Ethereum is a blockchain with the ability not just to record data in a decentralized fashion but also to run applications on a decentralized network of computers.
Like all blockchains, Ethereum uses a decentralized network of computers. Users can leverage this network of computers to execute transactions containing data and other types of information on Ethereum without having to rely on a single party or server to guarantee the security and authenticity of that data.
However, Ethereum’s functionality is not limited to recording information. Ethereum also hosts compute resources that can be used to run applications. Such applications are called distributed applications, or DApps.
Compute resources refer to the computing power that is necessary to execute computer code. In a traditional computing architecture, that code is executed by an individual computer’s central processing unit (CPU) or set of CPUs.
On the Ethereum blockchain, computing power is provided by all of the computers that host the Ethereum network. Each computer on the network contributes some of its compute resources — in other words, its CPU capacity — to DApps. In exchange, the computer (and its owner) earns ether tokens.
Collectively, the computers on the Ethereum blockchain function as the so-called “Ethereum virtual machine.” In other words, they create a virtual computer composed of all of the computers that are connected to the Ethereum network.
In this way, Ethereum makes it possible to decentralize compute resources and application execution. This is a key feature of the Ethereum blockchain that performs the computations required by DApps and one that other blockchains, such as Bitcoin, lack.
(You can run smart contracts on Bitcoin, and you may sometimes hear people claim that Bitcoin can therefore support DApps, but its support is extremely limited, and thus any DApp made today would not be able to run on top of Bitcoin.)
There are two other important features associated with Ethereum.
The first is smart contracts, mentioned above. A smart contract is a contract based on computer code that is automatically executed by a blockchain when certain conditions are met. A DApp could use a smart contract to guarantee that payment is automatically made between different cryptocurrency wallets when an item is delivered, for instance. Smart contracts are not unique to Ethereum — other blockchains support them — but they are an important part of many Ethereum-based DApps.
Also important in regard to Ethereum is the ERC-20 standard, a technical standard that allows developers to create tokens that can be used within DApps that run on Ethereum. DApps use tokens as a mechanism to interact within the application. Although it is not absolutely mandatory to follow the ERC-20 standard when creating an Ethereum token, adhering to the standard ensures that your tokens will be exchangeable for other ERC-20 tokens.
You may sometimes hear the word “Ethereum” used to refer not to the ethereum blockchain but instead to the token that is used to power the blockchain. These tokens are otherwise known as ether.
Ether tokens serve two main purposes. First, they incentivize people to connect their computers to the Ethereum network, thereby supplying the storage and compute resources that the Ethereum blockchain requires to run. By participating in the Ethereum network in this way, you can earn ether. Second, people who want to run a DApp on the Ethereum blockchain use ether to pay for the resources they consume.