Ethereum is now the second most popular cryptocurrency after Bitcoin, and it has gained a lot of traction from blockchain communities as an important blockchain to support future development projects.
Ethereum gained traction in 2017, with its coin (ETH) price increasing by approximately 11,000% from $8 per ETH on January 1, 2017, to $900 by the end of the year.
As a result, Ethereum has piqued the interest of both new cryptocurrency buyers and blockchain programmers.
The allure of Ethereum is that it enables and supports the creation of dozens of new cryptocurrencies that use its native blockchain protocol to solve various problems. Some in the cryptocurrency community have dubbed it Blockchain 2.0.
While the experienced blockchain community is likely to be familiar with Ethereum, those who are new to the game and less tech-savvy are likely to be curious as to what makes Ethereum so popular.
This in-depth guide will walk you through the fundamentals of Ethereum and help you understand what’s going on behind the scenes with this major cryptocurrency.
Why Was Ethereum Developed?
The success of Ethereum and other cryptocurrencies can be traced back to Bitcoin, the first successful decentralized cryptocurrency. Bitcoin achieves network security through proof-of-work as computational power is expended to create blocks via bitcoin mining.
This secures the network and is the only way for new bitcoins to enter circulation. However, Bitcoin has no network functions other than being a secure network with decentralized algorithms enabling safe peer-to-peer transactions because it is not programmable.
Looking at the financial markets and the economic system, there is clearly more to what money should be able to do than the Bitcoin network allows.
This includes developing automated financial services using decentralized algorithms, which are made possible on the Ethereum blockchain through smart contracts.
Thus, Ethereum was created to make cryptocurrency usage more flexible. This is accomplished through smart contracts, which allow companies and individuals to customize services to meet market demand.
Ethereum’s programmability makes it a good fit for larger markets, and there are now thousands of decentralized applications on Ethereum offering a variety of services such as DeFi – Decentralized Finance, Play-To-Earn Blockchain Games, Decentralized Marketplaces for cryptocurrency trades known as Decentralized Exchanges (DEXs), and many more.
What Exactly Is Ether?
Ether is the Ethereum blockchain’s native currency; it is also the governance token and is required to conduct transactions on the Ethereum blockchain.
Ether is a gas token that is spent when transactions are initiated on the network; this fee varies depending on the network state; in congested environments, miners or validators prioritize transactions that spend more to be processed; these fees are calculated in gwei, a smaller unit of Ether.
Ethereum Proof-of-Stake Governance (PoS)
Previously based on the proof-of-work protocol, Ethereum switched to proof-of-stake in a process known as the merge.
In contrast to Bitcoin proof-of-work, where heavy hardware is required and governance is based on hash rates, the proof-of-stake consensus mechanism requires validators to stake tokens or coins to participate in governance and block production.
On Ethereum, governance is based on the number of tokens validators own, which means that a miner’s chances of producing blocks and earning block rewards are determined by the number of network tokens he owns.
This is thought to be a better alternative to Bitcoin proof-of-work because it consumes 99.9% less energy. It is also economically incentivizing because validators directly contribute to the overall value of the ecosystem through token acquisition in addition to block validation.
Bitcoin VS Ethereum
Because most new crypto investors and traders are familiar with Bitcoin and how blockchain works, comparing a cryptocurrency to how Bitcoin works can be useful.
To begin with, both Bitcoin and Ethereum operate on distributed blockchain networks. Both are decentralized, with no centralized authority or control. Miners support the network for each blockchain by verifying transactions in exchange for Bitcoin or Ethereum as block rewards. Furthermore, both Bitcoin and Ethereum are cryptocurrencies that are heavily traded on cryptocurrency exchanges.
There are, however, distinctions between the two. Gavin Wood, the co-founder of Ethereum, explains the distinction: “Bitcoin is first and foremost a currency; this is one specific application of a blockchain.”
It is, however, far from the only application. Consider a previous example of a similar situation: e-mail is one specific internet use that has undoubtedly helped popularize it, but there are many others.”
So, unlike Bitcoin, Ethereum employs blockchain technology for a different purpose. Bitcoin employs the blockchain ledger to maintain a permanent record of digital currency ownership, allowing for a novel method of peer-to-peer currency transactions.
Ethereum uses the blockchain to run an application’s programming code. Because developers use the Ethereum blockchain to build and support separate blockchains, the Ethereum blockchain and Ether coins are used to pay network transaction fees.
What is the Process Of Ethereum Mining?
Ethereum’s blockchain is based on Bitcoin’s protocol and design, which means it mines and supports the network using a Proof-of-Work (PoW) method.
PoW is a technique used by many of the first blockchain networks to support the system. It makes it difficult, expensive, and time-consuming to create a new block of data while making it very easy for anyone else to take and verify that data. It effectively makes it more difficult for network nodes to run computations, create new data blocks, and receive block rewards.
Ethereum employs the same PoW model as Bitcoin, but the platform was designed to support much more than just asset transactions. This means that nodes on the Ethereum network are responsible for keeping the Ethereum blockchain ledger up to date, which tracks current information and status for each smart contract on the network, all smart contract code and where it’s stored, and each user’s balance.
When new transactions are made on the Ethereum blockchain, the data is grouped together by network nodes or miners to form a block of data, which is then chained together with the other blocks on the ledger to form the blockchain.
Miners use their computing power to solve the computational challenge as quickly as possible in order to be the block creator and receive the reward.
The trick with PoW mining systems, such as Ethereum’s, is that the faster a computer solves the mathematical challenge, the more likely it is to be chosen for the new block.
Because Ethereum’s coin has been increasing in value, many miners worldwide compete for block creation and validation on the Ethereum blockchain network. Each time they add a block to the chain, new Ether tokens are generated and awarded to the miner.
Miners are thus the backbone of the Ethereum network, as well as the majority of other blockchain networks, particularly those that use a PoW mining model to support the network.
Vitalik Buterin is Who?
Vitalik Buterin has gained a lot of notoriety and popularity as the man behind Ethereum. According to the story, Vitalik was a Toronto-based programmer who was introduced to Bitcoin in 2011 and saw the enormous potential of blockchain technology.
That same year, Vitalik launched Bitcoin Magazine, an online media platform for blockchain and cryptocurrency information. But, along the way, he saw the possibilities for blockchain technology that went beyond simply creating the perfect transaction ledger.
He had a vision for Ethereum, which would take blockchain beyond the financial applications of Bitcoin and other digital currencies.
In 2013, Vitalik published the Ethereum white paper, which described his proposed blockchain platform, which could support any type of decentralized application that developers could imagine.
Vitalik and the other co-founders launched an ICO in 2014 to raise funds for the project’s development. Participants in the ICO purchased Ether coins to aid in development. They raised more than $18 million in total and launched the first version of the platform in 2015, about a year later.
What are Decentralization Applications?
So we now have a fundamental understanding of smart contracts and how they can be used in a blockchain network to create a novel type of agreement. These smart contracts are used by the Ethereum network to develop decentralized blockchain applications.
Most users downloading apps from the App Store on their iPhone or Android are familiar with traditional applications. For example, apps enable users to do things like check bank account balances, scroll through a news feed of friends’ pictures, and even play their favorite card game.
Dapps operate on the same principle. However, it runs on a platform supported by a network of nodes rather than a central group. This provides several advantages and benefits over our traditional apps.
Tamper-Resistant: Due to the properties of blockchain technology, Ethereum is resistant to third-party tampering. Dapps can be deployed on the network without fear of being hijacked by an unauthorized third party. Furthermore, the blockchain is built on a consensus principle, which requires all nodes and users of the network to agree on each change before it is implemented. This reduces the possibility of network fraud and corruption.
Decentralized: Decentralization is a key blockchain principle on the Ethereum platform. The network has no single point of failure, which means that the applications hosted on it never fail or go offline. This also has security implications, as it protects the network from potential hacking attempts.
Open Source: Users can inspect the source code of the dapp on both the back end and the front end. This means there is no code hiding under the hood that performs unnecessary functions for the user.
No Downtime: Because dapps run on a network of blockchain nodes, there is no single point of failure that can take the entire application offline. This means that the application’s service is always operational and functional, reducing the likelihood of system crashes and failures.
Dapps built on the Ethereum blockchain provide a lot of value to developers because they don’t have to go out and build a blockchain application from scratch. Instead, the framework exists via the Ethereum protocol and aids developers in saving time and effort when developing a new application. The dapps then pay the network transaction fees in Ether to use Ethereum’s decentralized network.
Ethereum is Used By Which Cryptocurrency?
With all of the talk about decentralized applications using the Ethereum blockchain, there are several notable examples of cryptocurrencies with Ethereum-based underlying blockchains.
Some of the cryptocurrencies may be familiar to you. Still, it provides a thorough understanding of the types of applications that can be built and run on a decentralized blockchain platform like Ethereum.
Golem is a global decentralized supercomputer aggregating the computing power of all machines in its network. Users of the Golem ecosystem can lend spare and unused computer resources to others who require more processing power to perform complex computations and tasks. This is a way to make some extra money by utilizing the same model that has brought Uber and Airbnb success.
Augur is a decentralized prediction market built on the Ethereum blockchain. Users can bet on the outcomes of future events using Augur’s prediction market to receive monetary rewards and prizes.
The less likely an event is to occur, the greater the potential reward users can earn by correctly predicting its outcome. Augur employs a method known as “The Wisdom of the Crowd” from the various predictors on their platform to generate real-time predictive data that is frequently more accurate than leading experts on a given subject.
Civic: Civic is a blockchain-based identity management service that allows users to control and protect the use of their identity. You must undergo the same authentication process every time you are asked to prove your identity. Civic’s ID management, on the other hand, allows users to verify their identity data once and then reuse that authentication in other places that accept Civic identification.
OmiseGo: OmiseGo (OMG) is a decentralized blockchain gateway and platform for high-value transactions and settlements. Their goal is to eliminate inefficiencies in financial systems so that lower-cost, higher-volume transactions, such as payments, payroll deposits, B2B commerce, asset management, supply chain activities, or loyalty programs, can be performed.
Storj: Storj is an open-source, decentralized file storage solution that uses encryption and file sharing, as well as their blockchain hash table, to store files on their peer-to-peer network. Storj uses blockchain technology to make cloud storage faster and less expensive.
Are There Any Benefits To Using Ethereum?
Ethereum has been a game-changing blockchain platform, ushering in a completely new direction and vision for blockchain use cases. However, as with most things, there are advantages and disadvantages to Ethereum’s blockchain network.
So, what are the potential advantages and disadvantages of Ethereum and its blockchain?
To be fair, because Ethereum has been revolutionary in the blockchain community, they have secured the second spot among cryptocurrencies in terms of total market cap. Aside from the well-known Bitcoin, Ethereum is the most important cryptocurrency in the market. They have a large developer community, a large and diverse media and public relations team, global distribution, and a dispersed group of strong advocates.
However, the Ethereum blockchain has recently encountered some of the same issues as Bitcoin, namely scalability issues.
What we mean by scalability issues is that the Ethereum blockchain, in its current state, would be incapable of supporting a large enterprise-level dapp. This is because the platform, as it currently stands, can only support about 15 transactions per second on the blockchain, which, as we know, is shared by the entire network of dapps running on the platform. To put this in context, Visa alone handles tens of thousands of transactions per second.
So, while Ethereum is intended to serve as an operating system for dapps, practical functionality is restricted to larger entities and projects. Consider Apple creating an iPhone that can’t make a phone call or have the phone app, or a Windows system that can’t run an Excel spreadsheet.
This is where the concept of network congestion comes into play. The Cryptokitties example is just one horror story about how something so insignificant in the grand scheme of things can have a massive ripple effect across the entire Ethereum network. Consider the Ethereum network to be a single-lane highway with traffic jams along the way when what is truly required is a major multi-lane interstate highway that will allow larger enterprises to use the existing blockchain framework for their applications.
Even with the current unscalable model, the Ethereum blockchain community is aware of these concerns. The scalability issues aren’t a big secret, but the supporting community expects them to be resolved.
While the core Ethereum development team has been working hard to address scalability concerns for some time, they’ve presented multiple proposals to the community with little success. They have yet to put together and agree on a concrete plan for addressing the core scalability issues.
Ethereum’s new proposed consensus mechanism called ‘Casper’ is one recent development toward scalability. This proposal aims to transition Ethereum from a Proof-of-Work to a Proof-of-Stake model. We discussed how the PoW method of mining and network support requires a lot of computing power, which is the root cause of the scalability issues.
All blockchains that use some form of Proof-of-Work model will eventually run into scaling issues once the network reaches a certain usage level. However, switching to Proof-of-Stake (PoS) may alleviate some of the scalability issues. PoS is an alternative method of processing blockchain transactions, allowing miners to earn block rewards based on the number of coins they own. As a result, the larger a node’s coin stake, the better its chances of mining the block and receiving a larger reward.
The ongoing problem for Ethereum is that there is no unified direction for Casper or the implementation of a new consensus mechanism. There are competing versions supported by various groups within the Ethereum community from a couple of prominent Ethereum developers. Furthermore, neither proposed solution includes a timeline.
There are several reasons to be skeptical of the Ethereum blockchain’s potential application. At the very least, major organizations and enterprises should temper their expectations about jumping on the blockchain bandwagon and using the Ethereum platform. Ethereum may end up being a great platform for issuing ERC20 tokens and launching small-scale applications.
How Should I Invest In Ethereum?
A crypto exchange is the most convenient way to invest in Ethereum and purchase Ether tokens. If you’re new to cryptocurrency and want to buy Ethereum, Coinbase is one of the easiest exchanges to use and will accept fiat payment in exchange for Ether tokens.
If you want to buy Ethereum, there are plenty of other great crypto exchanges to use. Other well-known examples include:
- Gemini \sKraken \sGDAX
- Bittrex \sBinance
How Should Ethereum Be Kept?
If you bought Ethereum on one of the crypto exchanges listed above, you’d want to properly store your Ethereum coins to keep them safe and out of the crypto exchange account. This entails transferring Ethereum from your cryptocurrency exchange wallet to a separate cryptocurrency wallet that you control.
The good news is that Ethereum coins are supported by a large number of crypto wallets. Furthermore, if you begin to examine the applications built on the Ethereum platform more closely, you may want to consider investing in those cryptocurrencies as well. All Ethereum-related tokens, known as ERC20 tokens, are supported by a variety of crypto wallets.
MyEtherWallet is a great example. MyEtherWallet, also known as MEW, is a web interface that allows you to store Ethereum and ERC20 tokens. MEW makes it simple for users to store all related tokens and cryptocurrencies in one location and wallet because Ethereum has over 1,300 applications running on the network.
Other Ethereum-compatible wallets include:
- Ledger Nano: Because the Ledger Nano is a hardware wallet that focuses on security, beginners should be aware of the two-factor authentication requirement for an added layer of security. This wallet keeps your Ethereum and other cryptocurrencies on a small flash drive. Trezor is a hardware wallet that is excellent for storing large amounts of cryptocurrency or Ethereum. The wallet interface is straightforward, and desktop versions are also available.
- Exodus: Exodus is a fantastic desktop wallet that supports Ethereum as well as many other coins. The user interface is excellent for first-time users, and they have a simple guide explaining how to back up their wallets. One interesting feature is in-wallet trading, which allows you to convert between the various cryptocurrencies supported.
- Jaxx: Jaxx is a cryptocurrency wallet created in 2014 by Ethereum co-founder Anthony Diiorio that supports Ethereum and various other cryptocurrencies. Jaxx is available as a desktop application, a mobile app, and a web browser extension.
Ethereum Is It The Right Investment For You?
We’ve gone over a lot of information about Ethereum, its blockchain, its cryptocurrency, and how it all works. You should now understand how Ethereum is a blockchain platform that allows other blockchain projects to become a reality.
It could be argued that there would be far fewer cryptocurrencies on the market today if Ethereum did not exist. The ability to create ERC20 tokens has enabled new blockchain businesses to emerge and get a running start using Ethereum’s existing infrastructure.
Of course, the consequences of this approach are twofold. While many innovative and exciting projects are being built and launched on the Ethereum platform, bad actors also can easily and quickly develop and release ERC20 tokens that serve no purpose other than to attract dumb money from inexperienced cryptocurrency traders. That is why, especially with ERC20 tokens, it is critical to understand the business and use cases behind the tokens you purchase.
There are several factors to consider when considering Ethereum and Ether coins as potential cryptocurrencies for your portfolio. While this is not investment advice for investors or traders, it should influence your investment decision.
The first is that Ether coins serve a purpose and perform a function within the Ethereum ecosystem and blockchain network. As previously stated, Ether functions as the system’s fuel. To use the underlying blockchain that supports all of the applications, all participants must use Ether.
This gives Ether a lot of value because these other applications would not be able to function without Ether. So one area of defined value for owning Ethereum is the cryptocurrency’s requirement for other cryptos and blockchains to exist.
On the other hand, the Ethereum platform itself is limited and may not be used as frequently in the future for developing dapps. If larger organizations are unable to leverage the Ethereum framework, they will most likely choose another blockchain platform or invest the time and effort to build their own.
Possibly, the development team will fail to solve the scalability issues, and Ethereum’s network congestion will worsen. Without addressing scalability, Ethereum’s future potential is severely limited. Some blockchain projects have already been built elsewhere to avoid congestion issues.
Potential investors considering Ethereum should consider both sides of the coin to determine whether Ethereum is the right cryptocurrency investment.
Who Are The Competitors Of Ethereum?
Before investing in Ethereum, potential investors should consider the various market competitors vying for Ethereum’s position as a blockchain platform for decentralized applications. Several projects attempt to succeed where Ethereum fails and innovate on the Blockchain 2.0 concept.
NEO: NEO is often referred to as the Chinese Ethereum because it also provides a platform for smart contracts and blockchain-based applications. NEO has gained traction in China, with Chinese blockchain developers utilizing their platform for new projects. NEO is more scalable than Ethereum and can handle nearly 1,000 transactions per second. They also support a variety of programming languages, including the popular C# and Java.
EOS: EOS aims to provide a more scalable platform by combining the security features of Bitcoin with the dapp support of Ethereum. These features include shared databases, built-in authentication systems, account recovery mechanisms, and decentralized storage and hosting. A community voting process is used to gain network consensus and facilitate changes.
Waves: Another platform that allows developers to create tokens for their applications on the network is Waves. The Waves platform is becoming one of the more accessible blockchain platforms for new businesses looking to launch an ICO or token. The Waves platform operates on a Proof-of-Stake model, with nodes holding 10,000 or more tokens supporting the network.
Ethereum is a foundational blockchain platform that has paved the way for much cryptocurrency innovation. Vitalik and his team took the Bitcoin concept and applied it to a wide range of other applications.
Other blockchains have since seen the Ethereum platform’s flaws and are attempting to capitalize on its success while increasing the value of their application-building protocol. It remains to be seen whether these other blockchain platforms can dethrone Ethereum as the preferred platform for developing new dapps.
However, Ethereum’s limitations are well known. There are numerous other competitors in the market. Ethereum’s development team is attempting to maintain its top-dog status, and for the time being, they continue to dominate the marketplace for new applications. Ethereum’s best days are probably behind it, but the good news for the blockchain industry is that innovation is happening everywhere, and Ethereum serves as a great jumping-off point for new platforms and applications.