What is Ethereum and how it works ? : Easy explanation

Written by Sushanth Kumar Reddy Kura | Published 2 years ago | 9 min read



Ethereum is a project with most number of use cases in the crypto space and is almost everyone’s favourite.

As of JULY 2020 Ethereum stands at second in whole crypto space coming after Bitcoin with a market capitalisation of 26.71$ Billion.

What is Ethereum ?

Ethereum is an open-source platform used to create decentralized applications i.e. the applications that no one has control on.

It is like a Do It Yourself platform for decentralized applications (DApps).

Ethereum’s main goal is to decentralize the internet.

But the question is why it wants to do that?

In current scenario major campanies like google, facebook, amazon have the control oftheir users data which is completely insecure.

And also users have to pay extra money for the middle man to use any service, for example : uber.

So Ethereum wants to connect people directlyWithout any middle man. This can be done by using smart contracts.

These smart contracts are the logic that run DApps.

(Click here if you want to learn more about smart contracts)

Ethereum has computers/nodes running across the world making it completely decentralize.

Ethereum network

So, whatever application you are deploying in the Ethereum platform it will be verified by all the nodes running in different places and these nodes make sure that the smart contracts execute as they are written.

What is ether and why is it needed?

Ethereum is often referred to as a currency but actually it is not. The actual currency is called ether.

But why do we need ether?

Ethereum as we discussed in the above section has basically many computers running actingtogether as a single super computer to execute the smart contracts that powers the DApps.

So, this whole process costs money like themoney to get the machines, power them etc.

This is the reason why ether was invented.

When people are taking about the Ethereum’s price they actually are referring to ether.

When people run the Ethereum protocol on their computer and act as a node the payment is done to them in form of Ether.

This is similar to the concept of mining where the bitcoin miners get paid for maintaining bitcoin blockchain.

Whenever a person wants to deploy a smart contract in the Ethereum network he/she has topay in ether.

The fee paid for smart contract deployment is also called as Gas.

This is done so that the developer will write optimized code to decrease the cost of the deployment and will not waste any useful computing power on performing some unnecessary tasks.

What are ERC20 tokens ?

These are the tokens that are developed or exist on the Ethereum platform.

These tokens utilize and rely on the technology of the Ethereum blockchain.

The native currency of the Ethereum is ether but besides ether it can also support other tokens like currency, shares of a company etc.

The tokens are created and managed with the help of smart contracts.

But this token creation process can be risky asonce the smart contracts are deployed to the Ethereum network they cannot be changed.

Imagine a bug in your smart contract that allows hackers to steal your tokens. Dangerous right?

Also there is problem of interoperability.Imagine for each token if different smart contract is created, while listing this coin on exchanges for buying/selling purposes it can be very difficult for exchanges to write separate code to interact with each token’s contract.

Not only for exchanges but for even wallet providers it can be very difficult for them to support hundreds and thousands of tokens.

So, in order to overcome all these problems the Ethereum proposed standard for these tokens called ERC20.

ERC stands for Ethereum Request forComments.

It proposes 6 mandatory functions your smart contract has to implement and 3 optional ones.

Mandatory functions:

1) total supply : total no. of tokens that can ever be created.

2) balanceof : It returns how many tokens a particular address contains

3) transfer : To taken an amount of tokens from the token supply to give it to the user.

4) transferfrom : Used to transfer the tokens between any two users who have them

5) approve : it verifies whether your contract is able to send tokens to the user taking into account the total supply.

6) allowance: It verifies whether one user has enough amount of tokens to send to another.

Optional functions:

1)  name : name of the token

2)  symbol : symbol of the token

3)  decimals : how many decimal points can

the token support

So, following this ERC20 standard for all the tokens it became easy for exchanges and wallets to support many tokens as they have to write the code only once to support infinite number of ERC20 tokens.

Explanation on Ethereum’s hard fork and How Ethereum classic was born

Image explains hard fork

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Ethereum was initially launched with a idea that ‘Code is Law’ i.e. once the smart contract

is written everything has to go according to it and no one not even the person who wrote it can change it.

But this came to an end when the DAO event happened.

DAO stands for Decentralized Autonomous Organization that allowed users to deposit the money and earn interest based on the investments that DAO made.

The Investment decisions will be crowd sourced and decentralized in DAO i.e. the people who invested themselves decide what company or product to invest in by voting.

The DAO raised a 150$ million in Ethereum currency Ether.

But the DAO’s smart contract was not written well leading to a hack that drained the DAO out of money.

Then after this big ‘incident’ or can be also called as an ‘accident’ the Ethereum community decided that ‘Code No Longer IsLaw’ and made some changes to Ethereum.

But some small group of people didn’t agree to the changes and struck to the original Ethereum and that’s how ‘Ethereum Classic’ was created.


Most of the tokens that exist today in the crypto market are ERC20 tokens i.e. they are built on Ethereum platform.

The number of DApp users in Ethereum doubled in Q2 2020 to reach all time high of1,258,527.