Ethereum is a name that comes up often in discussions of the digital currency space, and with good reason. Alongside mentions of ethereum, you may also encounter the term “ether." In this explainer, we’ll take a look at the differences between “ethereum” and “ether,” providing clarification on how they differ.
What Is Ethereum?
Put simply, ethereum is a technology which 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, though, it will be helpful to explore some foundational concepts related to blockchain.
In the modern, internet-focused era, we store all types of information (passwords, personal data, and financial details) on clouds and servers which are owned by major providers like Google and Facebook. There are a number of reasons for this; these companies allow the storage and retrieval of data for low costs and help to prevent the hassle of hosting and uptime.
On the other hand, having personal data stored on someone else’s computer makes that data vulnerable to hacking or other modes of intrusion. This is the basis of what is referred to as the “centralized” internet; it is one in which individuals are connected in myriad ways.
Recent years have brought the advent of a decentralized internet movement, with technologies like blockchain looking to splinter off from the main centralized internet in order to provide increased anonymity and security.
Ethereum is one result of the movement toward decentralization. In a sense, ethereum aims to use a blockchain – a distributed ledger system – to replace internet third parties which have typically been responsible for storing data and financial records. Ethereum makes use of “nodes” which are run by volunteers in order 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 “world computer" which would provide infrastructure to people all over the globe. 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.
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 start-up launches and fundraising efforts in support of new services and companies which are connected with the ethereum network.
What Is Ether?
So if ethereum is a type of decentralized internet and app system, what is ether? Ethereum is not “owned” by anyone, but all of the programs and services linked with the network require computing power, and that power is not free.
Ether is the solution to the issue of payment; it is a digital asset bearer (like a bond or other security). It functions like cash, in that it does not require a third party for processing or approval of transactions. However, ether is not exactly a digital currency. Rather, it should be considered as “fuel” for the apps on the decentralized ethereum network, according to ethereum.org.
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 that 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 Differs From 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. (See more: Bitcoin Vs Ethereum: Driven by Different Purposes.)
There are other ways that it differs. For instance, many digital currencies have hard caps, or maximum numbers of tokens or coins that can be mined. Ether does not have a limit of this type. 18 million ether can be mined per year. 60 million ether was bought by users in a 2014 crowdfunding campaign, while another 12 million went to the Ethereum Foundation.
The Ethereum Foundation is 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. (See also: How Do I Buy Ethereum?)
With all of these different collections of ether, it’s difficult to assess exactly how many ether 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.