Ethereum

The world of cryptocurrency is dominated by the entity which started it all: Bitcoin. It is the oldest, most valuable, and best known digital currency by a distance.

The number two by all these measures is Ethereum. Its value has actually risen faster in recent times but it does not receive anywhere near the same attention as Bitcoin.

Ether, the coin which powers the Ethereum network, has soared almost sevenfold in the last 12 months and is now valued at north of $1,000.

So how does Ethereum differ to its better known brother Bitcoin? What are its great strengths and weaknesses, and how stable is it?

What is Ethereum?

Ethereum is a network founded in 2015 by Russian-born Canadian Vitalik Buterin, who also started Bitcoin Magazine as a teenager and had written the white paper on it two years earlier.

Like Bitcoin, currently with a market capitalisation of over £452.4billion, Ethereum is decentralised, so it does not require a central bank or financial institution to issue it.

Both use blockchains, the digital ledger technology where transactions are recorded and validated using a peer-to-peer network of computers rather than a single organisation.

What are the main differences with Bitcoin?

Simon Peters, a cryptocurrency analyst at eToro, says Bitcoin has a single goal: ‘To become a global decentralised digital currency’ that can be used as a form of payment in shops and accepted by businesses.

Ethereum on the other hand is a decentralised computer platform. Ether is the technology’s actual currency and can be purchased through both centralised and decentralised exchanges, or digital wallets.

Ethereum hosts ‘decentralised applications’ or Dapps, where people can use Ether to pay for services such as finance, social media, and gaming.

What can Ethereum be used for?

A primary function of Ethereum is as a host of ‘smart contracts.’ Running on the platform’s blockchain, they resemble regular contracts, but lack middlemen like lawyers to oversee them.

Take an example of someone seeking to raise money for an animal welfare charity. On a crowdfunding website like Kickstarter, they would set a fundraising target and hope people donate enough money to hit that goal. When the target is hit, Kickstarter then pays out.

With a smart contract, there is no third-party facilitator whom the fundraiser and the donors trust to pay out once the target is reached. Instead, a payout is made automatically once the target is achieved.

This is all enabled by the Ethereum Virtual Machine, something cryptocurrency firm Coinbase describes as ‘like a giant, global computer made up of many individual computers running the Ethereum software’ that allows programmers to operate the smart contracts.

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