To avoid causing misunderstandings and complexity of expertise. The “How does Ethereum work?” overview will focus only on the comparison between two platforms: the Bitcoin Wallet and the Ethereum Operating System. Because the nature of Ethereum is based on an anonymous storage system (called the blockchain). But it is the foundation to make creative ideas for information systems a reality. Ethereum goes beyond the Bitcoin system to become a global supercomputer and processes all user information requests.
How does Ethereum work?
Ethereum: Supercomputer of the World
We can easily understand Ethereum’s working system with the following key elements:
- Electronic transaction: Similar to Bitcoin, Ethereum uses an electronic currency called Ether to pay for services between users (Peer) and the information processor (Miner). In order to have an Ether coin, users can convert from cash to Ether, but the conversion value will depend on the economic situation, and the value of Ethereum on the stock market.
- Data distribution system (Blockchain): When the transaction information, the signed Ether number and the address of the two parties are encrypted, it will be protected by the consensus mechanism and stored in the Blockchain system as evidence of transactions between users.
- Consensus mechanism: It is a program that encrypts randomly to protect the personal information of users and transactions between them.
- Miner: This can be an individual or an organization (anonymously) using a laptop/computer to perform the decryption of functions contained in the blockchains data system and confirm the transaction between the two parties.
- Smart contract: It is a transaction contract between the two parties and is also a code that records the terms agreed. This type of contract is a feature of Ethereum that other electronic money systems can not.
- Virtual machine: This is where the virtual environment operates the computer network of information processing. Miners and online information processing organizations will gather in this environment and be divided in to begin decoding the blockchains data system. This environment is like a giant virtual machine for processing all the information of global transactions.
How does Ethereum work?
With such tools Ethereum satisfies the programming needs of developers, users of smart contracts and pay for miners with Ether coin for processing blockchains.
Ethereum offers an innovative and easily changeable system. Its main products are completely automatically smart contracts and save time for users. Follow a detailed example of how this type of service works:
- Ms A is in England want Mr B to rent her home in the United States. In order to save both parties’ time and money, they create a smart contract that includes agreements between the parties. This contract will be started automatically when the terms of the contract are completed (deposit sent to the bank, good room allocation, etc.)
- The agreement is made on Ethereum’s system, which is easy to use and automatically enforces the terms set out without spending much time managing Ms A and the cost of airfare. Mr B can also confirm and respond to the condition of the room on the contract if there is a problem.
- These contracts are not limited to individuals like this example but can also be programmed into winnings, lotteries, insurance, bank transfer, and business transactions.
- Each month, this smart contract will run the encryption of the conditions and automatically transfer an Ether coin to Ms A’s account. Any personal information, transaction history and transfer amount will be encrypted as a blockchain and linked to many blockchain for security reasons. If a Hacker, Ms A, or Mr B deliberately modifies the contract code for personal gain, then their link will become erroneous and unrelated to the blockchain chain that is distributed throughout the system. So the intervention of a third party is very unlikely.
- The data block can only be decoded with a network of information processors (miners). They obtain the electronic signature of the two parties (provided by the consensus mechanism) and perform the authentication of the two parties by decryption. After successful blockchain decoding, the miners would be paid by the Ether coin.
So after the above process, Ms A will get the agreed Ether coin from Mr B, Mr B is granted the right to use the house under the contract and the information processor is paid from the system, not from Service fees come from Ms A or Mr B. If Mr B breaches a contract, Ms A can activate the contract and the system will deduct extra money from Mr B. Mr B will have to pay his deposit because the system has locked itself from the beginning.