I first bought Ethereum at the price of $7 per Ether. Within a few months Ether’s value was $200. That is probably the best return on an investment I will ever make. Having bought into Ethereum, but still not actually knowing what it was, I figured it was a good idea to understand what exactly I was buying into. Here is my best attempt at describing (in non technical terms) what I learned about Ethereum that excites me so much.
“For every complex problem there is an answer that is clear, simple, and wrong.” — H. L. Mencken
What is Ethereum?
Here is a sentence defining Ethereum using a bunch of words that the average human probably doesn’t understand.
Ethereum is an open-source, blockchain-based, general purpose decentralized application platform, enabling smart contract functionality. It employs the Ethereum Virtual Machine and the Solidity programming language to directly implement and execute peer-to-peer and multiparty agreements among other applications.
No wonder this stuff is confusing. That sentence makes no sense! So,What do those words mean?
First clarification: Ethereum vs Ether
When people talk about Ethereum often they are talking about two different things. One is the Ethereum Network, and two is the cryptocurrency Ether. Often times people are talking about the cryptocurrency when they say “Ethereum”, but Ether is actually the name of the cryptocurrency, while Ethereum refers to the Ethereum Network (we will go into more details later).
Blockchain
Blockchain is a fancy word for a simple concept. Blockchain is essentially a database. Each item that is stored in this database has a timestamp of when it was created and a link to the previous item created in the database (this is what forms the ‘chain’). That’s about it.
Often people talk about the blockchain as being super secure and “unhackable.” The details of how it’s safer get quite complicated. In short the mechanisms that provide this added security are:
- hashing
- encryption
- duplication aka consensus (all computers in the ethereum network have an exact copy of the blockchain database so if you want to ‘hack’ the blockchain you would literally have to change the data on every single computer in the network which is impossible)
- the links the items in the database have to its previous item
I won’t go into the details of these mechanisms here but if you are interested here is an article I think does an awesome job at introducing them.
So from now on, when you hear the word “blockchain” just think “database” or you can think “super secure database”.
Decentralized
I think new terms like ‘Ethereum’ are confusing because we don’t have much context around what they mean. It’s common to use an analogy of the Internet to describe Ethereum since they are both decentralized. So here it goes…
Who owns the Internet?… No one. The Internet is just a bunch of computers around the world that agree on how to communicate and send information to each other. The Internet is decentralized. There is no single entity that owns it. In this exact same way, Ethereum is decentralized… it is a bunch of computers around the world that have agreed on certain rules to send and store data. The data being blockchain data.
So, now when you hear the word “Ethereum” just think “internet”.
Smart Contracts
Smart Contracts are the name Ethereum has given to its apps. Just like anyone can make an app to accesses the Internet, Ethereum allows anyone to make an app to access the Ethereum internet (which just accesses the blockchain, which is just a database).
So now when you hear the word “Smart Contracts” or “decentralized Apps” or “dApps” just think “application like I have on my phone but that accesses the blockchain.”
Why Ethereum is More Awesome than Bitcoin
Bitcoin is only a blockchain based cryptocurrency. While Ethereum is a blockchain based currency (Ether), It also provides a way to create applications that allow access to that blockchain. (remember blockchain = database). Bitcoin cannot do this.
In other words, Ethereum is way more interesting than Bitcoin because it provides a way for all people to access the power of the blockchain for whatever purpose they can create.
Put the Pieces Together
So, putting all the pieces together, lets rewrite that first sentence about what Ethereum is. Here’s the original sentence to refresh your memory:
Ethereum is an open-source, blockchain-based, general purpose decentralized application platform, enabling smart contract functionality. It employs the Ethereum Virtual Machine and the Solidity programming language to directly implement and execute peer-to-peer and multiparty agreements among other applications
Let’s rewrite it to something (hopefully less confusing), like this:
Ethereum provides a place (a database) to store information about transactions, and provides a way (smart contracts) to access and modify that stored information. The Ethereum database is stored on the ‘internet’ (actually called the Ethereum Network). Anyone can build an app (Ethereum calls their apps ‘Smart Contracts’) that accesses and make changes to the Ethereum database (which is the blockchain).
Or even more simply put:
Ether is a cryptocurrency like Bitcoin. The Ethereum Network is like the internet and provides a way to create applications to access a database on the network.
