What is Ethereum? | A Complete Beginners Guide

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Updated: 23rd Feb 2021
Written by Drew Cheneler
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January 20, 2021
Written by Drew Cheneler

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Ethereum is recognized as the most influential blockchain project in the industry after Bitcoin.

Hosting a gigantic ecosystem that supports smart contracts and decentralized applications (dApps) alike, the project brings a layer to the existing blockchain sphere that has brought revolutionary changes.

Today, Ethereum (Ether/ETH) is the second leading cryptocurrency. Believing that it has a bright future ahead, investors believe ETH will outperform Bitcoin.

But to stick with the basics, for now, we will first explain what Ethereum is, how it works, and what you should do as an investor to capitalize on this cryptocurrency.

History of Ethereum

The idea of a blockchain network hosting smart contracts and decentralized applications first arrived in 2013. At the time, the industry’s best programmer Vitalik Buterin proposed the concept of Ethereum. A year later, he successfully crowdfunded the project.

Apart from Vitalik Buterin, Ethereum has multiple co-founders who became a part of the project by investing. The founders’ long list includes individuals like Anthony Di Lorio, Mihai Alisie, Charles Hoskinson, Vitalik Buterin, Joseph Lubin, Jeffrey Wilcke, and Gavin Wood.

Many of them have later left to work on their own blockchain projects due to disagreements regarding Ethereum’s design and future. Nevertheless, the protocol has still survived.

In 2014, Ethereum held an initial coin offering (ICO) in which it raised $16 million in total. This marked the first ICO in the history of cryptocurrencies. The team gained enough funds to develop Ethereum and launch it in 2015.

What is Ethereum?

Ethereum is a blockchain-based decentralized and open-source ecosystem that hosts smart contracts and decentralized applications. The protocol’s main premise is bringing self-executable computer-coded digital contracts that run without any third parties.

Being Turing complete, a computer concept describing software that can emulate Turing machines, Ethereum offers a platform and a programming language.

Called Solidity, users can utilize the language to create smart contracts and decentralized apps (dApps) on their own and have them listed on the Ethereum network.

Crypto enthusiasts use Ethereum not only to exchange value but to create blockchain applications as well.

Developers regularly work on new ideas and features that can help blockchain technology replace the legacy tech system.

Fans often refer to Ethereum as the ‘World Computer,’ implying that the project will one day become a global computer network that hosts every service and product on the planet.

What Is Ether?

Ether (ETH) is the main currency on the Ethereum network. The first network, based on the Proof of Work consensus mechanism, rewards miners who verify transactions and blocks with ETH.

A future network upgrade that features a Proof-of-Stake consensus model will also use the cryptocurrency to reward validators.

In both cases, ETH represents a fundamental part of the entire ecosystem. It drives growth and keeps the network afloat by financially incentivizing users to participate. Participants also use Ether to pay for fees.

Learn More: How to Bu Ethereum

How does Ethereum Work?

If you know how Bitcoin works, understanding Ethereum will be a breeze. In layman’s terms, Ethereum is an upgraded version of Bitcoin whose blockchain network brings far more features.

For many, the smart contract protocol is even seen as the second fundamental layer of the blockchain industry that supports new generation cryptocurrencies.

Apart from featuring the same distributed, decentralized, and impermanent blockchain network that Bitcoin does, Ethereum also has support for smart contracts and dApps.

Ethereum works with the help of miners who validate transactions and compile them into blocks.

By solving so-called mathematical puzzles, miners continually confirm and report on the state of the network. Subsequently, the network rewards these active participants with Ether.

Smart Contracts on Ethereum Blockchain

Smart contracts represent a powerful tool that allows users to create and execute digital contracts. They are used to automate business applications and to remove the need for administrative oversight.

For example, instead of manually checking transactions and verifying the functionality of a dApp, developers can use smart contracts to automatically process these tasks instead.

Once certain conditions are met on the Ethereum network, smart contracts will execute a job based on predefined agreements.

If a smart contract executes its code, it will transact and transfer goods between multiple wallets. This enables fast and seamless value transfers without any personal interaction.

On Ethereum, developers write smart contracts using the Solidity programming language. The contract itself is executed on the Ethereum VM (Virtual Machine).

How was Ether Distributed?

The very first Ether tokens were distributed once Ethereum launched in 2015. Every investor who has participated in the industry’s first token sale (ICO) a year prior has received the tokens. Ether was sold at a price of $0.311 per 1 ETH in the August 2014 ICO.

While the token has remained unpopular and hidden in plain sight for the first year, it soon turned into a highly desirable cryptocurrency.

ETH outperformed the entire crypto market by a high margin, rising extremely high from its ICO price.

At the time of writing, ETH costs $1,300 and has a $150 billion market cap. The crypto asset has a daily trading volume that is nearly identical to that of Bitcoin.

While Ether returned to its old ATH in 2021, it has not performed as great as BTC did during this bull run.

What Can Ethereum be Used for?

With Ethereum, developers can create all sorts of online and decentralized applications. Popular use cases include financial markets, banking, big data, health care, real estate, and energy.

We can generally use Ethereum to disrupt and revolutionize literally all modern-day industries and sectors.

The world of decentralized finance (DeFi) is Ethereum’s currently most popular application. This submarket develops decentralized financial instruments, essentially converting legacy banking tools into blockchain-based tools.

These instruments include loans, decentralized trading, derivatives, currency issuance, and many others.

Advantages and Disadvantages of Ethereum

Advantages:

  • Removes the need for intermediaries.
  • Is fully decentralized.
  • Enables Decentralized Autonomous Organizations
  • Features more functionalities compared to other blockchain networks.
  • Supports token listing without requiring vouching.

Disadvantages:

  • Smart contracts are extremely vulnerable to hacks and exploits. However, next-generation blockchain technology and cybersecurity are addressing this issue.
  • The network is not yet scalable, cannot support high workloads.
  • Gas fees tend to periodically reach high levels.

Ethereum vs Bitcoin: What is the Difference?

The main difference between Bitcoin and Ethereum resides in the inclusion of smart contracts. Bitcoin’s original blockchain network does not support smart contracts, nor can it host decentralized applications.

While both protocols feature the same fundamental aspects of a permissionless blockchain, Ethereum is far more advanced.

Another major difference is that Bitcoin has a limited supply and that it is not pre-mined. This makes it possible for investors to treat Bitcoin as a Store-of-Value (SoV) asset, like Gold, to hedge against the market.

Ethereum, with a theoretically unlimited token supply, cannot in any way mirror Bitcoin’s features. Moreover, Ethereum is hardly ever used to transfer large amounts of wealth.

By the end of 2021, Ethereum will become radically different compared to Bitcoin. By migrating to a PoS consensus model, developers will leave the old PoW design. As such, the way that the network works will be entirely different as opposed to Bitcoin.

Ethereum vs Litecoin: What is the Difference?

Litecoin, a hard fork of the number one cryptocurrency, is very different from Ethereum. It resembles Bitcoin and is primarily used as a digital currency. There is no smart contract functionality in this case as well.

The idea of Litecoin is to offer a payment system that is faster and cheaper than Bitcoin. New blocks are generated much faster, and the token supply is fixed at 84 million LTC. Litecoin features cheaper transaction costs. It uses a different PoW algorithm named Scrypt.

While both projects wish to improve the state of blockchain technology, their ultimate goals are vastly different. As such, they can coexist. Litecoin is no direct competitor to Ethereum.

Bottom Line: What Is Ethereum?

Ethereum is a blockchain network that comes with smart contract functionality. This characteristic allows developers to build decentralized applications and improve use cases other than payments.

The first mention of Ethereum was in 2013 when Vitalik Buterin published the project’s first white paper.

A year later, the project crowdfunded enough resources to actively develop the protocol. At the time, it was joined by many influential programmers in investors who became co-founders.

Following the ICO craze in 2016 and 2017 Ethereum became the largest ecosystem in the entire blockchain industry. Today, it hosts thousands of projects that offer various applications.

The network’s native currency, Ether, is used to financially incentivize miners to confirm transactions. However, the arrival of Ethereum 2.0 in 2020 made it possible for users to become validators by staking their assets.

With $52 million in daily trading volume and a market cap worth $150 billion, Ethereum is the second-largest cryptocurrency after Bitcoin.

The network is also a major part of the DeFi market, which creates decentralized financial instruments on the Ethereum blockchain.

All in all, Ethereum’s greatest achievement is launching a fully functional platform that supports smart contracts.

These self-executable computer-programmed contracts make it easy for developers to automate tasks, which they usually have to handle manually.

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Drew Cheneler
Drew Cheneler
Drew is a recognized Credit, Small Business, and Personal Finance Expert. He has been quoted in CNBC, Fox Business News Section, The Huffington Post, Business.com, Moneyunder30, US Chamber of Commerce, and more. He is known for breaking down complex personal finance topics into action-oriented advice, so you can make the most of your hard-earned money.