Ethereum is a name that comes up often in discussions of the digital currency space, and with good reason. When you read or hear about ethereum, you'll probably hear about ether as well. But we're not referring to the kind of ether you learned about in science class. In this explainer, we’ll take a look at the differences between ethereum and ether, providing clarification on how they differ.

Key Takeaways

  • Ethereum is a technology that uses blockchain development to replace internet third parties that store data and financial records.
  • In an idealized ethereum model, no one entity would control your personal data, making it less vulnerable to hacks or shutdowns.
  • To cover the cost of this power, you likely need to pay a marginal fee—ether is the token by which you make this payment.
  • A total of 18 million ether are mined each year.

What Is Ethereum?

Ethereum is a technology that makes use of the blockchain development that has undergirded most cryptocurrencies in the past several years. Before we can look at what makes ethereum unique, let's explore some foundational concepts related to blockchain.

We store all types of information—passwords, personal data, and financial details—in clouds and on servers which are owned by major providers like Google and Facebook. These companies allow for the storage and retrieval of data for low costs and help to prevent the hassle of hosting and uptime. But having personal data stored on someone else’s computer makes it vulnerable to hacking or other modes of intrusion. This is the basis of what is referred to as the centralized internet—one in which individuals are connected to in myriad ways.

Recent years have brought the advent of a decentralized internet movement. Technologies like blockchain want to splinter off from the main centralized internet to provide increased anonymity and security.

Ethereum is part of a movement toward a more decentralized internet that provides increased anonymity and security.

Ethereum is one result of this movement toward decentralization. In one sense, ethereum aims to use a blockchain—a distributed ledger system—to replace internet third parties that store data and financial records. Ethereum makes use of nodes run by volunteers to replace individual server and cloud systems owned by major internet providers and services.

The idea is that these nodes will connect to become a global computer that would provide infrastructure to people all over the world. In an idealized ethereum model, no one entity would have control over your personal data, and it would therefore be much less vulnerable to hacks or shutdowns.

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Joe Lubin answers: "Is Ether a Security?"

New Applications Possible

Along with the decentralization of server and hosting duties, ethereum also aims to support a new type of application—sometimes called a dapp. These applications work in a similar way to the broader ethereum network in that they are decentralized and make use of the global network of nodes that ethereum provides.

Ethereum has therefore been linked with the rise in initial coin offerings (ICOs), which are startup launches and fundraising efforts in support of new services and companies connected with the ethereum network.

What Is Ether?

Ethereum is not owned by anyone. All of the programs and services linked with the network require computing power—and that power is not free. So if ethereum is a type of decentralized internet and app system, what is ether?

Ether is the solution to the issue of payment—a digital asset-bearer like a bond or other security. You can call it the cryptocurrency of the ethereum network. Just like cash, it doesn't require a third party to process or approve transactions. According to ethereum.org, it should be considered as fuel for the apps on the decentralized ethereum network.

This is an abstract way of framing ether’s function, and a concrete example may help to make things clearer. Say there is an app on the ethereum network that allows you to create, modify, and delete simple notes. In order to complete any of these tasks, the app requires processing power via the network.

To cover the cost of this power, you likely need to pay a marginal fee anytime you wish to make any changes to your existing notes. Ether is the token by which you make this payment. It is, in a sense digital oil in that it allows the network to process the changes you’ve made. As a type of fuel, it then makes sense that ether transaction fees will be different depending upon how much fuel is required for the service.

Ether vs. Other Cryptocurrencies

Each particular action on the ethereum network or in a decentralized app requires a different amount of computational power and time. The greater the power and time required, the higher the ether fee for the action to be completed. In this way, ether is different from a digital currency like bitcoin.

There are also other ways that it differs. For instance, many digital currencies have hard caps or maximum numbers of tokens or coins that can be mined. With ether, there are no limits. A total of 18 million ether are mined each year. Sixty million ether was bought by users in a 2014 crowdfunding campaign, while another 12 million went to the Ethereum Foundation, a collective of developers and analysts who work to enhance the ethereum network and the underlying technology. Five ether tokens (ETH) are allotted to the miners that verify transactions on the network every 12 seconds. Despite their differences, the market for ETH functions similarly to that of digital currencies like bitcoin in many ways.

With all of these different collections of ether, it’s difficult to assess exactly how many exist at any given time. To make things more complicated, developers are in the process of trying to change the rules of ether creation to a new algorithm based on proof-of-stake rather than the older, but more common, proof-of-work concept. 

Investing in cryptocurrencies and other Initial Coin Offerings (ICOs) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns bitcoin.