Ethereum | What is Ethereum and how does it work?

Ethereum.org: ETHER - The crypto-fuel for the Ethereum network. Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.

What is Ether? 
Ether is a necessary element — a fuel — for operating the distributed application platform Ethereum. It is a form of payment made by the clients of the platform to the machines executing the requested operations.
Ethereum | What is Ethereum and how does it work?
To put it another way, ether is the incentive ensuring that developers write quality applications (wasteful code costs more), and that the network remains healthy (people are compensated for their contributed resources).

These apps run on a custom built blockchain, an enormously powerful shared global infrastructure that can move value around and represent the ownership of property. 

This enables developers to create markets, store registries of debts or promises, move funds in accordance with instructions given long in the past (like a will or a futures contract) and many other things that have not been invented yet, all without a middleman or counterparty risk. 

The project was bootstrapped via an ether presale in August 2014 by fans all around the world. It is developed by the Ethereum Foundation, a Swiss non-profit, with contributions from great minds across the globe. 

On traditional server architectures, every application has to set up its own servers that run their own code in isolated silos, making sharing of data hard. If a single app is compromised or goes offline, many users and other apps are affected. 

On a blockchain, anyone can set up a node that replicates the necessary data for all nodes to reach an agreement and be compensated by users and app developers. This allows user data to remain private and apps to be decentralized like the Internet was supposed to work.
  
ETHEREUM WALLET 
The Ethereum Wallet is a gateway to decentralized applications on the Ethereum blockchain. It allows you to hold and secure ether and other crypto-assets built on Ethereum, as well as write, deploy and use smart contracts. 
  
Learn Solidity, a new language for smart contracts 
Design and issue your own cryptocurrency Create a tradeable digital token that can be used as a currency, a representation of an asset, a virtual share, a proof of membership or anything at all. These tokens use a standard coin API so your contract will be automatically compatible with any wallet, other contract or exchange also using this standard. The total amount of tokens in circulation can be set to a simple fixed amount or fluctuate based on any programmed ruleset.

YOU CAN BUILD: 
- A tradeable token with a fixed supply
- A central bank that can issue money
- A puzzle-based cryptocurrency

Kickstart a project with a trustless crowdsale 
Do you already have ideas that you want to develop on Ethereum? Maybe you need help and some funds to bring them to life, but who would lend money to someone they don’t trust? Using Ethereum, you can create a contract that will hold a contributor's money until any given date or goal is reached. Depending on the outcome, the funds will either be released to the project owners or safely returned back to the contributors.

All of this is possible without requiring a centralized arbitrator, clearinghouse or having to trust anyone. You can even use the token you created earlier to keep track of the distribution of rewards.

YOU CAN BUILD: 
- A crowdfund to pre-sell a product
- A crowdsale to sell virtual shares in a blockchain organization
- An auction of a limited number of items

Create a democratic autonomous organization 
Now that you have developed your idea and secured funds, what’s next? You have to hire managers, find a trustworthy CFO to handle the accounts, run board meetings and do a bunch of paperwork. Or you can simply leave all that to an Ethereum contract. It will collect proposals from your backers and submit them through a completely transparent voting process.

One of the many advantages of having a robot run your organization is that it is immune to any outside influence as it’s guaranteed to execute only what it was programmed to. And because the Ethereum network is decentralized, you'll be able to provide services with a 100% uptime guarantee.

YOU CAN BUILD: 
- A virtual organization where members vote on issues
- A transparent association based on shareholder voting
- Your own country with an unchangeable constitution
- A better delegative democracy

Build a new kind of decentralized application 
Now it's your turn: start building what you dream of creating in Ethereum! Could your business be enhanced by operating on a cryptographically secure, decentralized, tamper-proof network? Check out the many great projects* already being built on Ethereum.

And since you'll be among the first developers in the world that are able to program decentralized applications, some of them might need your help.

*The above list is maintained by an independent party and the Foundation does not endorse its content or any particular project

ETHEREUM FAQ 
How are ethers created?
The total supply of ether and its rate of issuance was decided by the donations gathered on the 2014 presale.

The results were roughly:
- 60 million ether created to contributors of the presale
- 12 Million (20% of the above) were created to the development fund, most of it going to early contributors and developers and the remaining to the Ethereum Foundation
- 5 ethers are created every block (roughly 15 seconds) to the miner of the block
- 2-3 ethers are sometimes sent to another miner if they were also able to find a solution but his block wasn't included (called uncle/aunt reward) Note that after the Byzantium update is implemented, the mining and uncle reward is reduced to 3 ethers and 0.625-2.625 ethers, respectively.

Is the ether supply infinite? 
No. According to the terms agreed by all parties on the 2014 presale, issuance of ether is capped at 18 million ether per year (this number equals 25% of the initial supply). This means that while the absolute issuance is fixed, the relative inflation is decreased every year.

In theory, if this issuance was kept indefinitely then at some point the rate of new tokens created every year would reach the average amount lost yearly (by misuse, accidental key lost, the death of holders etc) and there would reach an equilibrium.

But the rate is not expected to be kept: sometime in 2018-2019 Ethereum will be switched from Proof of Work to a new consensus algorithm under development, called Casper that is expected to be more efficient and require less mining subsidy.

The exact method of issuance and which function it will serve is an area of active research, but what can be guaranteed now is that (1) the current maximum is considered a ceiling and the new issuance under casper will not exceed it (and is expected to be much less) and (2) whatever method is ultimately picked to issue, it will be a decentralized smart contract that will not give preferential treatment to any particular group of people and whose purpose is to benefit the overall health and security of the network.

Who needs ether? 
Developers who intend to build apps that will use the ethereum blockchain. Users who want to access and interact with smart contracts on the ethereum blockchain.

I bought ether during the 2014 presale. How do I access it? 
The Ethereum Wallet includes an easy presale import. Download it and it will offer that option automatically.

How do I mine ether? 
The Ethereum network is kept running by computers all over the world. In order to reward the computational costs of both processing the contracts and securing the network, there is a reward that is given to the computer that was able to create the latest block on the chain. Every 15 seconds, on average, a new block is added to the blockchain with the latest transactions processed by the network and the computer that generated this block will be awarded 3 ether.

Due to the nature of the algorithm for block generation, this process (generating a proof of work) is guaranteed to be random and rewards are given in proportion to the computational power of each machine. This process is usually called mining in the crypto-currency lingo.

CPU MINING USING THE COMMAND LINE 
If you are on a private network (and if you just want to test the technology for free, you should) then any normal computer with a normal CPU will be able to run the network and earn test ether (ether that is only redeemable on the test network where it was generated) through mining. This is the best choice for small-scale network or testing privately, as it's less resource intensive. On the real (or live test) network a normal desktop (or laptop) computer might take a very long time to successfully mine a block and receive ether.

MORE INFORMATION ON MINING 
- Ethereum's proof of work algorithm does not make use of Scrypt or Sha256, instead, it leverages EtHash, a Hashimoto / Dagger hybrid. You can read all about the theory behind this and its design in the Ethereum gitBook, mining chapter. Note that for Serenity (a future release, a major milestone on the Ethereum development roadmap) we are planning to switch to Proof of Stake (PoS).

- The Ethash proof of work algorithm is memory hard, you'll need at least 1+GB of RAM on each GPU. I say 1+ because the DAG, which is the set of data that's being pushed in and out of the GPU to make parallelisation costly, will start at 1GB and will continue growing indefinitely. 2GB should be a good approximation of what's needed to continue mining throughout the year.

- Mining prowess roughly scales proportionally to memory bandwidth. As our implementation is written in OpenCL, AMD GPUs will be 'faster' than similarly priced NVIDIA GPUs. Empirical evidence has already confirmed this, with R9 290x regularly topping benchmarks.

- ASICs and FPGAs are strongly discouraged by being rendered financially inefficient, which was confirmed in an independent audit. Don't expect to see them on the market, and if you do, proceed with extreme caution.

What's the relationship between bitcoin and ether? 
Ethereum would never be possible without bitcoin—both the technology and the currency—and we see ourselves not as a competing currency but as complementary within the digital ecosystem. Ether is to be treated as "crypto-fuel", a token whose purpose is to pay for computation, and is not intended to be used as or considered a currency, asset, share or anything else.

There are many ways in which you can use Bitcoins within the Ethereum ecosystem:
- Trade BTC for ETH: multiple third-party companies are working to make the exchanging of ether and bitcoins as easy and seamless as possible. If so desired one could trade bitcoins for ether with the purpose of executing contracts and trade it back immediately in order to keep their value pegged and secured by the bitcoin network. The latest version of the wallet includes an automatic conversion between ether and bitcoin.

- Use a pegged derivative:
Ethereum is a great tool for creating complex trading between multiple parties. If you have a source for the price of Bitcoin that all parties trust, then it's possible to create an ethereum based currency whose value is pegged to the market value of Bitcoin.

This means that you could trade bitcoins to a token that is guaranteed to always trade back to the same amount of bitcoins while still being fully compatible with other ethereum contracts.

- Use a Bitcoin relay to convert a 2-way peg: the bitcoin relay is a piece of code that allows you to sidechain a bitcoin into ethereum.

This means that you can use Bitcoin's native limited scripting capability to lock a bitcoin into a contract that is directly connected to an ethereum contract, which can then issue an ethereum based token that is guaranteed to be backed by bitcoin. The relay is under development and as implementations are tested and proved to be secure, we will list them here.

How do I send ether using the command line? 
ATTENTION: Ethereum addresses don't have built-in checks on them yet. That means that if you mistype an address, your ether will be lost forever, without a secondary confirmation window. If you are moving a significant amount, start with smaller quantities that you can afford to lose, until you feel comfortable enough.

There are two types of accounts in Ethereum: normal accounts, holding ether that can only be moved with a private key and contracts, which hold ether only controlled by their own internal code. In this section, we focus on the former. The remainder of this guide will be dedicated to the latter.

Similarly, your transactions are also of two types: those sent to normal accounts are ether transfers, while the rest are communication with smart contracts. Before you execute your first ether transfer you need a friend to send your ether to.

If you don’t have any, you can also create as many new accounts as you want, following the steps discussed previously and simply move your funds between accounts you own.

LOG ON TO www.ethereum.org FOR MORE INFO
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