What is… Ethereum?

It may sound like the musicians behind a trance track, but this challenger to Bitcoin takes the blockchain idea much further than the infamous digital currency

The so-called Bitcoin rival that’s taking blockchain far beyond digital currency.

Money used to be easy to understand: if you had a paper bill with “£5” on it, you knew what you could buy. Digital currencies such as Bitcoin are rather more complex, with their value derived from how much has been “mined”, a euphemism for applying electricity and processing power to solve difficult equations solely to lay claim to a Bitcoin (or slice of one).

But there are other uses for the blockchain beyond anonymously ordering pizza from takeaways run by hipster nerds or buying drugs online. At the heart of much blockchain innovation is Ethereum, which lets developers use the blockchain to run applications. Sort of like a distributed computer. Here’s what you need to know about the next blockchain tech.

Blockchain?

Let’s start with that. Old-fashioned Bitcoin was managed via a decentralised public ledger, which tracked trades and payments. Because a version of the record is held by anyone and everyone, it’s transparent and redundant — making it difficult to meddle with. It’s as though everyone involved has their own record book that’s always in sync. Bitcoin uses that ledger to track who paid whom, but Ethereum isn’t limited to currency.

What’s Ethereum, then?

The creation of developer Vitalik Buterin, Ethereum is a platform that uses the blockchain to let anyone develop an application powered by a decentralised ledger. Ethereum’s standout ability is smart contracts. Cut a deal with someone else, and Ethereum can automate the terms; when the job is agreed to be complete, the funds are automatically transferred, without any middleman, be it a lawyer or bank. It’s a handy way to manage transactions when there’s no trusted third party, and also a way to stay somewhat anonymous without any trust issues. That “if this, then that” aspect makes Ethereum programmable, so it’s a handy platform to build apps on.

What could it be used for?

The Ethereum Foundation suggests using the platform for crowdfunding: the system can hold supporters’ contributions in virtual escrow until you deliver on what’s promised, without carving off a percentage of funds raised to a site such as Kickstarter. It’s also handy for online shopping: if the user submits the correct funds for the selected product, the contract is complete, triggering the delivery – all without an external payment processing system.

Another idea is using Ethereum to run a business robotically, automating payments for tasks when they’re completed. Apps have been made for gambling, insurance, and even conflict resolution. Perhaps the most charming, though, is a smart contract with yourself via “Let’s get it done”, a prototype of a “self-commitment” app that uses Ethereum to nag yourself over instant messaging.

So Ethereum’s not a digital currency like Bitcoin, then?

Ethereum has its own digital currency, called Ether. And its value has gone stratospheric. In 2015, when Ethereum launched with an initial coin offering (ICO) – selling its tokens to early investors, sort of like an IPO for digital currencies – Ether was worth less than a dollar. In the past few months, it’s surpassed $265, so a tidy profit for anyone who bought in at the ICO. Alongside Ether, anyone can use Ethereum to create their own digital currency or token such as loyalty points or reward program. In other words, Ethereum isn’t the next Bitcoin – it’s how you build the next Bitcoin. Look out for our in-depth article on blockchain next month.