What You Need to Know About the Digital Currency Ethereum

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The general public first became aware of blockchain technology with the inception of bitcoin. Bitcoin, a decentralized digital currency, or cryptocurrency, allows people to send and receive funds to each other without the need for an intermediary such as a bank or payment processing company.

The safety and validity of these peer-to-peer transactions are made possible by blockchain, which facilitates a public ledger of all bitcoin transfers on the network and enforces checks and balances that prevent P2P pitfalls such as double spending and other fraudulent activity. While blockchain is, in fact, the underlying technology behind bitcoin, it is also utilized for a number of other purposes throughout various industries.

Because of its inherent transparency and ability to securely remove the middleman when facilitating digital asset transfers, currency or otherwise, blockchain presents some very unique opportunities to enterprising developers such as the team behind the Ethereum project.

What Is Ethereum?

Like bitcoin, Ethereum utilizes blockchain technology. Also, like bitcoin, Ethereum features a cryptocurrency named Ether that can be bought, sold, traded or produced by mining. The high-level similarities end there, however, as Ethereum was created and structured with a significantly different purpose in mind.

Essentially a programmable blockchain, the open-source Ethereum platform can be home to a multitude of user-created decentralized applications. What this means is programmers can use Ethereum not only to design and release their own cryptocurrencies like bitcoin but also store and execute future contracts like real estate payments or wills for example. Per its creators, Ethereum on its own is "value-agnostic" and in the end, developers and entrepreneurs will determine what it is used for.

As with any other blockchain, Ethereum's database is constantly updated by all nodes connected to the network. The Ethereum Virtual Machine (EVM) can run applications modeled from popular programming languages like JavaScript and Python, with every node executing the same sets of coded instructions.

Because all computing within the EVM is done in parallel across the entire network, you have a decentralized consensus that guarantees no downtime, instant fault or disaster recovery and ensures that any data stored on the Ethereum blockchain cannot be hacked or manipulated for any reason whatsoever.

Accounts and Smart Contracts

To truly understand Ethereum, you first need to grasp the concept of smart contracts. The Ethereum blockchain tracks the current state of each account along with the transfers of value between them, as opposed to its bitcoin counterpart that maintains a record of just financial transactions.

There are two types of accounts found on the Ethereum blockchain, Externally Owned Accounts (EOAs) and Contract Accounts. EOAs are user-controlled and accessible via a unique private key. Contract Accounts, meanwhile, contain code that is run when a transaction is sent to the account. These programs are commonly referred to as smart contracts.

Smart contracts open up a world of possibilities to ingenuitive coders, including the ability to create programs that execute contracts or move ownership of assets only when the time is right. Deploying this code to the Ethereum blockchain creates a new Contract Account, which is then run only when instructions to do so are sent by an EOA – controlled by the account owner that holds its corresponding private key.

When an instructional transaction is sent from an EOA to a Contract Account, the user is required to pay a nominal fee to the Ethereum network for each step of the program that they'd like to execute. This fee is not paid in fiat currency but in Ether, the native cryptocurrency associated with the Ethereum platform.

Mining Ether

Ethereum uses a Proof-of-Work (PoW) system to verify and execute transactions on its network, not unlike bitcoin or many of the other peer-to-peer protocols that utilize a public blockchain. Each transaction is grouped with others that have been recently submitted as part of a cryptographically-protected block.

Computers known as "miners" then utilize their GPU and/or CPU cycles to solve memory-hard computational problems until their collective power uncovers the solution. Once that occurs, all transactions are validated and executed and the block is added to the blockchain. Those miners who participated in solving the block receive a predefined share of Ether, their reward for keeping the Ethereum network running.

Newcomers to mining Ether typically join pools which combine the computing power of several miners in an effort to solve blocks faster and split the rewards accordingly, with those with more hashing power receiving a larger share of Ether. Some of the more popular Ethereum mining pools are Ethpool, F2Pool, and DwarfPool. Many advanced users choose to mine on their own.

Buying, Selling and Trading Ether

Ether can also be bought, sold and traded for fiat currency as well as other cryptocoins via online exchanges such as Coinbase, Bitfinex, and GDAX.

When investing and trading cryptocurrencies, be sure to watch for red flags.

Ethereum Wallet

The Ethereum Wallet is a locally-installed application, protected by a private key, that securely stores your Ether as well as any other assets built on the platform. You can also utilize the wallet software to write, deploy and execute the aforementioned smart contracts.

It is recommended that you only download the Ethereum wallet from Ethereum.org or its corresponding GitHub repository.

Ethereum Block Explorers

All activity on the Ethereum blockchain is public and searchable, and the easiest way to view these transactions is through a block explorer like Etherchain.org or EtherScan. If neither of these meets your needs, a simple Google search will return several alternatives.