Ether (ETH) is the main token of the Ethereum blockchain and the second largest cryptocurrency in the world by market capitalization. Much like the largest cryptocurrency, bitcoin, ether can be used to send payments directly to another person without the need for an intermediary such as a bank.
Ethereum’s long-term vision is to power more than just financial transactions. Software developers are capable of building applications on Ethereum, ranging from decentralized platforms for lending money to social media networks.
For any Ethereum-based application, ether acts as the main “fuel”. All activity on the blockchain requires an amount of ether to fuel it, also known as “gas”.
In Ethereum, ether can be used for the following things:
Payments: Like bitcoin, ether can be used for payments. Users can send ether to another user, and just like cash, payment does not require a third party to process or approve it.
Power decentralized applications: Ether is required to use decentralized applications (dapps) built on Ethereum, from staking ERC-20 tokens for yield farming to performing functions such as governance voting.
Transaction fees: Every Ethereum action – from payments to using dapps – requires a fee.
First, users need to decide which Ether wallet they plan to store their funds in. Ether can be purchased with fiat currencies like the US dollar or other cryptocurrency base pairs on a range of different exchanges.
Why are there ether fees?
Each time users send funds to and from an app or transfer an ERC20 coin between wallets, they must pay a fee to do so. Indeed, Ethereum currently uses miners to validate transactions on the network. These miners use their specialized hardware to add new transactions to the blockchain.
Prior to the London hard fork (a non-backward compatible upgrade that introduced new features), an auction-like system was used to determine how miners chose which transactions to process first. The higher the fees attached to a transaction, the higher it was added to the top of the list of miners. However, this meant that charges were incredibly unpredictable and could increase significantly in times of heavy congestion.
New base fees were introduced as part of EIP 1559 in 2021 to create a more predictable fee structure for Ethereum users. Instead of an auction-like system, fees are now set algorithmically based on the number of active users on the network at any given time. Tips can be added if a user wants their transaction processed faster, but this is entirely optional.
Ethereum transaction fees are calculated based on the amount of “gas” required by the action.
Each action costs an amount of gas depending on the computing power required and the duration of its execution. A transaction costs whatever your gas limit multiplied by the base charge plus any tip you wish to add.
In this way, ether has sometimes been referred to as “digital oil” because it is used to pay for mileage, so to speak.
How is ether used to power a dapp?
Ether functions as fuel for dapps on the network. Suppose you are using an Ethereum-based notepad application that allows you to write immutable to-do lists that are saved on the blockchain. To post a note, a user may need to pay an ether transaction fee to add a new listing to the notepad.
Dapps each enable this in a different way. When a user goes to post a note, for example, the Notebook app can prompt the user to submit the charge. Metamaskan in-browser ERC20 wallet, can be useful for this as it sits in the corner of the browser and can automatically understand when to help send transactions.
What is the difference between Ether and Ethereum?
Ethereum is the whole network. Ether is the primary token that runs on it, making it a crucial part of Ethereum.
How much ether is there?
Five ethers are created approximately every 12 seconds. But beyond that, the rules of the Ether economy are open and change frequently as new proposals for improvement are agreed upon by the Ethereum developer community. While bitcoin has a hard cap of 21 million bitcoins, the primary Ethereum token has no set maximum supply limit.
How many Ethereum tokens were created initially?
Sixty million tokens were purchased by users in Ethereum’s first crowdfunding campaign in 2014. Another 12 million went to Ethereum Foundationwhich is a group of researchers and developers working to improve the underlying technology.
Further reading on Ethereum
A visual guide to everything Ethereum.
Ethereum is the second largest crypto project in the world by market capitalization and was the first to introduce smart contract functionality to the industry.
Gas fees are something all users have to pay to perform any function on the Ethereum blockchain.
This article was originally published on Jul 22, 2021.