Let us begin by defining Ethereum in the simplest of terms possible:

Ethereum is an open-source platform for developers, which allows them to create decentralized applications.

The Idea Behind Ethereum

The understanding of Ethereum needs a basic understanding of how the internet functions and how Ethereum wants to improve upon it -

The internet has a ‘centralized’ system of functioning. Basically, any website which requires you to fill in private data and enter a password stores it somewhere on the internet. Every time you enter a password it matches it with the stored data and verifies that this is indeed the right user. However, this data is stored on web servers managed by companies such as Google, Amazon and Microsoft. These web giants ensure that the data is safe and secure and is always available any time a user wants to log in.

It is due to this centralized design that many people are in a fear that their private information is always in the hands of someone else. Even if you assume that these companies are honest and won’t touch your data, there’s a chance of hackers attacking it, or them having to give it up under governmental pressure. This is the biggest flaw in the centralized setup that the internet is.

This is where Ethereum comes in and this is the what it wants to change. The blockchain technology itself has come around because of the need for a decentralized internet system. While the bitcoin system intends to tackle the way the banking system works, Ethereum, with its decentralized nature and decentralized applications challenges the very system upon which the internet is based!

Wondering how you can mine for Ethereum? Read: How to Mine Ethereum

Ethereum wants to democratize the way the internet functions. The Ethereum network wishes to replace the servers and clouds with nodes which will be distributed all over the network. These nodes will be operated by volunteers all across the planet, thereby giving Ethereum it’s nickname of world computer.

Here’s an example which will help you understand Ethereum better:

A Practical Example: Apps on Ethereum

To understand how Ethereum intends to run apps in a decentralized model, let us assume we are talking about an app that allows you to draw stuff and share with your friends. However, the thing is, if this app exists in a current setting, all your data will be outsourced to a third party server, while your art will be stored with a server owned by the app maker.

However, in an Ethereum system, the app-maker keeps your data while the art that you have created on the app remains with you. The biggest benefit of this is that you control the app’s functionings. This ensures that even if the app’s servers go down your data will still remain with you and it will be secure and protected. Moreover it ensures that only you can make changes to your data.

Let us now take a look at something which has been confusing a number of people:

Ethereum is not Bitcoins

A common mistake that many people make is to assume that Ethereum in itself is a currency. In reality, Ethereum is much more than that. It is actually a platform based on Blockchain and it allows the users to create and deploy various applications. Ethereum has it’s currency called Ether.

Despite both of them being based on the blockchain technology, the Bitcoin based ecosystem and the Ethereum ecosystem are worlds apart. While the primary function of a Bitcoin Blockchain is to detect the movement and the flow of cryptocurrency, the primary function of the Ethereum Blockchain is to execute and maintain the programming codes of decentralized applications.

To understand Ethereum better, you must know about two main things:

• Ether

• Smart Contracts

Let us take a look at each of them:

What is Ether?

Similar to miners on the Bitcoin Blockchain, there are miners on the Ethereum Blockchain too. Miners here work towards mining ‘Ether’ instead of Bitcoins. Unlike Bitcoin which was created just as a cryptocurrency, Ether has a more definite purpose behind it’s creation. While Ether can be traded as a cryptocurrency, it is also used to pay for transaction fees and services on the Ethereum network by application developers.

Similar to other cryptocurrencies, Ether too can be stored in a wallet, transferred from one wallet to another and can be traded over various exchanges for a monetary value. However, unlike Bitcoins, Ether not only exists as a cryptocurrency, but it also helps power the system. Ether is often referred as the fuel for the Ethereum network because it helps run the decentralized applications on the network.

You would need Ether to do anything on the Ethereum Platform. Ether is the payment you make to do things on the platform (Thereby it’s like an fuel that powers the system). To understand Ether better, you need to know Gas Limit and Gas Price.

The final price of anything done on the Ethereum platform, the amount of Ether that you have to pay is calculated using the following Formula:

Final Price (In Ethers) = Gas Limit * Gas Price

Confused what Gas Limit and Gas Price are? 

Gas is the cost of performing an action on the Ethereum Network.

Gas Limit is basically the maximum amount of ‘fuel’ required to run an operation or execute a smart contract.

Gas Price can be understood as a cost per unit quantity for Gas. The price of gas can be controlled by the user and the higher the gas price the faster can an action take place.

Let us now look at the economics of Ether. Like Bitcoins, which are limited in number at 21 Million, there is no limit to the amount of Ether that  can exist. On an average 18 Million Ether is mined every year.

Want to Buy Ethereum? Read: How to Buy Ethereum

What is a Smart Contract?

The second major component of an Ethereum Network is a smart contract. This is something very unique to the Ethereum system. Basically, this is a program which automatically executes when certain conditions are met.

A standard contract functions on the basis of a set of rules enforced by law. A smart contract has rules enforced by cryptography. The idea of a smart contract has been around for ages. Electronic vending machines operate on a similar concept. Bitcoin too supports smart contracts but they are really limited as Bitcoin can only deal with it in terms of currency value.

Smart Contracts can do a lot more on the Ethereum Network as it allows the programmers to build their own smart contracts based on the ‘Turing Complete’ language. The basic characteristic feature of a smart contract is that it will run exactly as it was programmed to run and will execute a certain set of tasks when certain conditional triggers are met.

This makes it secure and helps deliver an original, untampered experience. Smart Contracts on Ethereum networks can be used to ensure smooth and secure transfer of money, content, property and much more. Practically speaking, smart contracts can do much more like ensuring a system of multiple signatories (action is performed only when multiple people agree), or setting up an agreement between users for purchase of services such as insurance.

There’s more to the Ethereum Networks than what meets the eye. They are still a nascent force in the markets and with the passage of time and a wider adaptability, it is expected that Ethereum will help power a new age, democratic system of internet and decentralized apps!