How does ethereum work?

You may have heard that ethereum is a cryptocurrency like Bitcoin. Although ethereum is the third-largest cryptocurrency by market cap, it is much more than a virtual coin. It's also a blockchain platform, and the cryptocurrency - used to conduct transactions on the platform - is actually called Ether, though it's often referred to as ethereum, too.

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What Is Ethereum?

Ethereum is an open-source platform that uses blockchain technology to create and run decentralized digital applications or "dapps" that enable users to make agreements and conduct transactions directly with each other to buy, sell, and trade goods and services without a middle man. For instance, users can bypass banks to transfer money, skip using a lawyer to draw up a sales contract, and launch their own fundraising site for project crowdsale rather than going through a crowdfunding Internet site, among other uses.

Ethereum operates via a global network of computers that work together as a supercomputer. The network assembles and runs smart contracts - applications that are, in theory, independent from any third party interference or censorship, as the blockchain is resistant to tampering. Smart contracts run exactly as programmed, greatly reducing the risk of fraud, and are self-executing, like an automat or vending machine that carries out the contract terms digitally. Once certain conditions are proven to have been met, such as the transfer of payment, then the merchandise is conveyed or made accessible to the buyer.

How Does Ethereum Work?

Based on blockchain technology, ethereum consists of a series of cryptographic, or secure, public records linked together that each is difficult to change because they are stamped with user data, time and date, and changes that must be approved by all users.

On the ledger, anyone can create a financial contract or keep debt or ownership registries and eliminate the use of an external recordkeeper or trust officer. They're called "trustless" transactions because they eliminate the need for trusting the counterparty to the transaction since the contract is self-fulfilling.

Because of its sweeping size and scope, ethereum's main technical problem has been speed and storage. It has operated at only a few transactions per second, with other crypto platforms able to carry out hundreds. Users have complained of bottlenecks and the expense of using the platform.

A recent report citing sources close to the project said ethereum developers are discussing an upgrade that could boost the technology's capabilities. The update, known as "ethereum 1x" is expected to potentially be rolled out in January 2019 and includes changes to help slow the ethereum blockchain's growth.

For any changes to be made to the platform, there must be a distributed consensus among the software users, but perhaps the update will be welcome if it addresses the ethereum platform's greatest shortcomings.