What Is Ether (ETH)? Definition, How It Works, Vs. Bitcoin

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  • Post last modified:December 15, 2023
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Ether (ETH) is the native cryptocurrency of the Ethereum blockchain, a decentralized platform that enables the creation and execution of smart contracts and decentralized applications (DApps). Ethereum, created by Vitalik Buterin and proposed in late 2013, went live in 2015, introducing a more programmable and versatile blockchain compared to Bitcoin.

Here’s an overview of Ether, how it works, and how it differs from Bitcoin:

### Ether (ETH):

1. **Utility on the Ethereum Platform:**
– Ether is not just a digital currency; it serves as the fuel for the Ethereum network. It is used to compensate participants who perform computations and validate transactions (miners) and to deploy and execute smart contracts on the Ethereum blockchain.

2. **Smart Contracts:**
– Ethereum introduced the concept of smart contracts, self-executing contracts with the terms of the agreement directly written into code. Ether is required to execute and run these smart contracts, which can automate a wide range of processes.

3. **Decentralized Applications (DApps):**
– Developers use Ethereum to build decentralized applications or DApps. These applications can range from financial services and games to supply chain management, all running on the Ethereum blockchain and requiring Ether for various operations.

4. **Mining and Consensus:**
– Ethereum initially used a Proof of Work (PoW) consensus mechanism similar to Bitcoin. However, Ethereum has been transitioning to Ethereum 2.0, which involves a shift to Proof of Stake (PoS). In PoS, validators are chosen to create new blocks and validate transactions based on the amount of Ether they “stake” as collateral.

### Differences Between Ether (ETH) and Bitcoin (BTC):

1. **Purpose and Functionality:**
– Bitcoin primarily serves as a decentralized digital currency and a store of value. In contrast, Ether is designed to power the Ethereum blockchain, enabling the creation and execution of smart contracts and DApps.

2. **Blockchain Technology:**
– While both Bitcoin and Ethereum use blockchain technology, Ethereum’s blockchain is more versatile and programmable. It allows developers to create decentralized applications beyond simple peer-to-peer transactions.

3. **Consensus Mechanism:**
– Bitcoin uses Proof of Work (PoW) as its consensus mechanism, requiring miners to solve complex mathematical problems to validate transactions and create new blocks. Ethereum is transitioning to Proof of Stake (PoS), a more energy-efficient alternative where validators are chosen to create new blocks based on the amount of cryptocurrency they hold and are willing to “stake” as collateral.

4. **Supply Limit:**
– Bitcoin has a capped supply of 21 million coins, making it a deflationary asset. Ethereum does not have a capped supply, and the issuance rate was initially higher, though it has undergone adjustments. Ethereum’s transition to Ethereum 2.0 aims to reduce issuance and could introduce mechanisms like EIP-1559 to manage gas fees and further influence Ether’s supply dynamics.

5. **Economic Model:**
– Bitcoin’s economic model is focused on being a decentralized digital currency and store of value. Ether’s economic model is tied to the usage of the Ethereum platform, where users pay fees (gas) in Ether for transactions and smart contract executions.

While Bitcoin and Ether share some similarities as cryptocurrencies, their design goals and use cases are distinct. Bitcoin is often referred to as “digital gold” and a hedge against inflation, while Ethereum is recognized for its programmability and the creation of decentralized applications.