What Is Ether Cryptocurrency?

Ether is the transactional token that facilitates operations on Ethereum-based smart contracts and dapps.

Ether is a medium of incentive or form of payment for network participants to execute their requested operations on the network.

Key Takeaways

  • Ether is the transactional token of the Ethereum network. It is similar to other cryptocurrencies in that it is a medium of exchange, but it is different in that it has a specific and limited use.
  • Ether facilitates the computation of decentralized apps (dapps) and acts as fuel for the transaction. Apps that are more data-hungry and require more computing power require more ether to operate.
  • Users may exchange other cryptocurrencies for ether, but ether cannot be substituted with other cryptocurrencies to provide gas for transactions.

Understanding Ether Cryptocurrency

The Ethereum network supports building and running digital, decentralized applications (dapps) for business and personal use.

A developer who builds Ethereum apps may need to pay charges to host and execute the apps on the Ethereum network, and a user who uses such apps may need to pay for using the app. Ether acts as a medium to allow such payments. A developer who builds an app that uses minimal network resources will pay fewer ethers compared to the one who builds high-resource apps.

Ether Is the “Fuel” of Ethereum

Ether's function as a way of tracking and facilitating transactions is metaphorically closer to a fuel rather than a currency.

The computational resources required to execute a smart contract are tracked and paid for with ether. Just as an inefficient engine will require more fuel, and an efficient engine will consume less fuel, data-hungry apps require more ether to process transactions.

The use of ether on the Ethereum network or in a decentralized app depends upon the amount of computational power and time required by a particular process, request, or transaction. The more computation power and time is needed by an app, the higher the ether fee that is charged for the action to be completed.

This mechanism is notably different from the working of a standard cryptocurrency. Nevertheless, ether does have properties that make it similar to cryptos like Bitcoin.

Ether as a Cryptocurrency

Ether has a limited supply capped at 18 million ethers per year. During the 2014 presale, 60 million ethers were created and allocated to the contributors and another 12 million were created for the development fund involving early contributors and developers and the Ethereum Foundation.

Unlike Bitcoin, the total number of ether does not have an absolute cap. Originally, the 60 million ether premine and 12 million set aside to fund development was intended to be supplemented yearly with a new issuance of 18 million more ether.

At present, 5 ethers are created every block (roughly 15 seconds) and allocated to the block miner. Around 2-3 ethers are occasionally sent to another miner if they were also able to find a solution but the ensuing block wasn't included. Such rewards are often referred to as uncle block rewards.

Ether can be mined by creating a new block and adding it to the blockchain. On average, a new block is added to the blockchain every 12.5 seconds and the miner who generated the new block is rewarded with 2 ethers.

Ethereum Developments That Affect Ether

Ethereum developers have been working on shifting the network from a proof-of-work system to a proof-of-stake (PoS) system since 2017. The project is nicknamed Casper, and its implementation could have profound effects on ether.

As part of the Casper move to PoS, the Ethereum network was exposed to a difficulty bomb that would slow down transactions on the network and induce an "ice age" where transactions come to a halt and the system freezes. (The Ethereum community loves an apocalyptic metaphor.)

At the end of 2019 Ethereum developers deployed the Istanbul hard fork that created a dramatic increase in block processing time. Pedro Febrero speculates this was due to the developers not tweaking the difficulty of mining new blocks to fit the update.

On January 1, 2020, at Block #9,200,000 the Muir Glacier upgrade was implemented which delays the difficulty bomb for another 4 million blocks. According to Anna Larsen, this improved performance on the network, but increased ether inflation by 5%. These moves by Ethereum's developers have eroded confidence in the project, and by extension, they have the power to erode confidence in the project's token, ether.