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What is Ethereum? ETH Explained

Investors looking to get exposed to cryptocurrencies will sometimes mistakenly focus all their energy on Bitcoin, at the expense of the major altcoins, including Ethereum. Ethereum is an alternative to Bitcoin but it is also a lot more.

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What is Ethereum?

Ethereum is the name of the open-source community that created and maintains the Ethereum blockchain, home to the cryptocurrency ether (ETH) and many other applications.

To reiterate, ether is the name of the cryptocurrency and Ethereum is the name of the blockchain that ether runs on.

People tend to get introduced to cryptocurrencies through Bitcoin. How is Ethereum different from Bitcoin?

  • Bitcoin is a digital currency, sometimes referred to as digital gold. People invest in it as a store of value because the number of Bitcoins is scarce. Bitcoins work on the Bitcoin network, which is a blockchain.
  • Ethereum is a decentralised blockchain. It is in essence a software platform, used by developers, particularly in the areas of decentralised finance (DeFi) and non-fungible tokens (NFTs). The Ethereum token ether can be invested in just like Bitcoin.

How Ethereum works

Ethereum works by harnessing the computing power of the network it is running on to maintain and expand the underlying.

What this means in practice is that everyone who connects their computer to the Ethereum network agrees to contribute towards this collective pool of processing power in return for receiving fees. These fees are called ‘gas’ payments and provide an incentive for people to take part in the network.

Importantly, the fees are paid in ether, so participation in the network is an implicit vote of confidence in the currency and means that ether, unlike some other cryptocurrencies, can’t be accused of lacking a real economic function given how many successful applications have already been designed and deployed on the network.

What does Ethereum do?

Ethereum does everything a cryptocurrency – or any currency, for that matter – must do. Essentially this means it can be held in a digital wallet and used to make payments electronically.

However, Ethereum is much more than this.

Smart contracts are one of the Ethereum network’s most important and innovative features. These are programs embedded into the blockchain that automatically execute a predetermined function when certain specific conditions are met. Because they are triggered automatically without the need for any intermediary, they can enormously speed up and reduce costs for a wide range of transactions.

The use-cases for Ethereum – smart contracts in DeFi

Banks have traditionally been the essential middlemen for numerous economic transactions, and for performing this task they have charged heavy fees.

However, smart contracts potentially make high bank fees a thing of the past. This is because decentralised financial apps running on Ethereum allow users to specify the exact timing and conditions under which payments will automatically be made, therefore eliminating the need for any intermediaries.

For example, corporate payroll functions can be automated to ensure that each employee receives their stated salary at a fixed time each month once payroll is set up as a smart contract between the employee and the employer.

This dramatically reduces the need for staff to perform the payroll functions, and saves the company money in the form of fees that no longer need to be paid to the facilitating bank.

The same principle applies to banks too, with PwC quoting a Santander report that estimated banks could save up to $20 billion a year by implementing smart contracts for many of their back-office functions.

About Ethereum Mining

Ethereum mining works in a functionally similar way to Bitcoin mining. ‘Miners’ consent to using their hardware’s processing power to solve the cryptographic puzzles required to keep generating the next blocks in the ongoing blockchain, and are compensated with gas fees.

How does Ethereum make money?

From an investing standpoint, you will not be investing in a company or corporation called Ethereum that ‘makes money. Ethereum is a decentralised public ledger, so there is no owner or shareholders that make money.

Ethereum is therefore best thought of as a technology or even an ‘infrastructure’ which allows businesses and customers to interact with each other in a potentially more efficient way.

Is Ethereum as good as Bitcoin?

If we are just talking about the price per token, then a Bitcoin is worth more than an Ether. However, the price of an ether has been more stable over time than the price of Bitcoin and has also gained in value quite considerably versus the dollar and other fiat currencies since its inception.

Is Ethereum a good investment?

Purely based on percentage returns – nailing the next 100X price move etc – Ethereum will probably underperform some of the up-and-coming cryptocurrencies looking to fill some niche void in the market.

As we can see from the following chart, Ethereum has already enjoyed a gigantic upside. While the price might still rise to new highs, the rate of change will almost inevitably be slower.

 

Source: Google

 

If you believe Ethereum has a big role to play in the future, there are two ways to invest. One is to buy and hold (hodl) the ETH token; another is to invest in companies that use the Ethereum technology.

Ethereum 2.0

The reason for creating Ethereum 2.0 comes down to the ideological battle of Proof of work vs proof of stake.

Essentially, Ethereum 2.0 can be thought of as an additional layer being built into and on top of the existing Ethereum technical architecture.

The main purpose of this additional layer will be to ensure that all connected devices are complying with the network rules, hence its designers are already referring to it as the ‘consensus layer’.

Slated to be launched in several stages, more updates and developments in this space are expected within the first half of 2022.

Where to buy Ethereum?

Ethereum has long since staked out its status as the second most well-known cryptocurrency, and accordingly purchasing ether is almost as straightforward as purchasing many fiat currencies.

Virtually any specialist cryptocurrency exchange will allow you to purchase ether, and many exchanges which don’t specialise in digital currencies and assets can facilitate this, too.

FlowBank is a digital bank where stocks and foreign exchange are traded alongside cryptocurrencies such as ether.

 

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