Bitcoin might be leading the crypto arms race right now, but Ethereum is charging right behind.As a software platform that issues the second largest cryptocurrency in the world and aims to create a decentralized version of the internet, Ethereum is a technology you definitely don’t want to overlook.
What is Ethereum?
Ethereum is a blockchain-based software platform that hosts a decentralized app store and payment system on its network. On Ethereum, users can build distributed applications with no regulation or censorship and use smart contracts to conduct safe and reliable transactions with each other.
Launched in 2015, Ethereum uses blockchain technology to replace centralized computing systems that store people’s data. Common examples of these centralized computing systems are Apple and Google, which regulate the types of apps in their app stores. Another example of a centralized computing system is Amazon, which stores your credit card information and other personal data.
Since one entity controls an entire system, like Apple and their App Store, they can regulate, censor, and even ban your app if you don’t follow their rules.
Centralized computing systems also have a single point of failure, which means cybercriminals can easily hack into them. For instance, on Amazon, the sensitive information you store on their website is also stored on their servers. If a cybercriminal hacks into their servers, they could steal your credit card number.
By leveraging blockchain technology to create a decentralized app store, Ethereum gives all the power back to the users. Users are the only ones who can modify their apps and access their own personal information. The App Store can’t impose regulations on them, and companies can’t store their information.
Another way Ethereum leverages blockchain technology is by validating and securing all the transactions made in its cryptocurrency, Ether, with smart contracts. Smart contracts automatically perform the transactions and other actions agreed upon by both parties, so users can conduct safe and reliable transactions with each other. This prevents any party from reneging on the contract’s terms.
For example, with smart contracts, an insurance company’s customers could submit their claims online and, if they meet the required criteria, the smart contract would instantly trigger an automatic payout to the customer.
If a user wants to make changes to their apps and run smart contracts, though, they need to pay a fee in Ether based on the amount of computing power needed to fuel these activities. Users can acquire Ether by mining or purchasing it.
Ethereum vs. Bitcoin
Even though Ethereum and Bitcoin both use blockchain to validate and publicize every single transaction of their cryptocurrency, Bitcoin is just a currency, while Ethereum is a software platform.
Ethereum and Bitcoin also have two different purposes. Ethereum built their platform on blockchain technology to liberate users from centralized systems that impose rigid regulations and have alarming security vulnerabilities.
Bitcoin, on the other hand, is built on blockchain technology to introduce a new global currency and payment system that connects consumers directly with suppliers, which lowers transaction fees and removes the need for a financial middleman, like a bank.
To accomplish their goal, Bitcoin’s blockchain completely decentralizes the cryptocurrency by requiring a network of millions of miners to solve complex cryptography puzzles to validate each of its transactions, instead of asking a central power like a bank to verify them. But this thorough decentralization and validation process also makes Bitcoin much slower at confirming transactions than Ethereum.
Since Ethereum only has thousands of computers or nodes validating activity on the platform compared to the millions of nodes validating each Bitcoin transaction, Ethereum’s average block mining time is a quick 12 seconds, while Bitcoin’s average block mining time is a sluggish 10 minutes.
Blockchain and Ethereum Mining
To truly understand how Ethereum can decentralize an app store and validate all of Ether’s transactions, you need to understand the basics of the Blockchain technology underpinning the platform.
Blockchain is like a digital ledger that records each transaction of a cryptocurrency, copies itself, and sends the copies to every computer, or node, in its network.
To make sure the ledger’s true state is verified and updated, each node in the network cross-references and communicates with each other to see if all the copies are the same. This publicizes and validates every single transaction of the cryptocurrency.
If one of the copies isn’t the same, due to a manipulation of a transaction’s record after the fact, the network rejects the transaction. This security protocol halts people from altering the ledger to spend the cryptocurrency more than once or send someone else’s digital funds to themselves.
To update Ethereum’s blockchain with new transactions, a new block, which is a bundle of these transactions, needs to be created and added to the chain. But to create and add the block to the chain, the block needs to be validated by the answer to a complex cryptographic puzzle. So individuals, groups, or businesses use mining rigs, which consists of mining hardware and software, to try and solve it.
These validators are called miners, and the first miners to solve the problem will be rewarded with a payout of Ether. Once a miner solves the cryptographic puzzle, which is verified by each node in the network, the new block is created and added to the blockchain and the winners earn a block reward, which is five Ether, along with however much computing power it took to validate the transactions in the block.
Validation methods like cryptocurrency mining are called proof-of-work or PoW, and they're one of the reasons why cryptocurrency and blockchain are considered so innovative.
Incentivizing miners with payouts of Ether to validate its transactions makes the cryptocurrency safe, secure, and trustworthy to use. Mining also releases Ether into circulation, which increases the odds that users will build more apps on Ethereum, boosting the platform’s and cryptocurrency’s value.
Originally published Oct 12, 2018 7:00:00 AM, updated January 31 2022