How Does Ethereum Work?

The logic and mechanics behind Ethereum explained in simple words.

The purpose of this article is to explain how Ethereum works by providing a general and non-technical overview of its logic and inner mechanics. Please keep in mind that what is described below is a simplified version of what actually happens, but it should be technical enough to give you a general understanding of how it works. Should you have any questions please write them as comments or private notes, it would help me refine this article over time and make it much clearer for future readers.

Let’s explore each of these layers in detail.

Transactions can contain both value and information. The value is expressed in “Ether”, the digital currency of Ethereum platform. And the information is code that can pass data and trigger actions. This is relevant for the software layer of Ethereum, for the hardware layer let’s just keep in mind that is made of hundreds of computers spread across the planet that are connected to one-another via the internet.

Anyone can offer his/her own computer to process the transactions of the network simply by running some code on his/her laptop. There is a scheme of incentives that promotes the growth of Ethereum network, in fact those who run the nodes get rewarded in “Ether” - that is a valuable asset as it can be used to make use of the applications running on the platform.

This should be enough to give you a general understanding of Ethereum hardware layer. If you would like to learn the details of how these computers coordinate the work and process transactions you will need to learn the mechanics of blockchain technology: this article is a good start (it uses Bitcoin blockchain as example to explain the technology, but most of the content is valid for Ethereum as well²).

The flexibility of Ethereum platform is what made it popular among the early Bitcoin and blockchain enthusiasts. In fact, while Bitcoin has been designed as a currency to transact value between different actors, Ethereum has been developed to extend the use of Bitcoin underling technology and build a broader, general purpose blockchain.

Ethereum software layer has been built to allow the transaction of value in any shape or form, being it a currency, a house, an identity, the rights to use or reproduce a song or any other asset you can think of.

In example, a Smart Contract can implement the following logic: if both Mark and Bob send five Ether to Jack, then automatically send two Ether from Jack to Alice.

Ethereum also allows anyone to create new digital currencies (or more specifically “tokens”) that can be exchanged by all Ethereum users. This enables a broad range of applications: from digitalising the reward points at your favorite coffee shop, to creating whole new economies in specific markets.

In the picture below you can get a glimpse of what Solidity code looks like, this basic smart contract generates a new token and enables its transfer to other users.

To summarise, Ethereum software layer enables software developers to design smart contracts that enable programmable transfer of value. All smart contracts code is public, so anyone can check what these programs actually execute.

The combination of the hardware and software layers described above enable Ethereum to work as a global, decentralised super-computer on which third party applications can be executed.

Due to the open and transparent nature of Ethereum, many developers around the world came together and built a strong and large community that is currently working to extend the functionalities and applications of this platform.

Building public, decentralised applications has several benefits that outperform private, centralised applications, in particular:

If you found this article useful please hit the “Clap” button👏 on the left as many times as you feel like or donate some Ether (ETH) to my address below: 0x7cf57FE1310f832B16bE1f38c2710bDfD2f820D5

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