What is Ether, Ethereum's cryptocurrency?

Ether's purpose

Just like with the Bitcoin network, Ethereum relies on its own cryptocurrency.

Here, miners compete to earn Ether, Ethereum’s digital asset. While Bitcoin aspires to become the world’s currency, Ether has a different fundamental function: it is the “fuel” required to run decentralised computer programs.

Developers and users pay transaction fees in Ether to run and operate decentralised applications and smart contracts on the Ethereum network.

It incentivises deployment of efficient DApps (less code, means less file size, means fewer fees) and creates an eco-system that rewards contributors.

Bottom line:

  • Bitcoin is nicknamed digital gold,
  • Ether, on the other hand, is considered as digital oil.

Transaction and wallets

Ethereum provides a safe, fast and reliable transaction management system with a few different features.

Similarly to Bitcoin, Ethereum blocks hold a database of all transactions that have occurred. Its network issues a new block every 20 to 30 seconds, while Bitcoin and Litecoin blocks are generated every 10 and 2.5 minutes respectively.

While Bitcoin has only one type of accounts (public addresses), Ethereum holds two different types:

  • Externally Owned Accounts (EOA) - unlocked by private keys, similar to Bitcoin.
  • Contract Accounts - designed by a smart contract and unlocked by a pre-defined EOA’s private key.

The former is controlled by a human being - like Bitcoin - while the latter, also referred to as “smart contract”, is governed by code.

As such, smart contract accounts are very flexible depending on how they are programmed.
They can be controlled by an EOA (human being), or hold funds and disburse to another account.
They are programmed bank accounts, therefore malleable and flexible.

Ether's supply fundamentals

Ether has different monetary functions to Bitcoin: its token economics are built to handle the Ethereum network and its aspirations.
Rather than being capped at 21 million units, Ether has no fixed supply limit and was introduced by one of the first Initial Coin Offerings during fall 2014.

Here’s how the Ether distribution was designed:

  • 60 million Ether to the ICO investors.
  • 12 million Ether (20% of the above) for the developers, founders and early backers.
  • 5 Ether mined on each new confirmed block: every 16 seconds approximately.
  • 2-3 Ether are sometimes rewarded to miners who generate a correct block which has not been added to the chain.

In this framework, 18 million Ether are added to the token supply per annum.

If this rate of generation stays permanent, the inflation will reduce every year and newly issued Ether will replace any tokens lost on the network (deleted wallets, incorrect address etc…).

However, token supply fundamentals are expected to change but the overall Ether supply will not be increased, rather decreased as per the founding team’s communication.

On a short-term basis, Ether is “diluted” as the injection of 19 million units per annum has a significant impact on the total supply.
One must take into account these token economic fundamentals before acquiring into Ether.