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How Does Ethereum Work?

How Does Ethereum Work?

Ethereum uses a blockchain that looks very similar to Bitcoin’s until you get into the details.

Ethereum is a platform on which transactions can be made using Ether or other tokens which have been made using the protocol, and smart contracts and decentralized applications (Ðapps) can be executed using the distributed computing power of what’s called the Ethereum Virtual Machine. When viewed from different angles, Ethereum is an open-source coding environment, a market upon which to distribute new blockchain-based applications, and a distributed computing machine that processes functions of the blockchain applications across a broad network. Distributed computing itself is not that new, but distributed computing on a blockchain is.

Ethereum works because many people are eager to use it as a platform for their own ideas. It has yet to be proven in many ways, of course, because it is young, and because the code people are writing on it is new, and because the people interfacing with the environment have created a new and turbulent marketplace with a lot of gray areas. Many new companies launching ICOs have used the ERC20 protocol to create and market virtual currencies, many of which have unfortunately turned out to be Ponzi schemes. The DAO (Decentralized Autonomous Organization) which was a large and expensive experiment in blockchain-based corporate governance, resulted in millions of Ethereum lost to hackers, and subsequently a huge rift in the Ethereum community and a hard fork in the Ethereum network. Because the possibilities of what Ethereum can do are basically limitless, care and prudence must be exercised when committing resources to the various projects until their security and viability have been well-tested.

From a technical aspect, Ethereum works by taking information about transactions, executable code for Ðapps, and smart contract information, and blending it into blocks which are given to thousands of computers simultaneously that attempt to validate it through the process known as mining (although at the Serenity stage of Ethereum, proof-of-work mining will be replaced by proof-of-stake validation). Once the information in a block has been validated it is added to the distributed ledger of the blockchain and the requests to call up the code a distributed application (Ðapp) are processed by functions on the Ethereum Virtual Machine. The code of a Distributed Application is held on the blockchain as the backend to the process and the Ethereum protocol uses various computers in the network to compute the requests and calculate the Gas bill. The Ethereum platform itself can be seen as one giant computer that everyone has access to, and users have to pay a fee for the computer to process something.

Keywords: oil and gas, Initial Coin Offering (ICO), ERC 20, Dapps, Ethereum Virtual Machine, Ethereum mining,