Ethereum was created in 2015 by Vitalik Buterin to empower users to build their own applications on the blockchain. It is now both the second most well known cryptocurrency and the second most valuable, behind Bitcoin. While Ethereum is often associated with Bitcoin, it is actually quite different. Bitcoin is essentially a platform for online payments. In contrast, Ethereum is a platform for smart contracts. Smart contracts are a type of computer code that can automate the transfer of money, shares, and information. For example, a smart contract could be created to automatically pay someone every time they write a blog post. Check out this article to learn more about Smart Contracts:
What is Ether?
Ethereum is actually not a cryptocurrency. Rather, Ethereum refers to the blockchain network which is the platform for the cryptocurrency Ether. While Ethereum and Ether technically refer to different things, the terms are often used interchangeably. If you hear someone talk about the price of Ethereum, they are actually referring to the price of Ether.
How Does a Smart Contract Run on Ethereum?
Since Ethereum is decentralized — not controlled by any institution — the users of the network have to help run it. To do so, Ether owners run a program on their computer which works with all the other members of the network to validate transactions. Every time a smart contract is created, it is sent out to all the members of the network to be verified. The computer programs automatically check to see if the person who is attempting to send the Ether actually has enough to do so. If they do, the transaction is added to a list of recent transactions known as a block. Roughly every 10 seconds, the most recent block is added to a chain of all the previous blocks on the network. This database is known as the blockchain. It is impossible to make changes to the blockchain after the fact. This is ideal for smart contracts because it makes them binding.
It would be possible to create an additional smart contract later, in case the terms of the agreement change, but this would have to be agreed to by both parties.
The way in which the most recent block is added to the blockchain involves a process called mining. In this process, transactions are verified by the computer programs attempting to solve a complicated math problem, known as a “hash equation”. The computer that does this the fastest receives a small payment of Ether. This payment does not come from any specific user, instead it is generated by the entire network. This is done to incentivize users to run the program that runs the network. The account that sends the transaction also has to pay a separate, small fee to the miner known as “gas”. The reason it is referred to as a gas fee is because it essentially is what gives miners the energy to run the Ethereum network.
The validation process is known as Proof of Work
An Example Ethereum Smart Contract
Ethan wants to pay Bob to write an article for his blog. Ethan only knows Bob online, so they don’t really trust each other. Ethan only wants to pay Bob once he has finished the article, but Bob wants to make sure he gets paid once he submits the article.
Ethan creates a smart contract on Ethereum which states that the payment for the blog post will be sent once it is completed. He shares the contract with Bob who accepts the terms.
To run the smart contract, Ethan has to pay the gas fee. Miners on the network then validate the transaction and add the terms of the smart contract to the blockchain.
The Ether that Ethan will use to pay for the construction is automatically set aside from his account to guarantee that once the article is completed, the payment will be sent. This is the equivalent of holding money in escrow.
When Bob completes the blog post, Ether is automatically transferred to Bob’s account.
If the article is not completed, the money is returned to Ethan’s account.
Artificial intelligence can be used to make sure that the article was actually written properly to resolve any potential disagreements.
Why are Smart Contracts Important?
The reason why smart contracts are valuable is because they could potentially replace the third parties needed in contracts today. Instead of having to pay a bank to hold money in escrow, smart contracts could be used to make the process cheaper and faster. This could also be applied to online marketplaces like eBay. Instead of having to pay eBay to play the role of the trusted third party to make sure that payments are handled properly, smart contracts could be used instead. Again, smart contracts would make the process faster to process and cheaper to use.
Complex smart contracts can also be used to create decentralized applications — dApps. Potential uses for dApps range from online hiring marketplaces without service fees to being able to make money lending computer power to people around the world. Another interesting dApp concept is decentralized social media, where users don’t have to give their personal information to a large institution and their posts cannot be censored. Check out some other cool applications being built on blockchain here:
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