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What is Ethereum, what is ether?

Daniel Roberts
Senior Writer

The value of ether rose 8,978% in 2017.

That was the biggest rise of any cryptocurrency in 2017 except for ripple. And much of ether’s overall rise came at the very end of the year (65% in December alone), suggesting that ether and Ethereum, the network it runs on, are super-hot right now.

You might ask: why? What is ether? What is Ethereum? And how is it different from bitcoin?

Here are your answers.

What is Ethereum?

For starters, remember that bitcoin, invented in 2009, runs on “blockchain,” a decentralized, immutable, peer-to-peer ledger that records every transaction done in bitcoins. Bitcoin miners use expensive machines to verify and upload (or “mine”) bundles of transactions (called “blocks”) to the chain.

Ethereum also runs on a blockchain, also maintained by miners. But unlike the bitcoin blockchain, Ethereum is designed specifically to carry out “smart contracts,” which are automated agreements for an exchange of value. (This is also called “scripting.”) Smart contracts are a way to cut the middleman out of financial transactions; a network of nodes carry out agreements by independently verifying them. The Ethereum blockchain not only records every ether transaction, but also the most up-to-date form of every smart contract.

Ether (ETH) is the token of the Ethereum chain. So ether is to Ethereum what bitcoin is to the bitcoin blockchain. (Be warned: most people simply refer to ether, the token, as “ethereum.”)

Vitalik Buterin published the Ethereum white paper in 2013, but the network did not go live until July 2015 when the “genesis block” of ether was mined on the Ethereum blockchain. Leading up to that, Ethereum held a token sale, nowadays popularly called an initial coin offering (ICO), in which it sold 60 million ether tokens and brought in more than $18 million worth of bitcoin. (Buyers bought ether and paid in bitcoin.) In 2017, ICOs exploded in popularity, and most of them are carried out over Ethereum.

Now, at the outset of 2018, the buzziest use case has been a digital cat-birthing game called CryptoKitties, in which users pay in ether to breed, trade, and collect digital cats. That might make you laugh, but the game’s dual purpose has been to illustrate the uses of Ethereum. It took off: more than 200,000 people are now playing CryptoKitties.

As a result, the game’s popularity ended up also exhibiting the limitations of the Ethereum network. It got so popular that it bogged down the system, and the cost per cat, or “gas” per transaction, had to be raised. “Gas” on the Ethereum chain is paid for in ether. To make a transaction settle faster, you can pay for more gas.

Cryptokitties.co home page.

Another concern some have about Ethereum is security. In 2016, a decentralized network called The DAO (it stands for decentralized autonomous organization), built on top of the Ethereum blockchain, raised $150 million in an ICO but was promptly hacked to the tune of $50 million worth of ether. After the attack, an SEC official expressed concern over the security of Ethereum.

In the wake of the hack, Ethereum forked into two separate chains, creating a second cryptocurrency: “ethereum classic” (ETC) is the coin of the original chain, and ether (ETH) is the coin of the new chain. In general, most developers moved on to the new chain, so even though one coin is called “classic,” it’s the other coin that is more prominent. (You would be forgiven for finding this a little confusing.)

CB Insights describes Ethereum as “bitcoin’s multi-talented, more versatile younger sibling.” And indeed, many in the digital currency world see more potential business opportunities with Ethereum than with bitcoin.

Why is ether up so much, and where can you buy?

Price of ether in 2017.

You might think that the rise in the price of ether is a sign of faith in the technology, or excitement about Ethereum’s potential, or tied to the rise of ICOs.

But amid the coin-investing mania that kicked into high gear at the end of 2017, most people don’t appear to care about why each cryptocurrency was created, the technology behind it, or its use cases: they only care that it’s going up in value, and they want to buy some. Buyers are treating all of these digital coins as speculative investments, without much difference among them.

So it’s possible that the rise in ether is at least somewhat tied to its uses, but also that it’s mostly from investors fearing they missed out on bitcoin and flocking to the next best thing. (Ether was the No. 2 coin by market cap for all of 2017 until the final week, when ripple leapfrogged it.)

It helps that you can buy ether on Coinbase, the most popular mainstream brokerage for buying cryptocurrencies. Ether was in fact the second coin that Coinbase added after bitcoin, and it has since added two more: litecoin and bitcoin cash.

The ease with which a regular person can buy some ether has helped it soar as an investment. It’s a little bit harder to buy up ripple, though that has not stopped determined speculators from flocking to that coin, as well. In fact, very little is slowing down the crazed investment in digital coins here at the start of 2018.

Daniel Roberts covers bitcoin and blockchain at Yahoo Finance. Follow him on Twitter at @readDanwrite.

Read more:

What is ripple?

What is litecoin?

What is bitcoin?

How to buy bitcoin

Bought bitcoin? You must practice ‘cold storage’

Why bitcoin matters

The 11 biggest names in crypto right now

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