The possibilities Ethereum offers and how it works

Following the Reserve Bank of India’s judgment lifting the ban on cryptocurrency payments, they have gained traction in India. We explain some key concepts in a series of explainers by talking to experts. We start with what is ethereum and how it works.

Ethereum (the cryptocurrency itself is technically called ether) trades at ₹44,970 ($610) at present, almost five times its value at the start of this year at ₹9,625. However, it is still a long way off from its peak of ₹88,125 that it reached on 12 January 2018. Ethereum has a market cap of around $70 billion compared to bitcoin’s $360 billion.

What is ethereum? It is a software platform that runs on a decentralized network, which allows specialized applications to run in unique ways. Ethereum is like the bitcoin software, but it does things differently. Bitcoin can move value from one place to another. Ethereum can move value from one place to another based on conditions.

The three important concepts to know about ethereum are smart contracts, decentralization, and privacy.

Smart contracts: The question ethereum’s inventor, 19-year-old Vitalik Buterin, asked in 2013 was basically this: what if you could put conditions on the payments being made on the blockchain? Ethereum stores these “if and then” contracts on its blockchain, an immutable ledger. The contracts execute automatically once the “if”part has been completed. For example, if my taxi has brought me to my destination, credit the driver’s account.

These are called smart contracts. A smart contract doesn’t require a third party like a bank, notary, or government official to verify it. Instead a cryptographic code is attached to the contract verifying that this is the one true version of the contract, agreed upon by the two parties.

Instead of being stored on a central database, smart contracts are stored in multiple copies on a large global network of computers. For a criminal hacker to change the contract, they would have to simultaneously change thousands of computers, which is nearly impossible.

Decentralization: This stops hackers from changing smart contracts on the ethereum blockchain as there is no single weakness to attack.

Decentralized applications or dapps offer new possibilities for gaming, the creation of virtual worlds, marketplaces for digital art and other assets such as decentralized finance. Enthusiasts say we are only beginning to understand their potential.

Privacy: Companies like Facebook and Google keep your information on their servers where other companies and even criminals could access them. With a dapp on ethereum, you can put limits on what the smart contract can do with your information and take it back when it’s done.

Ether: The value of ether reflects the energy put in to mine blocks and verify transactions. Beyond that, the value of ether is tied to the value which people place in the ethereum network itself. The more powerful and valuable things the network can do, the more valuable ether becomes.

From 1 December 2020, ethereum has started its transition to Ethereum 2.0, a blockchain system that can process more transactions at lower cost and with less consumption of electricity.

As told to Neil Borate by Vikram Rangala, chief marketing officer at ZebPay