This article is not financial advice. Ensure to do your research before putting money in this volatile asset.
Ethereum is a platform which decentralizes not just digital money but almost anything.
Ether is different from Ethereum. Ether is the cryptocurrency that powers the Ethereum platform.
What is Ethereum?
(If you wish to understand what bitcoin is before reading this article please click here)
Bitcoin decentralized digital money. You can send or receive bitcoin without the need of a central intermediary like a bank.
That’s great. So what else can be decentralized?
Financial tools, Social Media, Art, Content, Real Estate, Gaming or something else?
Ethereum is a platform that works like Bitcoin but it decentralizes almost anything.
Its use cases are increasing fast.
Ethereum platform facilitates the creation of decentralized applications on its blockchain. This is done with the help of smart contracts.
What are Smart Contracts?
Smart contracts are programmed agreements. They are a set of codes stored on the blockchain.
Think of a smart contract as an if-then statement. So once the condition is met, it performs the defined action.
They are executed automatically without the need for any manual interventions.
You pay the rent of your house on 1st of the month.
Instead of you having to reach out to your landlord, the contract will get automatically executed. And the rent will be transferred instantly.
This is a simple example. There are a lot of complicated use cases as well.
How is a smart contract different from a real-world contract?
Smart contract removes the need for an intermediary. It means there is no delay in the approval process.
Smart contracts follow the words literally. So it is not affected by human error and there can be no manipulation.
Since it is stored on the blockchain
- There is no downtime as they are distributed across nodes.
- They are tamper-proof. They cannot be changed once created and deployed on the network. Even the original author cannot change it. If any change is required, they have to convince the entire network first.
Decentralised applications or Dapps are the applications that run smart contracts.
Just like mobile apps are built on top of Android or iOS, Dapps are built on the top of the Ethereum blockchain.
Dapps function like normal apps.
But these applications run on a decentralized network instead of a centralized server.
As they use smart contracts, they eliminate the need for a middle man.
Example of utility of a Dapp:
Uber connects you with a driver and takes a cut for connecting both the parties.
A Dapp example can be a Decentralized ridesharing app where the user and driver are connected directly without needing a middle man.
This will reduce the cost for the users and result in higher earnings for the drivers.
What is Ether (ETH)?
Ether is the digital currency of the Ethereum network.
It can be used as a store of value, investment or for transactions in the network.
It enables execution of requested operations in smart contracts.
Currently, ether is the second largest cryptocurrency after bitcoin in terms of market cap.
What is GAS?
Gas is the micro ethers required to run the smart contracts.
But why use gas, why not use ether directly?
Think of ether as a currency (like a dollar) and gas as a commodity (like Oil).
As ether is volatile, any change in ether price will change the transaction fees drastically.
Suppose 1 ether is $2500 today and it increases to $5000 next month. Then a transaction that was costing X today will cost 2X next month.
To avoid this type of scenario gas is used.
The difference in ether and gas is to decouple their prices.
Although gas is linked to ether, The fluctuation in ether price will not affect gas. The number of gas required for an operation is constant. But the value of each gas is adjusted so that the final amount is not volatile as ether.
Gas serves another function as well.
Along with incentivizing the miners, gas is a way to keep the codes of smart contract lean and error-free. Inefficient code will need more work to ensure thereby needing more gas.
Also without gas, a user might send in a malicious or error program which may bring the Ethereum network down.
But why do gas prices rise sometimes?
There is a limit to the amount of transaction that can be added to 1 block of the blockchain. (-596 transactions)
Gas prices rise in a crowded network as users who want to have their transaction picked up by miners try to outbid other users.
There are certain updates to the Ethereum network which will improve its scalability and utility.
Validation of transactions in Ethereum follows a mechanism (Proof of Work) similar to Bitcoin.
This validation mechanism of Ethereum is going to change significantly with Ethereum 2.0
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