What is Ethereum?
Ethereum (ETH) is a blockchain platform that uses open-source software. A blockchain is a system that records and verifies digital transactions across multiple computers on a peer-to-peer network.
Ethereum houses the world’s second-largest cryptocurrency by market capitalization, ether. The only cryptocurrency worth more is Bitcoin.
Bitcoin (BTC) aims to change the world’s perspective on money by creating a digital currency as an alternative to traditional fiat currencies like the US dollar or the euro. Ethereum, like Bitcoin, attempts to be an alternative to traditional currencies, but it differs from Bitcoin in the fact that Ethereum allows people to build decentralized applications (dApps) on top of it. These apps have no oversight from a central authority like a bank or a government, run without permission with near-100% updates, and are accessible to everyone globally. These dApps include smart contracts, non-fungible tokens (NFTs), and decentralized finance (DeFi).
In short, Ethereum aims to revolutionize how internet-based applications operate by giving users more freedom. Ethereum’s decentralized approach allows the platform to do away with intermediaries in favor of smart contracts, which is a code that takes the place of traditional middlemen such as governments and banks and carries out predefined rules automatically.
To understand Ethereum’s potential for applications, transactions, and smart contracts, we must look at how it compares to Bitcoin and its functionality for the average user.
Ethereum vs. Bitcoin: What’s the difference?
Ethereum differs fundamentally from Bitcoin’s network, because the former aims to support applications and smart contracts and offer a decentralized currency platform. In contrast, Bitcoin focuses exclusively on being a superior asset and a form of money.
Ethereum and Bitcoin both rely on blockchain technology. Presently, both rely on the Proof-of-Work (PoW) consensus mechanism to secure the network. However, an upcoming change in Ethereum's architecture will change Ethereum’s consensus mechanism to Proof-of-Stake (PoS), which will change its speed, accessibility, and functionality.
Are Ethereum and ether the same thing?
Ethereum’s website cites ether as “the currency of Ethereum apps.” To use the Ethereum network, one must pay in ether.
To further break this down, we can consider ether as Ethereum’s fuel. Ethereum requires a lot of computing power to run, and this power is not available for free. Users are required to pay for Ethereum transactions and operations using ether, which facilitates applications to run on the platform.
How does Ethereum work?
If Ethereum were a centralized system, it would exist on a single server supervised by a central authority. Instead, Ethereum's network exists on multiple computer systems globally, making it decentralized.
Each system is known as a "node.” Each node has a copy of Ethereum's primary decentralized system, the Ethereum Virtual Machine (EVM). If one node fails, thousands of other systems are in place to back it up, meaning one would have to control a majority of nodes to hack the system. This makes Ethereum immensely difficult to cyber attack and more difficult as the value of the currency increases.
Like every blockchain, each interaction on Ethereum's network is called a transaction, which is stored in a "block" that miners authenticate. Once authenticated, a transaction becomes publicly visible on Ethereum's blockchain.
Validating a new block is important because it proves the block is unique and immune to duplication. Currently, each block has a 64-digit code to go with it. The entire authentication process is known as PoW, as miners use their advanced computing power to prove each new block is legitimate. Miners receive payment for their work in the form of ether.
What is Ethereum gas?
Users pay validators a fee for transactions using Ethereum gas. If a miner authenticates a particular transaction initiated by a user, the user will pay the miner, further incentivizing mining in the future. Ethereum gas also modulates the number of actions a user can make per transaction, ensuring security on the blockchain and preventing spam because the more transaction demand there is, the higher the gas fee is. This means that at times of peak demand, only users who are willing to pay a steep premium will transact.
How does Ethereum make money?
Ethereum allows users to build applications on its blockchain, with ether as a utility token allowing applications to interact with the blockchain. With recent updates, Ether’s supply is determined by the types of activity on the network, meaning based on its usage, it can be inflationary or deflationary.The value of the network is likely highly correlated to the usage of applications built on top of it. One can calculate the network’s value by the total fees paid to miners or other methodologies. Ethereum historically has far more fees generated than any other blockchain, including Bitcoin.
What is Ethereum used for?
Ethereum’s native token ether can be used to transact and store value much like Bitcoin. However, unlike Bitcoin, Ethereum has the ability to develop and run applications on top of it.
As a result, Ethereum's use, unlike Bitcoin’s network, is not limited to simple financial transactions. Users can complete complex Ethereum transactions involving smart contracts, where two parties mutually agree to a set of conditions at which to execute a previously agreed-upon transaction. When the set of conditions is met, the contract will automatically come into effect, delivering ether to the relevant party. Applications built on smart contracts can be everything from loans to royalties paid to musicians to agreeing to query data from a blockchain and more.
The combination of Ethereum's decentralized nature, ether's functionality as a utility token, and the growing ecosystem of apps on top of Ethereum fuels its use and appeal. To further understand Ethereum’s practicality, we must look at its advantages and disadvantages for both users and developers.
Advantages and Disadvantages of Ethereum
Ethereum’s mass appeal comes from its many advantages over other cryptocurrencies. It maintains the second rank in crypto for a reason. Below, we attempt to break down some advantages and disadvantages of Ethereum as it relates to other cryptos.
- Greater liquidity – Ethereum has high liquidity, thanks to its compatibility with multiple cryptocurrency exchanges, trading platforms, and brokerages. Users can trade ether for cash or assets like digital art and precious metals. Other cryptos have less liquidity, meaning there is likely to be more price volatility.
- Less code risk – Ethereum has been around for several years, meaning it's less likely that one will be able to find a bug in the codebase to exploit as opposed to its competitors.
- Larger developer ecosystem – Ethereum has the largest developer ecosystem in crypto, and many recent competitors have even adopted the EVM standard as they attempt to lure Ethereum developers to other chains. After all, more developers means more apps, which further means more functionality and potential value on the blockchain.
- Greater decentralization – Compared to most cryptocurrencies, especially the more recent competitors, Ethereum is far more decentralized. This means that there isn’t a core group of individuals who control the whole project, which could act against the protocol’s best interest or be compromised.
- Smart contract-enabled – Ethereum's capability to run applications on its blockchain opens a world of opportunities to users and investors. Smart contracts allow users to set any conditions, leaving its limit to the imagination of its users. NFTs, DeFi, and other token systems exhibit Ethereum’s potential much higher than other digital currencies, which aren’t smart contract-enabled.
- Upcoming upgrade – Ethereum is attempting to modernize the world’s financial system through ETH 2.0, which will adopt a PoS protocol, allowing developers to scale Ethereum without compromising security and decentralization.
- Potentially deflationary issuance – Ethereum will become more deflationary, meaning more coins will be burned than mined. This development comes after Ethereum passed a major test to migrate to a PoS consensus mechanism in Ethereum 2.0.
- Rising transaction costs – Ethereum's rising demand has increased user transaction fees, called gas, which gives Ethereum its value, although its see-saw nature can make gas expensive. Miners can benefit from high gas prices as they reap higher rewards, but the average netizen will have to shell out a higher fee if they want to enable a transaction. The inability to transact cheaply has caused many to opt for cheaper smart contract platforms in periods of high demand. Projects are also attempting to build scaling solutions on top of Ethereum to fix this issue.
- Potential for crypto inflation – Ethereum's creators put a cap on the number of coins the platform releases each year at 18 million. However, there's no mention of ether's lifetime supply. As it stands, ether's supply is infinite, raising questions over its ability to appreciate like Bitcoin, whose algorithm has a maximum cap of 21 million coins.
- Low base-layer transactions per second (TPS) – Despite being the world's second-largest cryptocurrency, Ethereum provides a mere 12-15 TPS within a six-minute confirmation window. ETH 2.0 aims to increase this number to a whopping 100,000 TPS.
- Challenging for developers – Ethereum's high-level programming language requires increased computational power and technical know-how. As a result, developers and programmers may find it challenging to migrate from centralized architecture to decentralized systems. Other competitors offer newer solutions that may be easier to work with.
What is Ethereum 2.0?
Ethereum 2.0 is the long-awaited major upgrade to Ethereum. With ETH 2.0, Ethereum's Mainnet will become more scalable. It aims to reduce gas fees, increase TPS, become more deflationary, and make life more convenient for the Ethereum community.
ETH 2.0's major talking point is its transition from a PoW protocol to a PoS one. This will gradually reduce the need for miners who use advanced computational power, electricity, and technical expertise. ETH 2.0 will see staking (the process of holding or locking up crypto, by which users may or may not earn rewards), replacing mining, meaning users will gain more control over the transaction process. Estimates claim that ETH will reduce its carbon footprint by up to 99.95%.
The transition to Ethereum 2.0 has been in the works for years and has been marred by several delays. Part of this reason is for the decentralized effort to build the upgrades. These delays have caused many to switch off, but may be justified if the upgrade works smoothly.
How to buy Ethereum?
Users cannot buy Ethereum itself, as Ethereum is the network that hosts decentralized applications and smart contracts. Instead, those interested in transacting on the Ethereum network can buy ether. Here's how:
- Cryptocurrency exchanges – Users can buy and sell cryptocurrencies on crypto exchanges and trading platforms like Binance, Coinbase, and Kraken. Ethereum's popularity makes ether an almost universally available digital asset.
- Deposit fiat money to buy ether – Users can link their bank accounts to crypto exchanges and deposit fiat currencies, such as the US dollar or the euro, to pay for ether and other assets on Ethereum’s network.
- Use a crypto wallet – One of the most common ways to store and trade crypto is through crypto wallets. Users can buy, sell, or store digital assets with different wallets.
The next phase of crypto
The world of cryptocurrency is evolving. Ethereum 2.0’s impending launch will bring many benefits to the crypto space, but it’s not the only cryptocurrency scaling rapidly.
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At Worldcoin, we aim to empower every human on Earth through the power of cryptocurrency. The best part? All users are created equal and don’t have to pay for their share of Worldcoin.
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