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What is Ethereum?

Ethereum is a big network of computers connected over the internet, each one storing a copy of a database, and was originally conceived by Russian developer Vitalik Buterin, 23. That database is a ledger, or a record of a series of transactions that have taken place between different accounts. In other words, it's a giant set of accounts and a record of the transactions between them which is open for anyone to inspect. This ledger, in cryptocurrency parlance, is known as a blockchain, because transactions are grouped into blocks, and blocks are chained together one after another to form the ledger.

What is Ether?

The currency in use on the Ethereum network is called Ether.

How does Ethereum work?

The computers on the Ethereum network aren’t special in any way. They can be laptops, Raspberry Pis, servers, desktop computers and more - essentially any kind of typical computer can become a part of the Ethereum network. Computers that join cryptocurrency networks like Ethereum are usually known as nodes.

Each node has a copy of the blockchain, and because it's stored on so many computers that means taking down the network is extremely difficult to achieve. If there’s no single entity to take down, how do you "stop" Ethereum? You can’t - not easily anyway, short of turning off the internet (and good luck with that). It’s similar to the principles that other technologies like bittorrent and other peer-to-peer services are built on - there’s enough copies of the data around that stopping the existence or spread of it is extremely difficult to the point where it’s realistically impossible.

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Why does Ethereum and Ether exist?

The main advantages of cryptocurrencies (of which Ethereum is just one) are that money can be sent anywhere in the world at any time, almost instantly, with no transaction cost. There are no Ethereurm middlemen, borders or financial institutions to please or navigate.

Depending on the currency, you’re pretty much guaranteed to be 100 per cent in control of your money. Due to the cryptographic technology behind blockchains, identities behind accounts are virtually anonymous and once money is sent, it’s sent. It's impossible for any person or institution to step in and say, actually, we’re going to seize your money or reverse a particular transaction (like your government or high street bank can). Money sent is money sent - and that’s the end of it. Given these properties, you can see why the Silk Road came into existence.

How is Ethereum different from Bitcoin?

If you know even a little about Bitcoin, you'll probably think that Ethereum sounds similar to Bitcoin. You’d be right, except for one small yet important detail: the Ethereum network is programmable. Bitcoin, by contrast, is passive - if you want to make a transaction, you do it yourself by loading up your wallet, input an address and an amount, and hit "send". Then you only need to wait for the transaction to be confirmed by the network.

Ethereum is active rather than passive, as it has its own programming language called Solidity. Because the Ethereum network is programmable, and if every node on the Ethereum network is guaranteed to have the same data and execute the same code, then the Ethereum network could potentially become a giant, distributed supercomputer upon which anyone can execute code.

While you could write a very simple "smart contract" similar to what we know as a standing order in the UK, which can be used to pay a landlord rent your every month, there is the potential for much more sophisticated solutions.

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In a normal situation, you pay your landlord rent and she or he gives you the keys to her apartment for you to live in. There's an element of trust there - you pay the rent, and you hope the landlord then honours their end of the bargain and gives you the keys. With a smart contract, the landlord would place a digital key (imagine the apartment has a digital code entry system rather than locks and keys) into escrow. If you pay the rent, the key is guaranteed to be released to you. If you don't, the key isn't released. Given there are many thousands of computers on this globally distributed network witnessing and enforcing this code, you can rely on the fact that the contract between you and the landlord will be honoured.

Vitalik Buterin © Getty Images

This hypothetical example is exactly the kind of idea which hasn't been possible until now, and is fuelling the hype around smart contracts, and hence Ethereum. It's possible that a killer feature built on top of Ethereum could change the world to a similar degree as the internet or smartphones. This potential is precisely the reason why values have skyrocketed from $10 in January this year to $360 at the time of writing.

Where do I get Ether?

The easiest way to get Ether at the moment is if you're already a holder of Bitcoin. Simply set up an account on a cryptocurrency exchange like Poloniex, send your bitcoin to the exchange, and trade it for Ether.

The second easiest way is to sign up to a cryptocurrency broker like Coinbase or Kraken. After supplying some identification documents (something which breaks the anonymous nature of cryptocurrency somewhat) you can purchase Ether with a credit or debit card. There are typically limitations on the amounts you can purchase every week, but if you're super serious and wish to invest a lump sum, you can transfer larger amounts via bank transfer to Coinbase and acquire much larger amounts of Ether (as well as Bitcoin and Litecoin).

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The hardest way to get Ether is to mine it. This involves processing transactions on the Ethereum network, and the reward for doing this is to be paid in Ether by the network itself - this is the root process, the oxygen if you will, which keeps cryptocurrency networks running. Mining takes a lot of time and a deeper knowledge of cryptocurrency, and given the value of Ether currently, is the least cost effective way - for the money you'd spend on electricity, you'd get more Ether by buying it from a broker. But, it would keep you virtually anonymous if you did mine it.

How do I store Ether?

Ether, like all other cryptocurrencies, is stored against addresses - the equivalent of your bank account number and sort code. Each address has a key which needs to be kept ultra secure. That key is the key to operating the account, and with it, and only it, your Ether can be transferred to another address or account. As we already know, once Ether is transferred, it's transferred - there is no going back, hence the need to keep the key to your account very secure, and be very careful who or what you send Ether to. One typo in the account code (which is a string of characters) and the currency is gone forever.

How do I keep my Ether secure?

There's a number of ways of keeping your Ether secure. The first is the most basic way, and that's to generate something called a paper Ethereum wallet. It's called a paper wallet because you literally generate an account number and key, and then print it out for safe keeping while leaving no trace of it on your computer. The idea being that if it's not left on your computer anywhere, then computer is compromised by malware, the malware won't be able to search your computer for any account numbers and keys left around.

Another very popular way is to use a hardware device such as a Ledger Nano. Ether is stored on the device itself, and only those with physical access to the device can remove currency from it.