What is ethereum?

Ethereum is a distributed computing platform built on blockchain technology. One way to think of it is as a “world computer” in which anyone, anywhere can run an application and have an unlimited amount of processor power available to them. Apps that run in ethereum are very secure because no third party can manipulate them.

Deeper definition

Ethereum developed after the cryptocurrency bitcoin. Bitcoin uses what’s called a blockchain, a publicly accessible digital ledger, to record and verify every bitcoin transaction. The blockchain cannot be manipulated, which permanently protects the integrity of the system.

Ethereum takes the blockchain advantages of automatic verification and total transparency, and applies them to software. Apps are built on the ethereum platform using “smart contracts”: a programer records instructions on the blockchain in the form of a smart contract, and the fulfillment of certain conditions executes the contract: a good is ordered, a service is rendered, or an investment is secured. All transactions on ethereum utilize a cryptocurrency called ether.

The blockchain enforces the smart contract even when the users don’t know or trust each other, giving them an advantage over conventional contracts that must be enforced by civil courts. There is no room for interpretation and no possibility of loopholes: the code runs the same way every time. Smart contracts can be used to certify the results of an election or a sports bet, or manage every part of a business’s workflow. One company is using ethereum to verify exchanges made in a person-to-person energy-sharing power grid. Another authenticates the existence and ownership of precious assets, like gold. Major institutions like J.P. Morgan, the Royal Bank of Scotland, and Microsoft have all deployed ethereum.

This all works because every app that runs on ethereum is decentralized, meaning that they don’t exist wholly on a single node, and it would take the manipulation of every node to attack the system, something virtually impossible for even the most resourceful group of hackers.

The cost of the processing power that runs the ethereum network is measured in “gas,” and the reward for people who contribute processing power is paid in ether. The ethereum protocol will soon be updated to a more efficient, environmentally friendlier computation system that pays out smaller rewards but requires significantly less processing power.

When you’re ready to purchase your first ether, you’ll need some money in the bank. Bankrate can help you choose a good checking account.

Ethereum example

Roger is a film critic who thinks he can make a little money on the side by betting with ethereum. He pays a tiny fee to deploy a program with the condition that if a new film, Prognosis Negative, tanks at the box office, he owes any party to the smart contract 1 ether, but if it succeeds, they owe him 1 ether instead. When Roger’s app detects that Prognosis Negative is a modest success, it automatically triggers his payout, and it’s impossible for any party to avoid paying.

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