What is Ethereum? Simply explained
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What is Ethereum?
There are 2 key parts to Ethereum.
- The Network: Ethereum’s platform is powered by blockchain technology which allows individuals to build decentralized applications directly on the network.
- The Token: Called Ether ($ETH), which is a store of value like Bitcoin, but its main purpose is to reward individuals on the network for processing transactions.
In Summary: Ethereum is a completely decentralized network where individuals can build decentralized apps atop of. — AKA the “backbone” of Web 3.0
What is Ethereum trying to replace?
Let’s say you own a small business. Every time someone uses their credit card at your shop, you are forced to give away a percent of your sales to a credit card processor like Visa or Mastercard.
For a business like yours where every dollar matters, this can be extremely costly.
Now, think about how much you trust Visa. You trust them to facilitate all of your customer’s transactions, safely store your customer’s credit card numbers, and always stay running.
While it may seem like these credit card processors are secure, that isn’t always the case as seen here, or here, or here… you get the point.
Ethereum allows us to use applications such as banking platforms or social media sites without the need for an intermediary or putting all of our trust in a single platform. Resulting in cheaper, safer, and quicker transactions.
How is Ethereum different than the internet we have today?
Ethereum uses a network of computers to store data rather than one centralized location like Amazon Web Services.
Since Ethereum runs on a network of computers rather than one, it becomes virtually impossible to hack.
Another big aspect of the Ethereum network is the smart contract compatibility.
Smart contracts are simply just digital contracts stored on the blockchain.
For example, Kickstarter is the intermediary between a business and its supporters.
Someone who wants to crowdfund a business transfers money to Kickstarter, which then transfers the money to the business for a fee if certain conditions are met.
In this scenario, both sides are trusting KickStarter to accurately and safely transfer the money.
With smart contracts, there is no need for an intermediary to oversee the transaction.
A supporter can send $ETH directly to a contract, which will only send out the money to the business if certain conditions as outlined in the digital contract are met.
Why use a smart contract? They are stored on the blockchain meaning they can never be changed and do not require a 3rd party. Resulting in a cheaper, safer, and quicker transactional process.
Other potential use cases include banks giving out loans, insurance claims, or any other 2-sided transaction.
Is Ethereum the same as Bitcoin?
Ethereum founder Vitalik Buterin, built Ethereum using inspiration from Bitcoin.
But, Bitcoin at its core is strictly a store of value similar to gold. While Ethereum is a network that hosts decentralized apps, smart contracts, and other transactions.
What real-world implications does Ethereum have?
- Potential use in voting systems (Results can’t be altered)
- Decentralized finance (No need for Visa)
- Digital identity (No need for a passport)
- Security infrastructure (Decentralized databases)
- Health data storage
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