By now, chances are pretty good that you've heard of bitcoin, the cryptocurrency unleashed on the world in 2009 by a mysterious person or group that goes by Satoshi Nakamoto. Maybe you've heard it's the currency that fuels massive darknet drug markets like the now-defunct Silk Road. Or maybe your encounter with the cryptocoin was more benign and you saw one of the weird looking bitcoin ATMs in a convenience store.
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But unless you're already pretty involved in the cryptocurrency world, you may not have heard of ethereum, the second largest crypto asset that's recently been giving bitcoin a run for its virtual money. Even if you have heard of ethereum, you may be at a loss when it comes to explaining how it differs from bitcoin.In either case, you've come to the right place.Ethereum is often touted as a "world computer."What that fancy language really means is that ethereum is a platform for the creation of decentralized applications (dapps), using what are known as smart contracts. Smart contracts are bits of code that automatically execute an action after certain requirements have been met—say, sending a slice of an app's profits to investors after a predetermined date has passed. Bitcoin has smart contracts, too, but ethereum makes them really easy to use since they're baked into the system's design.All of this takes place on a blockchain, which bitcoin uses, too. All a blockchain does is act as a public ledger that lists everything that goes on in the network in real-time. It's the tool that makes the whole thing possible. The blockchain, and thus the ethereum network, is distributed across thousands of computers (or "nodes") around the world. It's also "Turing complete," which means that smart contracts on the blockchain can handle most computational functions, allowing them to be pretty sophisticated.
WHAT IS ETHEREUM?
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For example, say that I want to send my colleague Jordan some money. I would register this contract between myself and Jordan on the blockchain and the ethereum network would automatically facilitate the exchange of money. Since the blockchain is a public ledger, anyone and everyone can see that this transaction happened.You may have heard that bitcoin is relatively anonymous, since people are identified by cryptographic addresses, not their names. Ethereum is similar. Unless Jordan or I decide to broadcast our identities on the network, no one will know who executed that transaction—they'll just see that a transaction for X amount of money occurred at a given time.If you want to take a look at what's happening on the ethereum blockchain for yourself, you can check out all the transactions on the ethereum network, or look at a particular user's history, at any time using a tool called Etherscan.Ethereum was invented by Vitalik Buterin, a Canadian computer programmer born in Russia who cut his teeth on bitcoin as a teenager. In 2013, Buterin published the white paper that would lay the foundations for the ethereum network. He was only 19 years old at the time, which is why he is often hailed as as a boy genius.In 2014, Buterin hosted a crowdsale to fund the launch of ethereum and raised 18 million dollars through his Swiss company, the Ethereum Switzerland GmbH. On July 30, 2015, the first (or genesis) block of data on the blockchain was created and the ethereum network was born.
WHO MADE ETHEREUM?
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It's early days for ethereum, and Buterin is still leading the bulk of development work. He has a team of programmers behind him, however, and the ethereum community is fairly active when it comes to sharing ideas about what should come next. Buterin still holds most of the influence, although he told Motherboard in an interview that he is already thinking of reducing his role and getting others to take up the mantle.
HOW IS ETHEREUM DIFFERENT THAN BITCOIN?
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Because of this requirement, bitcoiners are using increasingly powerful (and expensive) computer chips, preventing most normal folks from participating. Ethereum's mining scheme, on the other hand, was designed to be "memory hard," which means that using more powerful chips won't improve your chances of being the first to win the race. In practical terms, this means that individuals will always to be able to use their home computers or low-cost chips to mine ether. Ethereum miners are also rewarded with ether.However, bitcoin will always be based on wasting computational resources in this way, but ethereum is already planning to move away from the "proof of work" mining system to something called "proof of stake"—more on this later.The ethereum network runs on a crypto asset (sometimes called a cryptocurrency) called ether, which is abbreviated ETH.Ether is how people pay for things in the ethereum network. For example, when someone invests in a new ethereum app, they do so by sending ether to the developers. Ether's value is determined by a market where people buy and sell it for real-world money. Like bitcoin, new ether is mined by people using their computers to complete useless math functions that prove they did some work.At the moment there are about 90 million ether in circulation. No more than 18 million ether are newly minted each year. While bitcoin has a hard cap on the number of coins that will ever exist, ethereum has no predetermined limit for the total number of coins that will be in the network years from now.
WHAT IS ETHER?
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But that doesn't mean new ether will be entering the system at that rate forever. Soon, ethereum will change the method it uses to mine new ether, which will in turn cause the cap of newly issued ether to be restricted. As for how much lower the cap will actually be, ethereum's website simply says it's still being researched.Gas is the "fuel" that runs the ethereum network. The value of gas is determined by the cost of computation for an action the network performs—basically, everything that dapps and smart contracts do cost gas. This ensures that nobody does work for nothing, and discourages inefficient code.Gas is paid out in ether, and currently the value of gas is a tiny, tiny fraction of ETH. The reason that ether itself isn't the fuel for ethereum is that the price of ETH can change based on market demand. It wouldn't be good for anybody if the cost of performing actions on the network was suddenly unaffordable because ETH had a good week. Instead, gas will always be pegged to the actual cost of computation, and paid out in ether.Just like in bitcoin, users on the ethereum network need a wallet in order to buy, sell, and hold ether.Unlike a wallet you use for cash in the real world, ethereum wallets don't actually contain any of your cryptocurrency. Rather, all cryptocurrency is floating around in the blockchain network itself. Wallets are just an address that you use to register your transactions on the blockchain and signal to everybody else that you own some of that cryptocurrency.
WHAT IS GAS?
HOW IS ETHER BOUGHT AND STORED?
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When you create an ethereum wallet, just like in bitcoin, what you're really doing is creating a pair of unique cryptographic keys. The public part of the key pair is your wallet address, which others can use to send you ether. The second half of the key is secret, and known only to you. This secret key allows you to move the ether that is associated with your wallet address on the blockchain.A good way to do this is by creating a 'paper wallet' on a service like myetherwallet, which will generate a public and private key that you can then print and store in a safe location. A more secure method, however, is to use a hardware wallet like the Nano Ledger or Trezor, which allow you to store your keys offline and away from hackers. Fair warning: If you lose your paper or hardware wallet, you've lost your private key. This means you've lost all the ether in your wallet forever. There is no possible way to recover it.You can buy more ether using real-world money on sites known as "exchanges." These are kind of like stock markets for cryptocurrencies. One popular site is called Coinbase, which is part exchange, and part wallet service that lets you store your ether. On Coinbase, instead of having to remember your keys, you just need to remember your email and password.This sounds easy, but it can be dangerous. Coinbase actually stores your private key, which allows their service to be very user-friendly, but could mean disaster for you if hackers ever compromise their site and take your key. That would allow them to steal your cryptocurrency. If you do use Coinbase, use an application like Authy or Google Authenticator to make it a bit more difficult for the bad guys.
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