Ethereum

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Launched in 2015, Ethereum is a decentralized software platform that enables Smart Contracts and Distributed Applications (ĐApps) to be built and run without any downtime, fraud, control or interference from a third party. During 2014, Ethereum had launched a pre-sale for ether which had received an overwhelming response. The applications on Ethereum are run on its platform-specific cryptographic token, ether. Ether is like a vehicle for moving around on the Ethereum platform, and is sought mostly by developers looking to develop and run applications inside Ethereum. According to Ethereum, it can be used to "codify, decentralize, secure and trade just about anything." Following the attack on the DAO in 2016, Ethereum was split into Ethereum (ETH) and Ethereum Classic (ETC). Ethereum (ETH) has a market capitalization of $41.4 billion, second after Bitcoin among all cryptocurrencies.

Ethereum is a peer-to-peer network of virtual machines that any developer can use to run distributed applications (Dapps). These computer programs could be anything, but the network is optimized to carry out rules that automatically execute when certain conditions are met, like a contract. Ethereum uses its own decentralized public blockchain to store, execute, and protect these contracts cryptographically.

Each computer on their network downloads a small virtual machine to sync with the Ethereum blockchain and remains available to execute contracts. This distributed network of computers conveniently provides the security, reliability, and computing power necessary for carrying out designed arrangements. Of course, this consensus network isn’t free or private, so developers only use it for consensus on outcomes and when their data can be public. The Ethereum blockchain is publicly searchable here.

While most examples of these contracts depict various human interactions, the technology is currently preferred for industrial use-cases like strict business logic between organizations or machine-to-machine communication. For instance, some energy companies are researching ways to create a smarter grid, where houses can automatically buy and sell power. Another example is the International Business Machines Corp. (IBM)/Samsung Group "Internet of Things" collaboration. However, they used a fork of the Ethereum’s code - for the sake of privacy - to control how these "things" communicate with each other.

The financial industry loves the promise of a controllable blockchain, but not the lack of privacy. So, consulting companies like Eris have forked Ethereum to sell it, bundled with their consulting services, to help banks construct their own private networks.

Ethereum is certainly an innovative implementation of virtual machines with amazing possibilities. However, we don’t yet know how large the unforked Ethereum network will grow nor how scalable this network could be.

As digital currencies have become increasingly popular, you’re likely to have encountered terms and names that may have been unfamiliar just a short time ago. This industry is an exciting and fast-changing one, but it can be difficult to stay on top of all the terminology and to understand the technology that underlies the virtual currency world. (For help navigating this maze, we've compiled a comprehensive list of Blockchain terminologies for your convenience. Please refer to the article: Blockchain Lingo for Newbies, on our Blockchain Consulting page.)

Ethereum is a name that comes up often in discussions of the digital currency space, and with good reason. Alongside mentions of ethereum, you may also encounter the term "ether." In this explainer, we’ll take a look at the differences between "ethereum" and "ether," providing clarification on how they differ.

What Is Ethereum?

Put simply, ethereum is a technology which makes use of the blockchain development that has undergirded most cryptocurrencies in the past several years. Before we can look at what makes ethereum unique, it will be helpful to explore some foundational concepts related to blockchain.

In the modern, internet-focused era, we store all types of information (passwords, personal data, and financial details) on clouds and servers which are owned by major providers like Google and Facebook. There are a number of reasons for this; these companies allow the storage and retrieval of data for low costs and help to prevent the hassle of hosting and uptime.

On the other hand, having personal data stored on someone else’s computer makes that data vulnerable to hacking or other modes of intrusion. This is the basis of what is referred to as the "centralized" internet; it is one in which individuals are connected in a myriad of ways.

Recent years have brought the advent of a decentralized internet movement, with technologies like blockchain looking to splinter off from the main centralized internet in order to provide increased anonymity and security.

Ethereum is one result of the movement toward decentralization. In a sense, ethereum aims to use a blockchain – a distributed ledger system – to replace internet third parties which have typically been responsible for storing data and financial records. Ethereum makes use of "nodes" which are run by volunteers in order to replace individual server and cloud systems owned by major internet providers and services.

The idea is that these nodes will connect to become a "world computer" which would provide infrastructure to people all over the globe. In an idealized ethereum model, no one entity would have control over your data (personal or otherwise). Therefore, it would be much less vulnerable to hacks or shutdowns.

New Applications Possible

Along with the decentralization of server and hosting duties, ethereum also aims to support a new type of application (sometimes called a "dapp"). These applications work in a similar way to the broader ethereum network in that they are decentralized and make use of the global network of nodes that ethereum provides.

Ethereum has therefore been linked with the rise in initial coin offerings (ICOs), which are start-up launches and fundraising efforts in support of new services and companies which are connected to the ethereum network.

What Is Ether?

So if ethereum is a type of decentralized internet and app system, what is ether? Ethereum is not "owned" by anyone, but all of the programs and services linked to the network require computing power, and that power is not free.

Ether is the solution to the issue of payment; it is a digital asset bearer (like a bond or other security). It functions like cash, in that it does not require a third party for processing or approval of transactions. However, ether is not exactly a digital currency. Rather, it should be considered as "fuel" for the apps on the decentralized ethereum network, according to ethereum.org.

This is an abstract way of framing ether’s function, and a concrete example may help to make things more clear. Let's say there is an app on the ethereum network that allows you to create, modify, and delete simple notes. In order to complete any of these tasks, the app requires processing power via the network.

To cover the cost of this power, you likely need to pay a marginal fee anytime you wish to make changes to your existing notes. Ether is the token by which you make this payment. It is, in a sense "digital oil", in that it allows the network to process the changes that you’ve made. As a type of fuel, it then makes sense that ether transaction fees will be different depending upon how much "fuel" is required for the service.

Ether Differs From Other Cryptocurrencies

Each particular action on the ethereum network or in a decentralized app requires a different amount of computational power and time. The greater the power and time required, the higher the ether fee for the action to be completed. In this way, ether is different from a digital currency like bitcoin.

There are other ways that it differs. For instance, many digital currencies have hard caps or maximum numbers of tokens or coins that can be mined. Ether does not have a limit of this type. 18 million ether can be mined per year. 60 million ether was bought by users in a 2014 crowdfunding campaign, while another 12 million went to the Ethereum Foundation.

The Ethereum Foundation is a collective of developers and analysts who work to enhance the ethereum network and the underlying technology. Five ether tokens (ETH) are distributed to the miners that verify transactions on the network every 12 seconds. Despite their differences, the market for ETH functions similarly to that of digital currencies like Bitcoin in many ways.

With all of these different collections of ether, it’s difficult to assess exactly how many ether exist at any given time. To make things more complicated, developers will change the rules of ether creation to a new algorithm based on proof-of-stake (rather than the older, but more common, proof-of-work concept) after 2017, and the creation of ether will undoubtedly be impacted.

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Haley Welsch
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