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30/04/2018 15:37 BST

What Is Ethereum And How Do Cryptocurrencies Work?

Ethereum could become even larger than Bitcoin, here's why.

While Bitcoin has managed to steal most of the limelight around cryptocurrencies there is another that’s pushing for supremacy and that’s Ethereum.

While its price is nowhere near as high as that of Bitcoin, Ethereum has the potential to be considerably more useful as a piece of technology.

Here is a brief explanation of what Ethereum is and why it could soon overtake Bitcoin as the leading cryptocurrency in the world.

What is Ethereum?

Ethereum is a cryptocurrency at its core. That means it’s a digital-only currency that you can use as a means to transfer funds or buy goods and services.

The currency of Ethereum is known as ‘Ether’ and can be mined just like any other cryptocurrency such as Bitcoin.

Jack Taylor via Getty Images

Unlike Bitcoin however, Ethereum isn’t solely a digital currency. It is a digital platform that allows you to create secure, automated transactions between two people or companies that can be recorded and traced across the world.

In addition you can create something called a smart contract, which then allows you to create a digital contract that’s completely independent of two parties and impartial. 

What makes it so special is that it’s completely decentralised, which means there’s no one single computer that’s in control of the technology.

Decentralisation means that it can’t be influenced, hacked or taken offline by criminals or governments without vast amounts of work and as such it makes the entire process much more secure and private.

What is crypto mining and how do I buy Ethereum or Bitcoin?

Bitcoins and other cryptocurrencies are created through a process called ‘mining’. In much the same way that we mine for gold, a person can chose to become a Bitcoin miner.

This process involves using a computer to solve complex mathematical problems, at the end of which a person may or may not be rewarded with their very own single Bitcoin.

When Bitcoin first started this was an easy way to make money but as the requirements to earning one have shot up, the sheer number of computers needed to earn a Bitcoin mean you’ll probably end up losing money in electricity bills.

Also this is not an infinite currency, the rules of Bitcoin (and many other cryptocurrencies) state that there are a finite number that can be created. In the case of Bitcoin, there can only be a maximum of 21 million Bitcoins in existence.

It is this mining process that, just like gold, has helped Bitcoin reach the enormous financial values that it currently holds. As such when buying or selling, nothing is simply worth 1 Bitcoin, mostly because a single Bitcoin is now equal to around £5400.

What can I buy with cryptocurrencies?

More than you might think. However the real advantage of Bitcoin and other cryptocurrencies is not what you buy with it, but rather how you are buying it.

Many up and coming companies like to say that will take Bitcoin as payment, but on a day-to-day basis it’s surprisingly limited.

You can’t pay your taxes in Bitcoin, or pay a parking fee in Ethereum.

Instead cryptocurrency’s advantage comes in the way that every transaction is traced.

What is blockchain?

As we mentioned earlier, cryptocurrencies operate using a technology called blockchain.

This is a process that means every Bitcoin is traced and verified by a vast network of computers, rather than a single entity like a bank.

Blockchain underpins all cryptocurrencies and it comes in varying forms of security and resilience against hackers e.g. Bitcoin’s blockchain technology is less focused on security than say Ethereum’s.

Now in the example of Kodak’s newly formed cryptocurrency, blockchain offers photographers a major benefit regarding image copyright. Because every coin and transaction is traceable and open to see, image rights can be virtually handed to the new owner and then verified by everyone else. You can’t then just try and sell it on without the original owner being notified.

Of course there’s a flipside to this too which is that it’s a very handy feature for criminals. Whereas a bank has the power to literally remove money from your account (if it suspects you of money laundering). Bitcoin is not a bank, so any transaction that takes places is completely unregulated. It doesn’t know the difference between a person buying a car or a drug dealer receiving a payoff.