For those that keep up with the financial markets, cryptocurrencies are on the rise and are set to compete with the centralized banking systems that currently run the world marketplace. Bitcoin was the first successful cryptocurrency invented in 2009 and has since exploded in both popularity and exchange rate to the US dollar. Due to this spike in use, it is harder to gain a profit from mining bitcoin (BTC) or being part of their blockchain than it was before. So then, what is Ethereum (ETH)? This is a new currency, with more advantages and lower barriers to entry in turning a profit on mining ETH, along with flexibility not seen in BTC.
How it works
In a traditional physical currency system, a central agency validates the integrity of a transaction and keeps a record in their ledger. In an e-coin currency, the ledger is maintained on a giant network of peer-to-peer computers. Transactions are grouped into “blocks”. This ledger is verified by their computing resources generating a hash value and working until that hash matches the hash of the transaction. This takes time, power and cannot be faked. The value of the coin comes from this “proof of work” that the computer did to guess the correct hash value. Once a computer obtains the correct hash, all other computers on the network get this hash sent to them and added to their running ledger. This entire concept and process is called the “blockchain”.
Both ETH and BTC use this technology to verify transactions and release more currency into the crypto economy. There is one main difference between these two cryptocurrencies, and that is the Ethereum Virtual Machine (EVM). Typically for each cryptocurrency, you would need to create a new application for each specific use case of the coin. With the invention of the EVM, though, this technology can be migrated to any new application, making it much more portable and easy to use.
ETH also introduces the concept of smart contracts. Smart contracts are very similar to physical contracts in that they bind two or more people into an agreement, typically with the exchange of currency involved, and the contract is executed when all requirements are met. The difference is that with a smart contract, this is simply a piece of code. In other words, they execute or reject automatically when all conditions are met. Smart contracts are analogous to autonomous agents in that they don’t need a human overseeing this contract. Furthermore, these contracts are replicated throughout many peers in the chain, ensuring that any smart contract drafted will not be lost. The code that runs this contract is automatically executed as soon as conditions are met, which is much faster than whenever a human can get around to reviewing the contract and deeming it worthy of execution or rejection. Finally, there is no way human error can disrupt this contract process unless it was present in the original drafting of the contract.
There is always the risk of human error interfering with any cryptocurrency. If your wallet data is not secure, a hacker can easily drain you of your currency instantly, while being verified as a valid transaction through the chain. Keep in mind best security practices, as always, when conducting ETH transactions.
ETH introduces a more flexible approach to electronic currencies built on the same infrastructure as currencies that came before it. Keep an eye on this technology as it continues to grow in the global marketplace.