to the next step can very generally be called “Ethereum 2.0.”

ICO Drama Circa 2017 – 2018: ICOs got a bad reputation in 2017 – 2018 for a myriad of complex reasons (mostly having to do with a lack of quality control in some cases and the SEC in other cases). However, in that messy process Ethereum clearly proved its core ability to act as a platform to create DAOs, build a coin networks, and crowfund many projects at a rapid pace. In simple terms, Ethereum worked, works, and is working.

SEMANTICS: The key words here are “decentralized and distributed” (which means hosted on many computers with no central controlling power), “tokens” (which can represent a cryptocurrency or anything you can imagine a digital string of numbers and letters can represent ), “smart contracts” (digital contracts/programs which can do a wide range of things, including distribute coins or record transactions using blockchain technology), “blockchain” (a secure, encrypted, and sequential digital record of “blocks” of data), “DAO” (an organization bound by smart contracts rather than the enforcement of central figures), and “DApps” (Ethereum is a decentralized computing platform that can host “decentralized applications” AKA software).

Vitalik Buterin Explains it All: If you want definitions for everything from DApps to Smart contracts, check out the creator of Ethereum’s guide to Ethereum terms.

The Peoples’ Decentralized World Computer (An Ideal): Where Bitcoin and its blockchain are focused on creating and maintaining a record of a single cryptocurrency and its transactions, Ethereum is an open-source software platform based on blockchain technology that does much more than just house a cryptocurrency. Due to this, this page is a bit more in depth than other pages.

Ether Vs. Ethereum: “Ether,” which trades under the symbol ETH, is the name for the cryptocurrency token native to Ethereum’s “blockchain-based smart contract platform” (just like Bitcoin is the token native to what we could call Bitcoin’s “blockchain-based smart contract platform”). Meanwhile, there are a number of unique cryptocurrency tokens that use the Ethereum platform and can often be bought with / traded for Ether. These Ethereum-based tokens are called ERC-20 tokens and can be stored in a ERC-20 friendly Ethereum wallet like MyEtherWallet. About 1/2 of “ICOs” use Ethereum’s platform and are ERC-20 friendly tokens that can be stored in an Ethereum wallet alongside Ether.

Ethereum Vs. Bitcoin: What Sets Them Apart? | CNBC. A simple introduction to Ethereum’s ether.

FACT: With Ethereum you need to pay “gas” for transactions (AKA a transaction fee). Thus, you always need at least a little Ether in your wallet so “gas” (transaction fees) can be paid.

The Basic of the Ethereum Platform and the Cryptocurrency Ether

To summarize all the above in one simple list:

  • The ether token which trades under the symbol ETH is the cryptocurrency. Ethereum is the underlying network.
  • Other cryptocurrencies that exist on the Ethereum network but aren’t Ether are often called “tokens” (technically all cryptocurrencies are “tokens,” but the term often is referring to ethereum-based tokens created on the Ethereum network like Augur).
  • The Ethereum platform is open-source, meaning any developer can work on it or build off it (see github.com). According to a former CCO, “Everything at Ethereum, including our website, our tools, our whitepapers and of course our all of our software and compilers are 100%, wall to wall open source and under the GPL.”
  • Ethereum is public, meaning all aspects of the platform are open to the public to use, buy, trade, develop, mine, etc.
  • Ethereum is blockchain-based, meaning smart contracts (which govern wallets, ether token transactions, and more) use blockchain technology like Bitcoin’s blockchain.
  • Ethereum is distributed and decentralized, meaning the blockchain (and in fact the whole network) is held by those who use the platform and there is no central force (there is no central bank controlling the currency nor a company responsible for hosting any software created).
  • Put that together and you get DApps, decentralized applications hosted on the blockchain based Ethereum Network.
  • Ethereum uses a smart contract system. Smart contracts are peer-to-peer contracts (really more like programs), that run on the Ethereum network, and can do just about anything (by paying a transaction fee in ether based on the computational power required to secure the contract; see, “gas“). See an example of a contract for the Unikoin Gold ICO (a contract that handles the distribution of the ERC-20 token UKG). Learn about smart contracts (essentially everything in the Ethereum network that isn’t a “token” or the blockchain technology underlying it can be called “a contract.” TIP: Bitcoin’s system is also a type of smart contract system. In all cases the general idea is recording transactions on a distributed digital ledger.
  • The reason Ethereum uses the terms “token” and “smart contracts” (rather than cryptocurrencies and “blockchain” is because of all the different things contracts can do and all the different types of tokens that can be created). Its much more than just a crypto and a blockchain, so it aspects of the Ethereum network get fancy names like “token” and “smart contracts.”

So again, Ethereum is an open-source, public, blockchain-based, distributed, smart contract system upon which Ether and other Ethereum-based tokens reside.

FACT: A lead developer, creator, and in many ways the face of Ethereum is Vitalik Buterin. You can follow him on Twitter to keep up-to-date with Ethereum.

Dan’s Intro to How Ethereum Works. A somewhat technical description of Ethereum for novices.

What Makes Ethereum Special?

As you have likely gathered at this point, Ethereum was built to be more than just a blockchain to hold the Ether cryptocurrency token and confirm transactions, Ethereum was built to be an open source and decentralized blockchain-based software creation platform that any developer can use.

At the core of this platform/network is a “blockchain-based smart contract system” and the native cryptocurrency Ether (which trades under the symbol ETH). However, unlike with Bitcoin and its blockchain, Ethereum’s platform is designed to run code rather than just account for a single token.

With that in mind, Ethereum can be used to do a range of things. It can be used make multiple unique cryptocurrencies, to do any type of contract, and even be used to create/store blockchain-based apps.

This can result in unique tokens/cryptocurrencies that aren’t Ether (but use the Ethereum network) like Augur, Golem, Aragon, etc, traditional contracts like insurance contracts (“contract” is a term that encompasses many things here; it goes beyond just basic contracts), and even software (like a Minecraft like game that is now hardcoded into Ethereum’s blockchain; a DApp).

With all that said, let’s go over some more Ethereum facts to move beyond what we have covered already:

  • Ethereum-based tokens can be traded for Ether on the EtherDelta token exchange and other decentralized exchanges built on Ethereum. This is useful for trading new tokens from ICOs as soon as they launch. Check out Coinbase Wallet and its ability to access DApps
  • Ethereum is the system, ether is the token, despite this… most people refer to all of this as ethereum and use the terms ether and ethereum interchangeably.
  • DID YOU KNOW? You can actually create your own token right now (via tokenfactory).
  • Ethereum initially launched as an ICO. Meanwhile, many ICOs use the Ethereum network.
  • Ethereum currently uses a Proof of work model of mining, but they are switching over to a Proof of Work / Poof of Stake hybrid. Learn more.
  • Ethereum has historically had some issue with scalability and speed, but updates like Casper, sharding, and Plasma aim to help solve those issues.
  • Another name for a cryptocurrency is “token.” Ethereum’s native token is called “ether.” Ethereum’s “ether” token trades under the symbol ETH and it is what most people think of when they think of Ethereum. Learn more about ether from ethereum.org.
  • Developers can “fork” off the Ethereum blockchain and create their own tokens (these may have different names in practice, for example KIN). Meanwhile “ethereum classic” is the original ethereum cryptocurrency. Ethereum classic still trades on cryptocurrency exchanges and can be used as cryptocurrency. A new investor probably just wants ETH (Ethereum’s ether) and a digital wallet like MyEtherWallet (or a coinbase account with a built in Ethereum wallet).[8]
  • Ethereum is a popular choice for ICOs due to its capabilities. About 1/2 of ICOs use ether-based coins.

Stoked on Ether yet? If not, check out this list of reasons to buy Ether.

What is an Initial Coin Offering?

Article Citations
  1. Ethereum – Wikipedia
  2. Ethereum – Official Site
  3. Ethereum Token – Official Site
  4. The Hitchhiker’s Guide to Smart Contracts in Ethereum
  6. How Do Ethereum Smart Contracts Work?
  7. A beginner’s guide to Ethereum tokens What is an Ethereum token?
  8. What are differences between Ethereum and an Ethereum token (like augur, aragon, golem, etc.)?

Author: Thomas DeMichele

Thomas DeMichele has been working in the cryptocurrency information space since 2015 when CryptocurrencyFacts.com was created. He has contributed to MakerDAO, Alpha Bot (the number one crypto bot on Discord),...