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Bitcoin created a decentralized monetary system which can transfer money from one person to another. That only allowed for monetary transactions, there was no way to add conditions to those transactions:
Alice can send Bob 5 BTC, but she couldn’t tell Bob that he will get the money only if he performed certain tasks.
These conditions are a smart contract: self-executing with specific instructions written in its code which get executed when certain conditions are made.
Say Alice wants to buy a house. The seller will receive the funds only if property rights are cleared and after the rights have been transferred over.
Ether is made of a blockchain (an immutable database) and a world decentralised computer (EVM), a virtual machine in which all the smart contracts function in Ethereum.
The EVM is a simple yet powerful Turing Complete 256-bit virtual machine. Turing Complete means that given the resources and memory, any program executed in the EVM can solve any problem.
A smart contract functionality needs to be 3 things:
Deterministic: it gives the same output to a given input every single time.
Terminable: contracts by definition, must be capable of termination in a given time limit.
Gas is a unit that measures the amount of computational effort that it will take to execute certain operations. Each and every line of code in an Ethereum smart contract requires a certain amount of gas to be executed.
Suppose you are going on a road trip:
In Ether world:
Incentivization. Like any proof-of-work peer-to-peer system, Ethereum is heavily dependent on the computational power of its miners. More miners, more computational power, more secure and fast the system.
To attract more miners Ether needs to make the system as profitable and alluring as possible for the miners. In Ethereum, there are two ways that miners can earn money:
If bitcoin is digital gold, Ethereum is alike the power grid, powering an ecosystem of worldwide decentralized applications.
The gas is the metering system for the consumed power. And ETH is the currency used to pay for running the software and maintaining the network.
To get an operation done in Ethereum, the sender of the transaction must specify a gas limit before they submit it to the network & a gas price:
If an operation runs out of gas, then it is reverted back to its original state like nothing actually happened, however, the operation generator must STILL pay the miners the fee for their computational costs and the operation gets added to the blockchain (even if it has not been executed).
When two numbers are added a million times in Ethereum it costs ~$26.55 in fees. On Amazon AWS system it costs $0.000000066.
This means that computation in Ethereum is 400 million times more expensive!
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