What Is Ethereum Cryptocurrency And How Does It Work?

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Ethereum is also referred to as the second popular cryptocurrency after Bitcoin. But unlike Bitcoin -or other virtual currencies - Ethereum is supposed to be more than just a medium of exchange or investment. In contrast, Ethereum describes itself as a decentralized computer network based on blockchain technology. Let's open up what that means.

How does Ethereum work?

Like all cryptocurrencies, Ethereum works on a blockchain network. Blockchain is a decentralized and distributed public ledger where all transactions are checked and recorded.


It is distributed in the sense that each participant on the Ethereum network keeps an identical copy of the book, which allows them to view all previous transactions. It is decentralized because the network is not managed or managed by a centralized entity - instead it is managed by all the owners of the distributed books.


Blockchain transactions use cryptography to secure the network and verify transactions. Humans use computers to "extract" or solve complex mathematical equations that confirm every transaction on the network and add new blocks to the system's underlying blockchain. Participants will be rewarded with cryptocurrency tokens. For the Ethereum system, these symbols are called Ether (ETH).


Ether can be used to buy and sell goods and services such as Bitcoin. Prices have risen sharply in recent years, making it a de facto speculative investment. What's special about Ethereum, however, is that users can create applications that run on the blockchain, with software running on computers. These applications can store and transfer personal data or process complex financial transactions.


“Ethereum differs from Bitcoin in that the network can perform calculations as part of the mining process,” said Ken Fromm, director of education and development at the Enterprise Ethereum Alliance. "This basic computing power transforms the stock of value and medium of exchange into a decentralized global computing mechanism and openly verifiable data warehouse."


Ethereum vs. Bitcoin

Bitcoin is primarily used as a virtual currency and store of value. Ether also acts as a virtual currency and store of value, but the decentralized Ethereum network allows you to create and run applications, smart contracts, and other network transactions. Bitcoin does not offer this feature. Used only as currency and store of value.


Ethereum also processes transactions faster. “A new block is validated every 10 minutes on the Bitcoin network, while a new block is validated every 12 seconds on the Ethereum network,” said Gary Devaal, chairman of the Katten Financial Regulatory and Markets Group. And future developments could make Ethereum transactions faster, he notes.


Ethereum Benefits

Large, existing network. “Ethereum is a proven network that has been tested over years of work and billions of practical trading values,” said Frome. “It has a large and engaged global community and the largest blockchain and cryptocurrency ecosystem.”


Wide range of functions. Apart from being used as a digital currency, Ethereum can also be used to process other types of financial transactions, execute smart contracts, and store data for third-party applications.

Constant innovation. The large community of Ethereum developers is constantly looking for new ways to improve the network and develop new applications. “Due to the popularity of Ethereum, it is usually the blockchain network of choice for new and exciting (and sometimes risky) decentralized applications,” said Avital.


Avoid middlemen. Ethereum's decentralized network promises that consumers will abandon third-party intermediaries such as lawyers who write and interpret contracts, banks that broker financial transactions, or third-party web hosting services.


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