Ethereum explained in simple terms


You came here to read the article on Ethereum certainly means you have developed a fair understanding of blockchain and Bitcoin. Well, If you still need a refresher then you can read it here:  What is Bitcoin? – Explained in simple terms

Why Ethereum?

I promise.  I won’t use the word “Decentralized apps” so soon. Neither will I use the “smart contract” without creating an adequate background.

Let’s start with an example.

Imagine we are all living in the 90s. The internet is a new phenomenon and everyone is going gung ho about it. You get a crazy idea. You think of developing a microblogging platform where people could tell what they feel in just 140 characters. You also give this platform an innovative name – “Twitter.” Soon, the idea catches up, millions of people join your platform including celebrities from all over the world. You build and maintain servers to handle such a large number of user profiles, their tweets, their friends, followers, and the entire data. You take advantage of such high traffic and monetize the platform by providing advertisements.

However, your business sometimes does face problems.  You occasionally get requests from the government to block certain notorious users (censorship). Although you want to keep the freedom of speech alive, you have to oblige to government’s requests and bring down certain content. You have also been hacked a number of times before when you had to shut down your services (downtime).

That’s okay. You learn to sail through occasional problems but one fine day, you receive a shock of your life.  You wake up to see a billion of users go missing from your platform. Later you learn that China has banned your websites to its citizens (third party interference). Your business is in turmoil now but you can’t help it. You really wish that you could run the business without any downtime, censorship or third-party interference until you stumble upon a new word called the blockchain.

Wow. You get an idea to build twitter on the blockchain so nobody could meddle with it. But as you know, blockchain consists of only ledgers where new transactions are being added. It is only doing the job of storing the data and preventing it from any tampering.  It does not provide any environment where you could just run your twitter source code and create a new website for users. You wait for a few more years until you come across something called “Ethereum”.

Ethereum turns out to be your problem solver. With Ethereum, now you could build Twitter on the blockchain. But, you are late to the party. People have already started building Twitter on Etheruem and it is called Tweether.

What is Ethereum?

You can think of Ethereum as Microsoft windows of the blockchain. It’s similar to an operating system where you develop applications on top of it. Your Twitter application on blockchain will not be on not on a single or a selected few computer but will be distributed across all participating computers in the Ethereum network. That means the copy of your application will be everywhere on the network. It could be on your computer, on your neighbor’s computer, and on my computer. No one can tamper with your application since it is on the blockchain. Such applications which do not remain on a single or a selected few computers (servers) but are distributed across a network are called decentralized applications or dApps.


Now, with this background, I feel safe to provide you definition of Etheruen as given on the Ethereum’s official website.

Ethereum is a  decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference.

Let’s try to understand what smart contracts mean?

What is a smart contract?

You know that the bitcoin blockchain consists of append only ledgers. When people transact bitcoins, their transactions are getting added in these ledgers. The function of this blockchain is to make sure that nobody tampers with these ledgers and since 2009, we have seen that the blockchain has remained tamper-proof. However, you cannot make a twitter like application on blockchain with just append-only-ledgers. You need to make the blockchain programmable so you could write and execute the logic.

Ethereum blockchain allows you to write programs on the blockchain and these programs are called smart contracts.Let’s understand this with an example.

You want to create an application where if someone says hello to you, you will pay $5 to him/her. I know, you can easily create such application. You will create a website and provide fields to take “hello” and bank details of the user. When user presses submit button, his/her account is credited with $5. This is a smart contract, that means this contract will be executed automatically without any manual intervention. However, when you run this smart-contract on a website, it is executed on a centralized application. By now, you know the drawbacks of such applications. Someone may hack it and instead of $5, he/she can debit $500 from your bank. But, with Ethereum you can build such programs on the blockchain, which remain working till eternity with no downtime, no censorship, and no third party interference.

This was a simple example to explain what a smart contract is. Here are a few interesting examples that are being developed on the Ethereum.


Alice.Si is on a mission to restore humanity’s trust in charities by holding funds in smart contracts so that donors only pay if the charity makes an impact. It helps keep charities honest and lets donors rest easy knowing that their money is actually going to a good cause.


The Gnosis platform looks to create a decentralized prediction market where users vote on anything from the weather to election results.


Now, let’s try to answer next logical question.

 What is Ether?

Ether is to Ethereum what Bitcoin is to Blockchain.

Like Bitcoin, Ether is given to miners who provide their resources to validate Ethereum blocks. However, unlike Bitcoin, Ether doesn’t operate as a digital currency but seeks to provide “fuel/gas” for the decentralized apps on the network.

Let’s go back to the example of a decentralized Twitter. Your decentralized Twitter is on the blockchain. To post a new tweet, you need to execute some code on the blockchain. When a sufficient number of tweets are generated, a block will be generated which needs to be verified before it is accepted by the public network. For this validation, some miners will deploy their computers and the miner who verifies the block first will get Ether as a reward. While no one owns Ethereum and anyone can use Ethereum the way they want but the system needs miners who will help verify the Ethereum blockchain.

Higher will be the computational needs on the blockchain, higher number validations need to be carried out and hence, more number of blocks generated and more Ether will be given out to the miners.

To summarize, Ether works as a transaction fee for running your decentralized apps the Ethereum blockchain.  These transaction fees are calculated based on how much computing power is taken by your application. In Ethereum world, this transaction fee is called “Gas”. Each action costs an amount of gas that’s based on the computational power required and how long it takes to run. A transaction costs 500 gas, for example, which is paid in Ether.

While bitcoin has a hard cap of 21 million bitcoins, Ether does not have a similar limit.

Who owns how much Ether?

  • 60m was purchased during 2104 crowdfunding campaign
  • 12 is owned by Ethereum Foundation
  • 5 ethers are being mined every 5 seconds who validate transactions

Where to buy Ether(eum)?

  • Buy directly on an exchange

You can purchase Ethereum directly on a digital exchange such as Coinbase. Coinbase also provides you the wallet to store Ethereum.

  • Convert bitcoins to Ethereum

Many websites such as Changelly provide services to convert bitcoins into Ethereum and other cryptocurrencies.


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