What is Ethereum & How it Works – The Newbie Guide



Ethereum is an open-source, decentralized network that allows smart contracts to be deployed on a blockchain with the use of ether. It’s a blockchain app (Dapp) platform that uses gas to run – in short. The network was created by Vitalik Buterin in 2015 although the white paper was proposed 2 years earlier.

That’s a mouthful though! Let’s convert that into plain English by dissecting each word at a time:


Ethereum blockchain is a distributed database that is constantly growing and therefore adding a new block to the chain every ≈17 seconds on average. Each new block contain records such as transactions and contracts.

The operations and transactions are executed and then calculated on the go thanks to the computing nodes. These are tens of thousands of computers spread around the world (users who opted-in to be part of the blockchain network).

All participant computers use a client that performs validating and relaying transactions on the blockchain. It’s worth noting that no decentralized technology would exist without them. These computers are incentivized for their work with Ether which is rewarded to them every time a block gets solved (≈5 ETH = $1,600 at the moment of writing).


That’s basically a source code that is freely available to the public and can be modified as long as you have access to a computer where that program is stored.

If Amazon was an open-source online retail store, then people with access to the source code computer could implement modifications to the website, for instance: how it looks like, what it sells or how much commission it gets per sale etc.

However, before any changes take place, the majority of its users would have to agree on particulars and reach so-called consensus by “voting” prior to carrying out any adjustments to the source code.

Ethereum is an open-source based platform which means that everyone can see its code and the mechanics behind it which leads us to discoveries of possible flaws.

Code adjustments aim to improve the platform – be it security, efficiency or scalability. The code can be altered in two ways – either by implementing a soft or hard fork.


No middle-man, no administrative center, no institution. Nobody controls anything – at least it might seem this way.

In simple words – if Amazon was decentralized, then it wouldn’t have been solely owned and therefore controlled by Jeff Bezos, its shareholders or any other singular entity. It would have been run by the majority of its users.

Ethereum is decentralized and spread out through the network of public nodes that are connected with each other on a peer-to-peer basis. These are simply people and their computers that run the Ethereum blockchain.

Ethereum’s decentralized network is a free-for-all kind of thing, you can do whatever the heck you like on it.

It’s not censored by anyone, there’s no administrators or moderators to ban you. Create as you see fit – this is the beauty of the dynamic behind it.

And that’s all thanks to the Ethereum Virtual Machine (EVM) which is responsible for processing the network requests and data storage.


Smart contracts are IF/WHEN/THEN agreements executed autonomously in timely manner on the Ethereum blockchain in order to exchange money, transfer property between contracted parties, render services for money or any other possible transaction of worth.

This simply means that contracts execute themselves automatically if certain conditions (specified beforehand) are met – see the Amazon example below.

You can read about smart contracts in detail in our dedicated article over here.

To give you an idea of what they are and how they work, presume this scenario of a sample smart contract:

  • You order item A from Amazon for amount X
  • Amazon delivers item A to you
  • Amount X is released to Amazon for item A

You can also say that in certain situations smart contracts act as escrow. Simplifying, they are pre-defined procedures that are executed without stopping them once the conditions are met.

Sounds familiar? I’m talking about Skynet below.


Ethereum’s main purpose is to serve as a platform to create and run decentralized applications. To ensure that the network runs smoothly, Ethereum needs crypto-fuel (called gas or ether) to perform operations. Think of this as payment which rewards the nodes for solving blocks in the chain.

Any centralized service that you can think of, be it bank accounts, mortgage brokers, car dealerships etc. could be decentralized by Ethereum and become immutable. Cool word, huh? I’ll explain in a minute what’s up.

The possibilities are endless. The odds are that we might face the world where nearly everything is decentralized. This will ultimately put YOU in charge of your faith and your personal and professional affairs.


For example, even though Ethereum derived from Bitcoin, the latter itself could be referred to as a Dapp (decentralized application).

That’s because Bitcoin is, in fact, a Dapp – its aim is to provide widespread decentralized peer-to-peer payment service. It serves the same purpose as, let’s say Paypal, except there’s no middle-man to impose control of the funds and/or various restrictions on the users.


Ether (gas) is also used as cryptocurrency to make payments and it has already become Bitcoin’s main rival, even though this wasn’t intended.

The growing popularity doesn’t seem to face an end which can only help Ethereum get even more traction. Some experts believe that it’s just a matter of time before Ethereum surpasses its ancestor and becomes no. 1 in the crypto-world.

3 Key Benefits of Decentralized Applications:

  • 100% uptime guaranteed – the apps or the network can’t be switched off because it’s run by tens of thousands of nodes spread around the world
  • Immutability – a middle-man, or any other singular entity, cannot make any changes to the data that is recoded on the blockchain without reaching the network consensus
  • Security – because the network is decentralized, it makes it near impossible to hack the data


Very similarly to the Neural Net-based Artificial Intelligence (Skynet), Ethereum and its Dapps aren’t perfect.  If the code contains a major flaw, like it was the case with The DAO project, it could turn out to be disastrous – you can read more about The DAO here.

The major downside of this is that once a Dapp is released and runs on the network, it cannot be stopped immediately – sometimes resulting in what has happened in the above example. There’s no cure nor is there a quick fix that could change the bad outcome.

In such scenario, the blockchain would have to be amended manually by reaching consensus to get rid of the error. This ultimately contradicts its decentralized ambitions, but as of yet, there’s no other option.


Since Ethereum is still a relatively new proposition in the crypto-world, it has already proven its vast potential and usability to become more popular than Bitcoin itself. Whilst these two coins have different purposes, the scalability of Ethereum far exceeds any other crypto-coin.

Will Ethereum and its smart contracts become Skynet 2.0? You might say that’s exactly where it’s headed. And you probably wouldn’t be wrong. For now though, Ethereum is one of the most promising blockchain technology available on the market and will most likely revolutionize the world.

What’s next?

You might want to find out where and how to buy and store Ether – this is part two of the new Ethereum – The Ultimate Guide. New articles are coming out every other day. Subscribe to your newsletter to stay informed!

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