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What is Ethereum & How Does It Work?

Ethereum is a blockchain-based open software platform that enables users to build a wide variety of decentralised applications, also known as “dapps”.

If you find yourself asking which is the better option out of Bitcoin & Ethereum then hopefully by the end of this article you will have that question answered for you. 

Keep reading if you want to learn:

  • What is Ethereum?
  • Who Invented Ethereum?
  • How Does Ethereum Work?
  • Ethereum Vs Bitcoin
  • Disadvantages
  • Advantages

What is Ethereum?

Ethereum is the second largest network to be created on the blockchain platform. Ethereum per se is a network that operates on the blockchain. Aside from the network, it has its own associated cryptocurrency tokens called “Ether”. 

Ethereum’s blockchain network is a decentralised public ledger open to everyone. Every transaction on the network is verified and recorded, much like Bitcoin. Ethereum’s open software platform enables users to build a range of decentralised applications; commonly referred to as “dapps”. 

Etheruem is powered by smart contracts. According to Leech, A smart contract is a program that runs autonomously on the Ethereum blockchain. Smart contracts eliminate the need of a third-party and unnecessary fees.

People have the power to transact directly over the network. Peer-to-peer lending has shown a gain in popularity on the Ethereum network. Lending apps that are being created on the Ethereum network enables users to lend money to others excluding the requirement of a bank. 

When certain conditions are met, the algorithm associated with the smart contract performs a specific function. For example when a peer-to-peer loan is deployed, the smart contract initiates the money to be lended when the collateral is placed into the correct wallet or account. The advantages of using a smart contract rather than a traditional lender are; speed of execution, minimial human errors and lower fees. 

Who Invented Ethereum?

Ethereum was first proposed by a Toronto-based programmer, Vitalik Buterin in late 2013. With the help of several co-founders, Vitalik Buterin launched the first version of the platform in 2015. 

His vision was to create a vehicle for decentralised, collaborative applications. According to Ollie Leech, Buterin realised that Bitcoin is like a pocket calculator, designed to do one thing, and it does it really well, but you can’t do anything else with it. So Buterin launched the Ethereum network, with the vision of creating something with far more potential than Bitcoin.

How Does Ethereum Work?

The Ethereum blockchain resembles the Bitcoin blockchain. Keeping in mind Buterins vision for Ethereum, he designed Ethereum in such a way that enables developers to write software through which blockchain transactions manage and automate key outcomes. This is where smart contracts come into play. 

A smart contract ensures certain conditions of the contract are met by writing it in code. Once predefined conditions are met, the automated software executes the agreement. A contract is inscribed into the blockchain when a certain number of anonymous participants agree to a set of terms. The contract is fulfilled after the triggering event occurs. The conditions of the agreement are carried out by the parties involved.

Ethereum Vs Bitcoin

Although Ethereum and Bitcoin have similarities, Bitcoin only uses one specific application of blockchain technology and primarily it is only a virtual currency and store of value. While Bitcoin is an electronic cash system that enables payments online. Ethereum does just that too. Furthermore, it focuses on decentralised applications and running the programming for them. 

Ethereum gives developers the opportunity to raise funds to create their own applications by setting up a contract and seeking pledges from the wider community. 

Ethereum’s limit is a little different from Bitcoin’s. The annual issuance of ether is regulated at 18 million units, which is equivalent to 25% of the total supply. Miners on the Ethereum network work to earn ether instead of bitcoin.

They charge varying fees for their transactions. It’s referred to as ‘gas’ in Ethereum. Transaction costs are determined by bandwidth utilisation, storage needs, and transaction complexity. Bitcoin transactions compete on an equal footing and are constrained by block size.


Transaction Costs Are Exceeding. Due to the rapid growth of Ethereum, it has resulted in higher transaction costs. 

Risk Of Inflation. Although Ethereum has an annual limit of 18 million Ether, there is no lifetime limit on the amount of tokens that can be created. As a result, Ethereum may behave more like dollars as an investment and may not appreciate as much as Bitcoin, which has a strict lifespan restriction on the quantity of units.

Learning Difficulties for Developers. As developers move away from centralised processing and towards decentralised networks, Ethereum can be tough to grasp for developers. 


A wide range of functions are available. Ethereum can be used to perform different forms of financial transactions, execute smart contracts, and store data for third-party applications in addition to being utilised as a digital currency.

Avoids the use of middlemen. The decentralised Ethereum network promises to free users from third-party intermediates like attorneys who draught and interpret contracts, banks who operate as financial intermediaries, and third-party site hosting providers.

Constantly evolving. Ethereum’s developer community is always seeking for new methods to improve the network and create new applications.

What To Do Next?

If you have enjoyed this article and want to learn more about Bitcoin and how it works, then check out our artcle What is Bitcoin.