What is Ether
Ether is a necessary element — a fuel — for operating the distributed application platform Ethereum.Every single step in a smart contract is a transaction or a complex computation and would have a cost that is measured in ``gas``. The price of this gas is paid by the requester in ``Ether`. Ether is the currency with which everything runs in the Ethereum. When people talk about ETH and ETC they are actually talking about the value of the Ether in their respective blockchain.
Every command has a specific gas limit which ensures that a buggy piece of code doesn`t end up depleting your entire ether wallet. So basically, the main reason why people fulfill their end of the bargain in a contract is that they are incentivized to collect Ether.
What happens when your ether supply gets depleted in the middle of the contract? If you do not have the ether required for all the gas payments, then all the transactions that have already taken place during the course will go back to the original state. But, your ether wallet will still reflect the change in balance since all transactions made in the blockchain are irreversible.
How are ethers created?
The total supply of ether and its rate of issuance was decided by the donations gathered on the 2014 presale. The results were roughly:
- 60 million ether created to contributors of the presale
- 12 Million (20% of the above) were created to the development fund, most of it going to early contributors and developers and the remaining to the Ethereum Foundation
- 5 ethers are created every block (roughly 15 seconds) to the miner of the block
- 2-3 ethers are sometimes sent to another miner if they were also able to find a solution but his block wasn`t included (called uncle/aunt reward)
Is the ether supply infinite?
No. According to the terms agreed by all parties on the 2014 presale, issuance of ether is capped at 18 million ether per year (this number equals 25% of the initial supply). This means that while the absolute issuance is fixed, the relative inflation is decreased every year. In theory, if this issuance was kept indefinitely then at some point the rate of new tokens created every year would reach the average amount lost yearly (by misuse, accidental key lost, the death of holders etc) and there would reach an equilibrium.
But the rate is not expected to be kept: sometime in 2018-2019 Ethereum will be switched from Proof of Work to a new consensus algorithm under development, called Casper that is expected to be more efficient and require less mining subsidy. The exact method of issuance and which function it will serve is an area of active research, but what can be guaranteed now is that (1) the current maximum is considered a ceiling and the new issuance under casper will not exceed it (and is expected to be much less) and (2) whatever method is ultimately picked to issue, it will be a decentralized smart contract that will not give preferential treatment to any particular group of people and whose purpose is to benefit the overall health and security of the network.
Who needs ether?
Developers who intend to build apps that will use the ethereum blockchain. Users who want to access and interact with smart contracts on the ethereum blockchain.