What is Ethereum and How Does It Work

by Sandip Das from
What is Ethereum and How Does It Work

1. What is Ethereum?

The straightforward answer is that just like Bitcoin, Ethereum is another cryptocurrency. Currently, there are over 9,000 cryptocurrencies. Bitcoin is the most valued crypto among them, while Ethereum is the second most valued.

A cryptocurrency is a digital currency that requires no bank or other intermediary. So, you can send or receive Ethereum through the Ethereum network without any financial institution. Everything happens peer-to-peer globally! Isn’t that interesting? If you want to find out more about what cryptocurrency is and how it works, we explain that in one of our article.

You need to remember that all cryptocurrencies don’t necessarily work in the same way or for the same purpose. So, there is a difference between Bitcoin and Ethereum. In this post, we will look into these differences to have a clear idea about how Ethereum works.

2. How does Ethereum Work?

Ethereum is a blockchain platform through which members can make transactions like a payment without an intermediary. So, if you want to send money to your cousin living in another country, you can do so by using Ethereum without the need to engage a bank in it. Read our complete blockchain guide for beginners to know more about how a blockchain works.

Ethereum is designed for many more functions than a typical cryptocurrency. A typical crypto is used as a payment mechanism - to pay for a slice of pizza or a brand-new Tesla. Ethereum wants to do much more. The idea behind Ethereum is to power the entire new version of the Internet, which we call the Web3.

So, if you are looking for answers to questions like how to use Ethereum or what can Ethereum do, there is a long list of answers. Before we provide the answers to some of them, let us assure you that Ethereum is among cryptos with the biggest potential, which we discuss in one of the articles published on this website - make sure to take a look!

2.1 Ethereum Network Explained

Ethereum networkis the decentralized and peer-to-peer network consisting of the Ethereum blockchain. The network participants, which are also called nodes, maintain the Ethereum blockchain. These participants record transactions and validate those on the Ethereum network. Since Ethereum is a public blockchain, anyone with enough computing resources can participate in the Ethereum network.

2.2 When was Ethereum Launched?

The idea of Ethereum can be traced back to as early as 2013. The Initial Coin Offering (ICO) of Ethereum took place in 2014. Officially, the Ethereum network went live in 2015. Ethereum was officially launched on 30th July, 2015. Since the beginning, Ethereum has attracted huge interest from investors and blockchain enthusiasts because of its myriad applications.

2.3 Who are the Founders of Ethereum?

The Russian-Canadian computer programmer Vitalik Buterin is most commonly associated with the Ethereum blockchain. He is the most prominent co-founder of Ethereum. He came up with the initial idea of the Ethereum blockchain in 2013. Ethereum also has an unusually long list of co-founders, which include Gavin Wood, Charles Hoskinson, Anthony Di Iorio, and Joseph Lubin.

2.4 Functions of Ethereum Explained

Ethereum isn’t like a typical blockchain platform executing just a specific task. Ethereum is an open-source general blockchain platform that can be used for a wide range of purposes and functions. It can be used as a payment mechanism or a platform for developing blockchain applications like blockchain games, crypto lending platforms, crypto trading platforms, social media, metaverse applications, decentralized-finance (DeFi) applications, and non-fungible tokens (NFTs)

In addition, Ethereum is the building block of Web3, which is the future version of the Internet. Because of the different ways we can use the Ethereum blockchain, it’s often compared with the Internet itself. We can use the Internet to get information, buy goods and services, process payments, send emails, connect on social media platforms, and watch videos. Ethereum is capable of handling all these and much more. Ethereum is, therefore, rightly called the ‘world computer’.

If you want to take your cryptocurrency investments (whether including Ethereum or not) to the next level, take a look at our article about beginners crypto trading strategies.

3. The Difference Between Ethereum and Ether

We often use the terms Ethereum and Ether interchangeably. However, there is a slight difference between these two. Ethereum refers to the Ethereum blockchain or the Ethereum network which is a decentralized platform for making transactions or recording information. Ether is the native currency or the digital currency of the Ethereum blockchain.

So, if we compare Ethereum with an economy, Ether is like the currency of the economy. For instance, if Ethereum is the US economy, Ether is the US dollar. Ether is represented by its short-form ETH. So, ETH is simply the ‘Ethereum cryptocurrency’ for a layperson.

4. Ethereum’s Consensus Mechanism

Every blockchain has a consensus mechanism through which information is validated on the blockchain. So, a consensus mechanism is just like a majority voting system on a blockchain. Earlier Ethereum used the proof-of-work (PoW) consensus mechanism. However, it’s extremely energy-intensive and has a very high emission level. So, to become an energy-efficient blockchain. Ethereum switched to the proof-of-stake (POS) consensus protocol in 2022. So, Ethereum is now a ‘green blockchain’ because of its high energy efficiency.

5. What is the Difference Between Ethereum and Bitcoin?

A comparison of Ethereum and Bitcoin is a common topic of discussion in the crypto community. So, let’s now address the question - how is Ethereum different from Bitcoin?

This table shows the key differences between these two leading blockchains:

Aspect Bitcoin (BTC) Ethereum (ETH)
Market position It’s the number 1 crypto in terms of market value It’s the second most valued crypto.
Applications It’s mainly designed as a digital currency. It’s designed for wider applications like payment, decentralized applications, and Web3
Native currency BTC ETH
Consensus protocol PoW PoS
Energy efficiency Requires a high amount of energy. Also, it has high emission levels. Extremely energy efficient. Ethereum’s emission level is very low.

As you can see above, there are a few, quite major differences between Bitcoin and Ethereum. Whether you decide to invest in the former of in the latter, our list of the best crypto exchanges will definitely be a useful source of information

6. What is Ethereum Smart Contract?

A smart contract is like a business contract but it’s executed by computer programs. So, smart contracts are automatically managed by computers without the need for any regulatory authority. A smart contract is a unique feature of Ethereum, which makes it suitable for a wide range of real-life use cases.

7. How Ethereum Makes Money

Investors would be interested in knowing Ethereum’s profits or how does Ethereum make money? before investing in Ethereum. So, you need to first understand Ethereum’s tokenomics, which is the economics of Ethereum tokens i.e. ETH.

Users need ETH to use the Ethereum blockchain for applications, games, or making payments. So, when more and more users adopt Ethereum, the value of ETH goes up. When ETH’s value goes up, investors holding ETH earn significant profits.

It is important to understand how making money with cryptocurrencies work. If you are looking for ways to boost your earnings from crypto investments, we recommend reading our article explaining how to use AI in crypto trading.

8. What are the Benefits of Ethereum?

It’s common for investors to ask about Ethereum’s benefits, or the advantages of Ethereum. One of the main benefits of Ethereum is that it’s a general-purpose blockchain. This means we can program it for a large number of different use cases.

Another advantage is Ethereum’s smart contracts which makes it easy to ensure different parties carry out their obligations. Lastly, Ethereum is extremely energy efficient because of its proof-of-stake consensus.

9. How is Ethereum Used in Real Life?

Ethereum has many real-life applications. For example, you can use Ethereum to send money to someone else or pay for goods and services to merchants who accept Ethereum. Also, you can use the Ethereum blockchain for developing any application like a gaming app or a payment app.

10. How to Buy Ether (ETH)?

So, if you are looking for an answer to how can I buy Ethereum, this post is the right place to know the answer. You can buy Ethereum from a large number of crypto exchanges like Binance, Coinbase, KuCoin or OKX. You can use these exchanges to buy Ether using fiat money like the US dollar or using other cryptos like Bitcoin.

Check out the reviews of the best crypto exchanges that we publish on our site, for example the article including the information about KuCoin referral code, in order to pick the most reputable one for your investments.

11. Is Ethereum a Good Investment?

Reading so far, a question might arise in your mind - is Ethereum profitable? The answer is that Ethereum is one of the leading crypto assets for investment. Ethereum has many strong use cases. There are millions of Ethereum investors who think Ethereum is going to be a key player in the crypto economy. Taking the above into consideration, ETH is one of the main options for crypto investments.

12. How to Make Money Using Ethereum?

Many crypto investors wonder about how to make money with Ethereum. The answer is that there are several ways of earning money from Ethereum. For example, you can buy and sell Ether to make profits from short-term Etheruem trading. You can also invest in Ethereum for the long term and earn profits when the price goes up substantially. You can also develop applications, like a subscription-based game, on Ethereum to earn money from users.

13. Does Ethereum Have a Future?

In our opinion, the future of Ethereum is full of potential because of its large number of use cases. Ethereum can be used for general purposes to develop many applications for the future of the Internet. It’s also going to be a key component of the next generation Internet. So, Ethereum is one of the most promising cryptocurrencies.

14. What is an Ethereum Wallet?

Many new crypto investors are confused regarding how to use an Ethereum wallet or what Ethereum wallet to use. An Ethereum wallet is simply a digital wallet for storing your ETH. Once you have purchased ETH from an exchange, you need to transfer and store it in an Ethereum wallet.

You will find a variety of Ethereum wallets in the market. They all belong to broadly two types of Ethereum Wallets - hot wallets and cold wallets. Hot wallets are connected to the Internet, while cold wallets are offline storage devices. Read our detailed guide on how to safely store crypto and choose the right Ethereum wallet.

15. Final Words on ETH

Crypto is one of the most innovative technologies in recent times. While Bitcoin was the pioneer in crypto, Ethereum addresses many of the shortcomings of Bitcoin. So, Ethereum has a much broader application. As the importance of the Ethereum blockchain increases day by day, it’s crucial to have an in-depth understanding of what Ethereum is and how it works, which we tried to explain in this article.

16. Ethereum FAQ

16.1 ❔ What is Ethereum?

In short, Etherum is a blockchain platform with Ether used as a native cryptocurrency of this platform (however the name Ethereum is also often used to refer to the cryptocurrency the platform offers).

16.2 ❔ What's the difference between Bitcoin and Ethereum?

They are both used as cryptocurrencies, however there are iportant differences between these two, which we present in the table included in the article above.

16.3 ❔ Is investing in Etherum profitable?

As we explained in the article above, Ethereum is one of the leading cryptocurrencies nowadays, so investing in it is definitely worth considering. Of course, before you do so, make sure that you can answer the questions “what is Ethereum and how does it work”.

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