What Is Ether (ETH)?

Ether is the transactional token that facilitates operations on the Ethereum network. All of the programs and services linked with the Ethereum network require computing power (and that computing power is not free). Ether is a form of payment for network participants to execute their requested operations on the network.

While ether can be thought of as the cryptocurrency of the Ethereum network, metaphorically speaking, it is more accurate to refer to it as the "fuel" of the network. Ether tracks and facilitates all transactions in the network. This process is notably different from the workings of a standard cryptocurrency. Nevertheless, ether does have some properties that make it similar to other cryptocurrencies, such as bitcoin.

Key Takeaways

  • Ether is the transactional token that facilitates operations on the Ethereum network.
  • While ether can be thought of as the cryptocurrency of the Ethereum network, metaphorically speaking, it is more accurate to refer to it as the "fuel" of the network.
  • The Ethereum technology uses blockchain development to replace the storage of consumer data, including financial records, by third-party Internet companies.
  • Ether is the world’s second-largest virtual currency by market capitalization; it is second only to Bitcoin (BTC), according to market value.
  • Ethereum developers started working on shifting the network from a proof-of-work (PoW) system to a proof-of-stake (PoS) system in 2017; the new underlying network is known as Ethereum 2.0 and it has yet to be fully released.

Understanding Ether (ETH)

The Ethereum technology uses blockchain development to replace the storage of consumer data, including financial records, by third-party Internet companies. A blockchain is a unique type of database; in a blockchain, data is stored in blocks that are chained together in chronological order. Blockchain was originally used to record bitcoin transactions. Today, it provides the foundation for most major cryptocurrencies.

The Ethereum model aims to create a situation where the personal data of consumers is less vulnerable to hacking because no one company is storing it. Like other cryptocurrencies, ether is a medium of exchange. However, unlike other cryptocurrencies, ether tokens can only be used for one specific purpose: to facilitate the computation of decentralized applications on the Ethereum network. Users may exchange other cryptocurrencies for ether tokens, but ether tokens cannot be substituted with other cryptocurrencies to provide computing power for Ethereum transactions.

The Ethereum network supports building and running digital, decentralized applications—called dapps—for business and personal use. The computational resources required to execute these operations are tracked and paid for with ether tokens.

A developer who builds Ethereum applications may need to pay charges to host and execute the applications on the Ethereum network, and a user who uses such applications may need to pay for using the application. Ether acts as a medium to allow for such payments.

A developer who builds an application that uses minimal network resources will pay fewer ether tokens compared to a developer who builds high-resource applications. Just as an inefficient engine requires more fuel—and an efficient engine consumes less fuel—data-hungry applications require more ether to process transactions. The more computation power and time is needed by an application, the higher the ether fee that is charged for the action to be completed.

How Is Ether Different From Bitcoin?

Ether is the world’s second-largest virtual currency by market capitalization. It is second only to Bitcoin (BTC), according to market value. Bitcoin was first released on January 3, 2009, while Ethereum’s live blockchain was launched on July 30, 2015. Unlike bitcoin, the total number of ether tokens does not have an absolute cap—it changes and grows constantly according to demand. As a result, the Ethereum blockchain is significantly larger than the bitcoin blockchain, and it is expected to continue to outpace bitcoin in the future.

Another key difference between the two is that, while the bitcoin blockchain is simply a ledger of accounts, contributors to the Ethereum blockchain can build more code into the transactions, creating what are called “smart contracts.” So transactions on the Ethereum network may contain executable code, while the data that is connected to bitcoin network transactions are generally only used for recordkeeping.

The amount of time that it takes to build a new block also varies between the two virtual currencies as well. A new block in the Ethereum blockchain can be confirmed in seconds, whereas it takes minutes for the bitcoin equivalent to occur. And most importantly, the overall aims of the networks are different. As a secure peer-to-peer decentralized payment system, Bitcoin was created to be an alternative to traditional currencies. The Ethereum platform was created to facilitate contracts and applications, and ether is the medium through which these transactions are made possible. Ether was never intended to be an alternative currency or to replace other mediums of exchange. Rather, its purpose is to facilitate and monetize the operations of the Ethereum platform.

Theoretically, these two technologies should not compete with each other; the Ethereum blockchain actually supports bitcoin. So while they do not compete with each other from a functional perspective—because they were developed for different reasons and have different internal dynamics—they have both attracted huge amounts of investment from investors. So it could be said that the two technologies compete for investor dollars.

Plans for Ether

Ethereum developers started working on shifting the network from a proof-of-work (PoW) system to a proof-of-stake (PoS) system in 2017. The new underlying network is known as Ethereum 2.0. The purpose of upgrading to Ethereum 2.0 is to make the underlying network faster and more secure. Proponents of the planned upgrade say that it allowed thousands of more transactions to take place every second.

In a PoW system, so-called "miners" compete with each other to solve difficult mathematical problems in order to validate transactions via their computers. With the new PoS system, the Ethereum network will rely on “stakers” (rather than miners), who already hold some ether tokens, to process all new transactions. In order to validate a transaction on the Ethereum 2.0 network, a staker must deposit ether tokens into a cryptocurrency wallet. To deposit ether tokens into a wallet, stakers must use a smart contract (a contract on the Ethereum blockchain that is automatically executed using code).

Unlike a PoW system, stakers don't need to use significant amounts of computational power because they're selected at random and they aren't competing with other miners. Stakers don't need to mine blocks; rather, they create blocks when they are selected and validate proposed blocks when they're not. This validation process is known as "attesting." According to Ethereum's website, you can think of attesting as saying "this block looks good to me." Participants in this process can earn rewards for both proposing new blocks and for attesting to ones they've seen.

On December 2, 2020, the founder of Ethereum, Vitalik Buterin, provided a roadmap for the release of Ethereum 2.0. And although the first block of the new Ethereum blockchain was created on December 1, 2020, the roadmap made it clear that the full implementation of Ethereum will take some time. Even though the platform has formally switched to version 2.0, it still depends on miners for computing power.