Although some are still questioning the need for blockchain technology, the truth is that it is already revolutionizing the world around us. Ethereum is an open-source, public, blockchain-based distributed computing platform and operating system that features smart contract functionality. A smart contract is a computer protocol that allows the performance of credible transactions without third parties. These transactions are trackable and irreversible. As a decentralized, “trustless” public ledger that keeps track of these transactions, Ethereum is considered to be an improvement over Bitcoin. With the help of highly advanced mathematical algorithms, both of these cryptocurrencies are changing the way the world does business.
Basically, Ethereum is comprised of blocks. The creation of the blocks—or the “genesis”—is triggered by transactions. The blocks cannot be separated and are chained together—hence the term “blockchain.” However, not just any transaction can form the basis for these blocks; validation is an extremely important part of the process. Transactions must be validated through the process of mining. A network of computers, which are referred to individually as “nodes,” work together to present what is called proof of work (POF) to the blockchain. Without proof of work, the block cannot be validated. All over the world, computers are working to solve the same problems. The one that solves it the fastest will be rewarded with a digital token known as an ether, the currency of Ethereum.
In the rare circumstance that there is a fork in the blockchain, a protocol called Greedy Heaviest Observed Subtree (GHOST) is followed to preserve order and prevent any disruption. This means that the most powerful block will, in essence, be declared the winner. However, these rewards do not come without a price. Gas limits and gas prices must be set by senders in order to make sure that everyone is paying their way. If the sender does not have enough ether in their account to pay, the transaction will be invalidated. Miners, which are the computers completing the difficult mathematical work, are the ones that are rewarded with the gas fees for their service.
There are a number of reasons why fees play an important role in this system, but one of the most important is that the fees essentially prevent the system from overheating. When everyone has a stake in the game, then rewards are received in a way that is organized, streamlined and fair. Because the system is so elegant and advanced, many other platforms are using Ethereum as their foundation.