What Is Ether?

Last updated on 12/18/2018

Ether is the underlying token powering the Ethereum blockchain.

Ether vs. Bitcoin

Ether serves a slightly different purpose for Ethereum than bitcoin does for the Bitcoin blockchain. Although ether is traded on public markets and has displayed price appreciation similar to that of bitcoin, they are quite different by design. Ether is not intended to be a unit of currency on a peer-to-peer payment network; rather, it acts as the “fuel” or “gas” that powers the Ethereum network.

What Is Ether’s Function?

At the highest level, Ethereum is an open-source platform that runs smart contracts. When smart contracts are run on a blockchain, they become self-executing when certain conditions are met. The execution of smart contracts requires computational resources that must be paid for in some way; this is where ether comes in.

Ether is the “crypto-fuel” allowing smart contracts to run. It provides the incentive for nodes to validate blocks on the Ethereum blockchain, which contains the smart contract code. Every time a block is validated, 5 ethers are created and awarded to the successful node. A new block is propagated roughly every 15 to 17 seconds. Some nodes may find the correct solution to a block without having it included in the network. The Ethereum network rewards these nodes with 2 to 3 ethers.

Individuals interacting with DApps on the Ethereum platform will have to pay the network in ether for the use. Developers are incentivized to create these DApps because they will be paid in ether for their work. Developers are also incentivized to write quality applications because wasteful applications will be more expensive and likely will not be used as frequently as better alternatives.

Using this information, the narrative around ether becomes clearer. Its final use will most likely be abstracted by basic button clicking, but assuming Ethereum becomes widely used, ether will be rapidly moving between users and miners. Its value is directly tied to the use of the Ethereum blockchain.

How Is Ether Issued?

The total supply of ether is not capped like the total supply of bitcoin is. Sixty million ether were created during the initial crowdsale, 12 million of which went to early backers and the Ethereum Foundation. Most of the money raised is being used to fund development initiatives.

Ether’s issuance model is unique in that it does not emphasize deflation like most other popular cryptographic assets. Initially, issuance of ether was capped at 18 million per year, which is 25 percent of the initial supply raised in the crowdsale.

Ether and Ethereum’s Consensus Algorithm

Ethereum is expected to switch its consensus algorithm from proof of work to proof of stake, which, in theory, is supposed to be more efficient and require a smaller mining reward, based on announcements from its founder, Vitalik Buterin. While there is no clear date for this shift to take place, the prospect has produced some uncertainty within the ecosystem.