Although ethereum (ETH) may not be valued as highly over exchange markets as Bitcoin, it’s market cap exceeds over $108 billion. Ether, the currency of the ethereum network, is the second highest priced cryptocurrency on the market and remains bitcoin’s greatest rival in the future of cryptocurrency.
Ethereum is much more than a decentralized currency and represents an entire ecosystem of transactions. It’s potential to revolutionize the IoT and the way we create applications and conduct online transactions could even disrupt the concept of the internet itself.
So what is the difference between bitcoin and ethereum? Bitcoin is essentially a digital currency, while ethereum is this plus the entire training and transaction network. Both face the same problems of scalability and could potentially revolutionize the future of commerce and business. Here, we’re going to try and provide an understandable explanation of the ethereum network before your head starts to explode.
The ethereum network is based on the same blockchain technology that bitcoin operates off of. Transactions or ‘smart contracts’ are setup between two parties and conducted over the ethereum network. Contracts are composed of nodes or data inputs that are governed by parameters or rules to complete a desired action. The action could be a price strike, trade, or expiration date. For example if you’re cooking an omelet, the eggs and butter would be the nodes while the heat would be the parameters or the laws of thermodynamics involved in cooking your eggs. All of this data is recorded on the public ledger of the blockchain.
While many online ecosystems hold data and information on single servers, the ethereum network operates the same as a P2P sharing network. Data is decentralized and recorded on nodes across the Ethereum Virtual Machine (EVM). Nodes are essentially the users or data inputted by users of the P2P network. Data is replicated across all nodes so in the event of a data breach, the entire network could still keep up and running without losing data.
Parties setup nodes to conduct smart contracts and this data is recorded to ensure that app developers and users can be compensated. Since every transaction is recorded, this keeps all parties accountable for their actions and ensures fairness. This also ensures that the rules governing the contract must be met in order for compensation to be generated. This enables people to conduct transactions without a middleman, such as a lawyer arbitrating a will or divorce settlement because past rules will have already been set up in the possibility of such an action being reached.
So, ether is the currency used to conduct ‘smart contracts’? Yes, but it’s complicated.
What is ETH?
Ether is the currency of the ethereum blockchain network. Each step on a ‘smart contract’ involves a complex computation, which has an associated cost for the transaction to proceed. Ether or gas, as it’s often referred to, represents the measurement of this cost and the value of the steps involved in the transaction. The cost or value of these actions is paid to the requester of the ether.
Actions that occur in the blockchain are irreversible, meaning that if you can’t afford to pay the requested amount for a smart contract, the contract will return to its original state, but you will have paid out the sum of what you could afford. Ethereum is a pay-to-play network, so ether is the cost to create nodes and conduct transactions over the network. The value of ether is determined within the market based on the same principles that guide any marketplace. People make money off of ether by exchanging it for other currencies, such as the US dollar.
Just like bitcoin, ether is mined by supercomputers who race to complete transactions and desired actions in the blockchain. There is no set monetary supply of ether and no one knows if there ever will be.
This sounds simple right. Unfortunately, we’re only scratching the surface of what ethereum truly represents.
The Ethereum Ecosystem
The ethereum ecosystem is a completely decentralized topology where everybody is equal. You may be wondering why any business or company would use ethereum. Ethereum acts as a shared network or computer for companies to conduct sensitive financial transactions without having to trust third party software. Since all data is recorded in the blockchain this preserves the integrity of the data and ensures it will never be lost.
In this lies the fundamental difference between ethereum and other cryptocurrencies. Companies can conduct their own marketplace transactions and set up funds and issue debt using the ethereum network. Individuals build their own projects, called DAPSS or decentralized applications. In this P2P network, DAPPS are analogous to websites over the internet.
Within DAPPS, companies and individuals can setup their own data ecosystems and transactions exclusively within their own DAPPS. This creates a fork where tokens arise.
What are Tokens?
There are two types of tokens:
- Usage Tokens: Native currency used to conduct transactions in the DAPPS.
- Work Tokens: Shares of the DAPPS (e.g. a piece of financial ownership and stake).
The most popular forms of work tokens over the ethereum network are golum, bancor, and augur.
People can issue tokens through an ICO, which is essentially an IPO for cryptocurrency networks. Many people have accused ICOs of being a ponzi scheme because massive amounts of funding can be collected before a DAPPS reaches an alpha stage.
In order to code tokens in ethereum you’ll need to be familiar with Solidity. Essentially token contracts are coded using a set of functions: mapping the contract, awarding the creator of the contract the tokens, and transferring tokens for ether to the opposing party.
Now, if every DAPPS codes their own tokens, how can this be transferred across different wallets and DAPPS networks? The Ethereum Request for Comments 20 (ERC20) was created to bridge this gap. Essentially, ERC20 is a set of 6 guidelines or parameters that tokens must follow in order to be transferred across different DAPPS. It also approves the use of tokens as a cryptocurrency asset. The value of each token is determined by the rules of supply and demand. Think of it like the PPP of different currencies as they are used in different countries, only the different countries are the DAPPS contracts that other parties have set up.
With this we have the robust ethereum network and marketplace.
The Benefits of Ethereum
- Businesses can automate business applications to conduct complex tasks securely
- Data is safely stored across all nodes ensuring data security
- The public ledger promotes transparency of business transactions across the network
- Businesses can create new wealth and value by completing complex computing processes over the ethereum blockchain
- Arbitration and decision-making is decentralized and determined by the code