They have gained momentum in India following the Reserve Bank of India’s decision to lift the ban on cryptocurrency payments. We spoke to experts to clarify some central concepts in a series of explainers. Let’s start with an explanation of what ethereum is and how it functions.
Ethereum (the cryptocurrency’s technical name is ether) is currently trading at 44,970 ($610), nearly five times its value at the start of the year of $9,625. However, it is still a long way from its all-time high of 88,125 set on January 12, 2018. Ethereum has a market capitalization of about $70 billion, compared to $360 billion for bitcoin.
What exactly is ethereum? It’s a decentralized software platform that allows specialized applications to run in unique ways. Ethereum is similar to bitcoin, but it operates differently. Bitcoin can transfer value from one location to another. Ethereum can shift weight from one place to another depending on certain factors.
Smart contracts, decentralization, and privacy are the three most essential ethereum concepts to understand.
Smart contracts: In 2013, Vitalik Buterin, the 19-year-old inventor of Ethereum, posed the following question: what if you could put conditions on payments made on the blockchain? These “if and when” contracts are stored on Ethereum’s blockchain, an immutable ledger, and they execute automatically once the “if” part is completed. For example, credit the driver’s account if my taxi got me to my destination.
Smart contracts are what they’re called. A smart contract does not need to be verified by a third party such as a bank, notary, or government official. Instead, a cryptographic code is added to the document, confirming that it is the only authentic version of the contract that the two parties have settled on.
Smart contracts are stored in several copies on a vast global network of computers rather than in a single database. To change the deal, a criminal hacker will have to change thousands of machines simultaneously, which is virtually impossible.
Decentralization: Since the ethereum blockchain has no single point of failure, hackers cannot alter intelligent contracts.
Decentralized applications, or apps, open up new possibilities for gaming, virtual world development, digital art marketplaces, and other assets like decentralized finance. Enthusiasts say that we are just scratching the surface of their ability.
Privacy: Corporations like Facebook and Google store your information on servers accessible to other companies and even criminals. In an ethereum app, you can restrict what the smart contract can do with your data and reclaim it when it’s done.
Ether’s value represents the amount of effort needed to mine blocks and validate transactions. Aside from that, the value of ether is determined by how much people value the Ethereum network. The network’s ability to do more efficient and valuable stuff increases the value of ether.
Ethereum has begun the transition to Ethereum 2.0, a blockchain system that can handle more transactions at a lower cost and less energy usage, as of December 1, 2020.