What is Ethereum? How does it work?

Like bitcoin, ethereum is another gem in the cryptocrurrency world. It is the second biggest virtual currency after bitcoin in terms of market capitalisation. It was founded in 2013 by Vitalik Butkerin and it uses a cryptocurrency called Ether, which is used as a payment method.


Ethereum is a decentralised system, which allows investing, accounting and implementing of decentralised programs or smart contracts. Smart contracts are transaction protocols or programs, which check the terms of a contract automatically and run as demanded by clauses in the contract.


Ethereum has a market share of 27 per cent and has been traded publicly since 2016. According to a report by Deutsche Bank Wealth Management, the issuance of Ether is limited to 18 million per year. Because the absolute issuance of Ether is limited, the relative inflation rate should decrease every year with rising demand.

It uses the Ethash mining algorithm, which is based off the Dagger-Hashimoto algorithm.

Brian Kelly in his book The Bitcoin Big Bang wrote that the goal of Ethereum is to make it possible for any developer to write a smart contract that will operate on the Ethereum blockchain. Once again, the impact of this technology should not be underestimated. The ability to create and distribute decentralised applications has the potential to disrupt a wide swath of businesses, not just in the financial industry.

Besides bitcoin and ethereum, there are number of cryptocurrencies which are hogging limelight these days. This included ripple, litecoin, monero, dash, NEM etc.