How Ethereum Works

How Ethereum Works

Only a few years ago, the term “cryptocurrency” was known only to a select group of people from different small pockets around the world. Before long, the term became synonymous with Bitcoin, which is perhaps the most well-known and widely used cryptocurrency on the market. In more recent years, however, other cryptocurrencies have emerged on the scene and are actively challenging Bitcoin for supremacy.

One of those cryptocurrency systems is known as Ethereum. Ethereum was only released in 2015, but despite its limited lifespan the cryptocurrency has gained a following of millions of people, with many millions more learning about it everyday. Having said all of this, we would be remiss were we to not mention that, despite many similarities, Bitcoin and Ethereum are totally different. The following will go into great detail with regard to just about everything you will ever need to know about Ethereum and how it works.

Ethereum Explained

Ethereum is not an overly complicated cryptocurrency to comprehend, however in order to aptly understand it we need to draw similarities to Bitcoin. Like Bitcoin, Ethereum operates and is able to be transparent thanks to the blockchain. For those who may not know, a blockchain is nothing more than a public ledger where all transactions that have ever taken place are stored.

Apart from the use of a blockchain, the similarities between Bitcoin and Ethereum begin to dissipate. While Bitcoin is strictly a financial vehicle like traditional currencies, Ethereum strives to be much more than that. At its core, Ethereum is attempting to replace large servers where all sorts of personal and financial information is stored, and often hacked as well. Rather than relying on a single company, or handful of companies, to store all of our data, Ethereum strives to store that data across a large network of interconnected computers, each contributing their own computing power to the network. By contributing power to the Ethereum network, the users are rewarded with a cryptocurrency known as Ether.

Why Use Ethereum

People are drawn to Ethereum because of the overwhelming uncertainty that online dealings in the modern day brings with it. Let’s take your online bank account, for example. This convenient tool allows you to transfer money, save money, and keep track of your money with just a few simple strokes of the keyboard and clicks of the mouse. This is great for so many reasons, but the fact of the matter is that the password and other information used to validate access to your account is currently being stored on a server either operated by the bank, or contracted by the bank. In the event that a hacker gains access to your bank’s servers, your password—as well as heaps of other information—will be compromised, and so too will your personal finances.

Whether we are talking about the password to your bank account or the password to your Facebook account, the storage of this personal information is the same. With Ethereum, the thousands of computers contributing computing power to the network allow information to be used and stored in the same way as it is now, with the exception of it not being susceptible to hacking. Because the data you upload to the network will, technically, be powered by a large network of computers rather than one, single server, the information is spread out and therefore impossible to be holistically stolen.

The Ethereum system strives to replace the traditional way of working online. It strives to mimic everything we do currently, only in a much safer, decentralized way. Though the whole network is still growing and definitely in its infancy, it is gaining attention from around the world. If you are wondering why we really haven’t made mention of any specific cryptocurrency, that is because the Ethereum network is much more than a financial system alone. Though there is a currency (ether), it is not the absolute main feature like is the case with Bitcoin.

Buying and Storing Ether

As was just mentioned, the network is Ethereum while the cryptocurrency operating within that network is known as ether. Ethere can be bought and sold in almost identical fashion to Bitcoin, but before you can buy any ether, you need to first establish a wallet whereby you can store it. As is the case with Bitcoin, there are hundreds of wallets out there which allow you to not only purchase and trade ether, but also store it.

Places where you go to purchase ether are typically referred to as exchanges. Just like you will need to go to the stock exchange in order to buy and sell stocks, you need to go to a cryptocurrency exchange in order to purchase ether. Establishing an account at a top exchange is usually as simple as supply a few bits of personal information, an email to validate that info, and your preferred method of purchase (credit card, bank transfer, etc.). Once you have an account set up, buying ether is as easy as any online purchase you have ever made. Simply select the amount which you would like to purchase, a payment method, and you will be able to trade USD (or any other fiat currency) for ether. In fact, on most exchanges you will even be able to exchange other cryptocurrencies for ether.

Once you have made the purchase, it then comes time to store and protect your ether. Luckily, most exchanges offer wallets as well. An ether wallet is identical to a PayPal e-wallet, or your online bank account. It is nothing more than the storage location of your ether. Like your PayPal and bank accounts, however, because they exist online, your account (and the cryptocurrency within it) are susceptible to being stolen/hacked.

Because of this very real fear, many people opt to store their ether on external devices that, quite literally, remove the ether from the internet. Because this is a cryptocurrency we are dealing with, and because it only exists online, if you remove the ether from the online network, it is unable to be hacked. Though we could go into extreme detail with regard to the different types of external devices, you can think of storing ether on an external device in the same way you think of placing files on a flash drive.

Making your life a bit easier nowadays is the fact that most exchanges offer what is known as cold storage. Cold storage is the same as taking your ether off the internet, only you are enlisting a service to do the work for you. As you could have probably surmised, this service comes at a price.

How Safe is Ethereum

Ethereum, and the ether that exists on it, is an inherently safe system to use because of the ecrypted blockchain. As was mentioned in the beginning, every transaction on the ether network is logged in the public ledger, or blockchain. While this is true, the transactions are logged in a way where the users, and all of their personal information, is kept secret. Understanding this, Ethereum is far saferto use than any conventional system we have in place now, because the chances of your provided personal information leaking are slim to none.

Where people can and have run into trouble before, however, is with wallets. The reason for this is due to the fact that ether, cryptocurrency wallets exist in much the same way that your PayPal account does. Because it is online, and because the information you provide the wallet in order to setup your accunt is stored on a private server, there is the chance that your account does get hacked. The scary part about all of this is that, in the event of a hack, if your ether is stolen and transferred away from your wallet, there is no recourse; your ether will be gone forever.

Therein lies the Catch 22 of Ethereum and ether. Though the Ethereum network strives to prevent any type of hacking or centralized data storage, the ether that is traded on a daily basis is done through sites that do not work on the Ethereum network, and are therefore susceptible to being hacked. While the incidence of ether being stolen is not very high, it has happened before. That is why it is always recommended to store your ether offline so that hacking can never occur.

Ethereum Price History

Like most cryptocurrencies, the price of Ethereum has changed dramatically from when it was first introduced in 2015. During the very early days, Ethereum was trading right around $1. After some 7 or 8 months, however, the price of Ethereum slowly began to creep upward. By the cryptocurrency’s 1 year anniversary, the price of the coin had grown by about 1200%. Slowly but surely from that point forward, Ethereum creeped upward in price.

In the early to middle parts of 2017, however, Ethereum went on what can only be described as a meteoric rise. Now, Ethereum has retained a rather lofty value and is growing in popularity every day that this is true. There is no saying what the future holds, but it is clear to see that Ethereum is slowly but surely entering the mainstream.