Ethereum (ETH) is the second most popular cryptocurrency after Bitcoin. Founded by Vitalik Buterin and Gavin Wood in 2015, Ethereum today’s market cap represents more than 17% of the $1.2 trillion global crypto market. There are some notable differences between Ethereum and the original crypto. Unlike Bitcoin (BTC), Ethereum is intended to be a medium of exchange rather than a store of value. Instead, Ethereum is a decentralized computer network built on blockchain technology.
What is Ethereum?
In crypto’s own words, Ethereum is a “global, decentralized platform for money and new types of applications,” running thousands of games and financial applications on Ethereum Blockchain. Crypto is so popular that other cryptocurrencies run on its network. The heart of Ethereum is its blockchain network.
Blockchain is a decentralized, distributed public ledger where transactions are verified and recorded. It is distributed in the sense that everyone participating in the Ethereum network has the same copy of this ledger, allowing them to see all past transactions. It is decentralized because the network is not operated or managed by a centralized entity – instead, it is managed by all the holders of the distributed ledgers.
Blockchain transactions use cryptography to maintain network security and verify transactions. Ether, the parent of Ethereum, can be used to buy and sell goods and services like Bitcoin.
But what is unique about it is that users can create applications that “run” on the blockchain just like software that “runs” on a computer. These applications can store and transfer personal data or manage complex financial transactions.
Ether and Ethereum: What’s the Difference?
You can use Ether as a digital currency in financial transactions, as an investment, or as a store of value. It is a blockchain network where Ether is held and exchanged. As mentioned above, this network offers several features in addition to ETH. “These can be simple movements of funds, but also complex transactions that can involve anything from exchanging assets to taking out loans to acquiring a piece of digital art,” said Boaz Avital, Anchorage product manager. Transactions are processed and stored on the Ethereum network.
The Ethereum network can also be used to store data and run decentralized applications. Instead of hosting software on a server owned and operated by Google ( GOOGLE) or Amazon ( AMZN ), where one company controls the data, people can host applications on the Ethereum blockchain. It gives users control over their data and they can use the app freely as there is no central authority to manage everything.
One of the most interesting use cases involving Ethereum is self-executing contracts or so-called smart contracts. As with any contract, both parties agree to provide goods or services in the future. Unlike conventional contracts, no lawyers are needed: Contracting parties encode the agreement on the Ethereum blockchain. Once the terms of the contract are met, it executes itself and delivers Ether to the appropriate party.
Ethereum vs. Bitcoin
Bitcoin is primarily used as a virtual currency and store of value. Ether also acts as a virtual currency and store of value. However, its decentralized network also makes it possible to create and run applications, smart contracts, and other network transactions.
Bitcoin does not offer these features. Ethereum also processes transactions faster. “New blocks are verified on the Bitcoin network every 10 minutes, while new blocks are verified on the Ethereum network every 12 seconds,” said Gary DeWaal, chairman of Katten’s financial markets and regulatory group. And future improvements will speed up its transactions even more.
Advantages of Ethereum
Large existing network:
Its advantage is a proven network that has been tested over years of operation and billions of hands trading value. It has a large, dedicated global community and the largest blockchain and cryptocurrency ecosystem.
In addition to being used as a digital currency, it can also process other financial transactions, execute smart contracts, and store data for third-party applications.
The large Ethereum developer community is constantly looking for new ways to improve the network and develop new applications. “Given Ethereum’s popularity, it is likely to be the right blockchain network for new and exciting (and sometimes risky) decentralized applications,” Avital said.
Its decentralized network promises to allow users to bypass third-party intermediaries, such as lawyers who draft and interpret contracts, banks that mediate financial transactions, or third-party web hosting services.
It can is also implemented in games and virtual reality. Decentraland is a virtual world that uses the Ethereum blockchain to secure things in the world. Land, avatars, wearables, buildings, and environments are tokenized by blockchain to create ownership. Axie Infinity is another game that uses blockchain technology and has its cryptocurrency called Smooth Love Potion (SLP) which is used for in-game rewards and transactions.
Non-Fungible Tokens (NFTs) will gain popularity in 2022. NFTs are tokenized digital items created using Ethereum. In general, tokenization gives a digital asset a specific digital token that identifies it and stores it on the blockchain. This establishes ownership as the encrypted data stores the owner’s wallet address. NFTs can be traded or traded. It is considered a blockchain transaction.
The transaction is verified by the network and ownership is transferred. NFTs are developed for all types of assets. For example, sports fans can buy sports tokens – also known as fan tokens – from their favorite athletes, which can be treated like trading cards. Some of these NFTs are images that look like trading cards, and some of them are videos of a memorable or historic moment in an athlete’s career.
Disadvantages of Ethereum
Rising transaction costs:
The growing popularity of Ethereum has led to higher transaction costs. Its transaction fees, also known as “gas,” can fluctuate and be very expensive. This is great if you’re making money as a miner, but less so if you’re trying to use the network. Unlike Bitcoin, where the network rewards transaction verifiers, it requires those participating in the transaction to cover the payment.
The potential for cryptocurrency inflation:
While it has an annual release limit of 18 million Ether per year, there is no lifetime limit on the potential number of coins. This may mean that as an investment, it can be traded like dollars and cannot appreciate like Bitcoin, which has a strict lifetime limit on the number of coins.
The steep learning curve for developers:
It will be difficult for developers to acquire as they migrate from centralized processing to decentralized networks.
Soon there will be Ethereum 2.0, which promises to improve the Ethereum Mainnet to increase scalability. The long-awaited Ethereum blockchain update will finally happen this summer, probably in August. The most significant change in Ethereum 2.0 is that the cryptocurrency will switch from a proof-of-work consensus mechanism to a proof-of-stake. This eliminates the need for miners to perform verification on expensive cryptocurrency mining rigs and consume a lot of energy. Staking, which involves locking up a certain amount of cryptocurrency to participate in the transaction verification process, will replace mining to verify its transactions once the merger is complete.
How to buy Ethereum?
There is a common misconception among people new to the Ethereum network. You don’t buy Ethereum itself – it’s the network. Instead, you buy Ether and then use it on the Ethereum network. Due to the popularity of Ethereum, it is very easy to buy Ether:
Choose a cryptocurrency exchange:
Crypto exchanges and trading platforms are used to buy and sell various cryptocurrencies. Coinbase, Binance.US, and Kraken are some of the larger exchanges. If you are only interested in buying the most common coins like Ether and Bitcoin, you can also use an online broker like Robinhood or SoFi. Be prepared to pay some amount in trading or processing fees for almost anything.
Deposit fiat money:
You can deposit currency, like dollars, in your trading platform or associate your bank account or debit card to fund purchases of Ether.
Once you have funds in your account, you can use the money to buy Ether at the current Ethereum price along with other assets. Once the coins are in your account, you can keep them, trade them, or exchange them for other cryptocurrencies in the future. Remember that you may pay taxes every time you trade or sell cryptocurrencies.
Use a wallet:
While you can store Ether in your trading platform’s standard digital wallet, this can be a security risk. If someone hacks the exchange, they can easily get your coins. Another option is to transfer coins that you don’t plan to sell or trade anytime soon to another digital wallet or cold wallet that is not connected to the internet just to be safe.
A wallet is a digital interface that allows you to access your Ether stored on the blockchain. Your wallet has an address similar to an email address where users can send ether, such as an email. Ether is not actually stored in your wallet. Your wallet has private keys that you use as a password to initiate a transaction. For each Ether you have, you get a private key. This key is required to access your ether. This is why you hear so much about key security with different storage methods.
A significant event in the history of Ethereum was the hard fork or the split of Ethereum and Ethereum Classic. In 2016, a group of network participants gained majority control of the Ethereum blockchain to steal more than $50 million worth of ether that was raised for a project called The DAO.
The raid’s success is attributed to a third-party developer’s participation in the new project. The majority of the Ethereum community decided to reverse the theft by invalidating the current Ethereum blockchain and creating a blockchain with an edited history. However, a fraction of the community chose to stick with the original version of the Ethereum blockchain. This unmodified version of Ethereum was permanently forked to become the Ethereum Classic (ETC) cryptocurrency.
Should You Buy Ether?
According to DeWaal, you may want to consider investing in the Ethereum network for several reasons. “First, it has value and is used as a virtual currency. Second, the Ethereum blockchain will become more attractive if it migrates to the new protocol. And third, if more people use the Ethereum distributed application, the demand for ETH may increase, and third, if “As more people use Ethereum distributed applications, the demand for ETH may increase, which means it is very attractive,” he added.
In addition to buying Ether directly, you can also try investing in companies that build applications using the Ethereum network. If you want to help manage your investment, you can also buy a professional investment fund such as Bitwise Ethereum Fund or Grayscale Ethereum Trust.
As with any investment, the answer to this depends on your financial goals, objectives, and risk tolerance. ETH cryptocurrency can be volatile, putting capital at risk. However, it is worth exploring as an investment because the various existing and emerging new technologies that the Ethereum organization uses could play a big role in our society in the future.
Before making any significant investments in Ether or other cryptocurrencies, consider talking to a financial advisor about the potential risks. Due to the high risk and volatility of this market, make sure it is money you can afford to lose even if you believe in Ethereum’s potential.