Ethereum often comes second to Bitcoin in most comparisons, and you’d be forgiven for thinking the two cryptocurrencies compete. However, that’s not the case. Although Ethereum has similar objectives to Bitcoin, it has more unique goals and features and even uses a different kind of technology.
Ethereum is a decentralized blockchain with smart contract functionality and the Ether token runs on this blockchain. The second most popular cryptocurrency after Bitcoin was founded by Vitalik Buterin in 2015. Generally, it accounts for 17% of the world’s crypto market.
Ethereum has several use cases. The token Ether enables its users to perform transactions, exchange it for other cryptocurrencies, and act as a store of value. Ethereum investors can also earn interest from staking.
More use cases include playing games, used on social media, and storing non-fungible tokens (NFTs).
In most cases, Ethereum is considered the next advancement of the internet – WEB 3.0. This is due to its decentralized-user-powered network.
This guide will give you more insights on basically what Ethereum is, how it is mined, how it works, how you can buy it, the pros and cons of Ethereum, and much more. If you want a better understanding but are tired of the technical explanations, stick around as we delve deeper for a more comprehensive outline.
History of the Ethereum blockchain
Vitalik founded the Ethereum program to address some of Bitcoin’s flaws. In 2014, he released Ethereum’s white paper which outlined the intelligent contracts and automated statements that allowed the development of decentralized applications.
At that time, DApp (decentralized applications) development was already in place in the Ethereum blockchain. Though the platforms were not sufficient to facilitate interoperability.
Vitalik saw the need to retain adoption so that apps can run efficiently. His goal was to make Ethereum unified leading to the launching of Ethereum 1.0 in 2015.
Ethereum 1.0 acts like Apple’s App Store, where several different applications all under the same rules run. With Ethereum 1.0 there are no central parties. The developers of the DApps are in charge as they formulate their own rules and the ruleset is hard-coded into the network.
Vitalik and his co-founders Gavin Wood, Jeffrey Wilkie, Charles Hoskinson, Mihai Alisie, Amir Chetrit, and Anthony Di Iorio carried out a token presale of ether, where they collected $18,439, 086.
The co-founders decided to launch the Ethereum Foundation in Switzerland to maintain and develop the network even further. Later on, Vitalik made the foundation a nonprofit and some co-founders drifted soon after.
In 2016, DAO (Decentralized Autonomous Organizations) was founded to govern the network. The DAO comprised a group that voted democratically on the network proposals and changes.
The DAO had a token sale that was set to last 28 days and 3 weeks into the token sale approximately $150 million was raised from more than 11,000 investors. A few months later the DAO was attacked and approximately $60 million worth of Ether was stolen. The DAO then voted for a hard forking to invert the theft and improve the security of the network.
The hard-working resulted in two blockchain networks. The initial blockchain diverged to a new protocol that had major updates on its software. The new blockchain reserved the name Ethereum as the initial blockchain was renamed the Ethereum Classic.
Understanding the Ethereum blockchain network
The main outstanding difference between these two Ethereum blockchains is that Ethereum Classic (ETC) is a digital asset with a fixed supply of 210,700,000 coins, while Ethereum (ETH) has no fixed supply.
The Ethereum Classic blockchain uses its native currency (ETC) to facilitate transactions and power smart contracts. It focuses more on the immutability of the “code is law” as popularly known and is a more speculative asset.
The Ethereum (ETH) blockchain is widely accepted and more popular compared to ETC. The blockchain has undergone several upgrades, with the biggest one yet planned for later on in this year. The much-awaited upgrade from the proof-of-work consensus protocols to the proof-of-stake consensus protocol is popularly known as The Merge.
Ethereum uses Ether (ETH) as its native token. ETH stands as the second biggest cryptocurrency in the world as it is widely used today as a digital currency, global payments and to run applications (DApps).
It is important to note that Ethereum Classic (ETC) does not follow the trajectory price of Ethereum (ETH). ETC is currently trading at $22.92 and ETH is trading at $1,901.46. This price difference is brought about by the fixed circulating supply of ETC.
Design
Both Ethereum and Bitcoin are Layer 1 blockchains. The two form the basis of the several Layer 2 networks that are built on them.
Layer 2 projects store their transactions on the Ethereum network as Ethereum provides data availability. Ethereum as a Layer 1 includes:
- A network of nodes that secure the network through block validation.
- A network of block procedures.
- A blockchain.
- A consensus mechanism.
The Ethereum community desired decentralization and security while still maintaining scalability. The blockchain trilemma states that a blockchain design can have only two out of the three features.
Ethereum having reached its network’s capacity of validating 1 + million transactions in a day, increases the demand for these transactions. This has made the transaction fees rise.
Therefore there is a need for scaling solutions. Scalability helps to improve the speed of the transactions without sacrificing the other two major requirements. Layer 2 comes with better benefits such as lower transaction costs, high-security maintenance, and more use cases.
Layer 2 is simply scaling solutions for the Ethereum network. A Layer 2 protocol comes as a separate blockchain that extends to the Ethereum blockchain.
The Layer 2 blockchain will be submitting transactions to layer 1 (Ethereum) in a bid to maintain Ethereum’s security and decentralization as Layer 2 handles scaling.
Examples of Layer 2 blockchain
- Arbitrum
Arbitrum is an optimistic rollup L2 blockchain that makes users feel as if they’re interacting with the Ethereum blockchain. Transaction costs on Arbitrum are only a fraction of the cost on Ethereum L
2. Polygon Hermez
Polygon is an open-source ZK-Rollup L2 blockchain. The blockchain aims to optimize the transfer of usable tokens, security, and low-cost transactions across Ethereum L1.
3. Optimism
Optimism is a Rollup that is compatible with the Ethereum Virtual Machines (EVM). It focuses on simplicity, speed and security.
4. Boba Network
Boba L2 focuses on scalability and augmentation. It is an Optimistic Rollup that was forked from Optimism. It also has high-speed withdrawals.
5. Aztec
This is an open-source L2 blockchain. It facilitates the scaling and privacy of the Ethereum L1 blockchain.
Benefits of building on the Ethereum Platform
- Ethereum is a highly versatile framework that is a suitable tool for developing decentralized applications using the Ethereum Virtual Machine.
- Decentralized application developers who use Ethereum smart contracts can leverage Ethereum as an example. This maturity also extends to the user experience of Ethereum applications for new users. The wallets such as MetaMask and Rainbow offer easy-to-use interfaces.
What’s the difference between Ethereum and Ether?
Ether may be used for trading, investment, or as currency in financial transactions. It is the cryptocurrency asset that runs the Ethereum network.
Ethereum is a decentralized network that stores and exchanges Ether. The network also has many functions that are not within the ETH. It’s often used for simple money transfers but can also involve complex transactions that include everything from transferring assets to taking out debts to obtaining a digital piece.
The Transaction is processed on Ethereum. Ethereum is an open-source technology platform for the storage of data and for running decentralized applications.
Ethereum vs. Bitcoin: What’s the difference?
Some common differences between Ethereum and Bitcoin are as follows;
- Bitcoin is considered the mainstream cryptocurrency. Though it comes with its set of cons. Scalability is a big issue when it comes to Bitcoin. Bitcoin uses the proof-of-work protocol which gives it a hard time scaling. This makes it serve as a store of value as many perceive it. Ethereum is expected to upgrade to a proof-of-stake protocol in August 2022.
- Bitcoin also has a market capitalization of 20 million coins. Ethereum’s supply has no limit as it is used as a way of interacting with the network and not only as a way of transferring value.
- Bitcoin is mainly used as a medium of exchange and a store of value, a credible alternative to the traditional form of currency (fiat currency). As for Ethereum, it is mainly a platform to run programmatic contracts and applications via its token Ether. It is therefore considered the world’s programmable blockchain
- Bitcoin has a transaction throughput (that is the number of transactions per second) of 7 transactions per second as Ethereum’s transaction throughput ranges at 30 transactions per second.
Ethereum mining
Ethereum mining is the process of creating blocks of Ethereum transactions and adding them to the Ethereum network. This blockchain has been using proof-of-work to create its network. However, it will soon be using proof-of-stake when it upgrades to Ethereum 2.0. We will discuss Ethereum 2.0 later in this guide.
Proof-of-stake consensus protocol improves the scalability of a blockchain network. The protocol will also help to have a mining process that is environmentally friendly with zero carbon emissions. Through the upgrade, Ethereum will be able to cut its carbon emissions by 99%.
Ethereum mining runs computer software and processes time as well as processing power for processing and creating the blocks. Network users should make sure everyone can agree to the process of executing transactions on decentralized platforms including Ethereum.
The miner helps by creating a block by solving computationally difficult riddles preventing an attacker’s access.
How does Ethereum work?
Ethereum users participate on the blockchain as nodes and just like Bitcoin, Ethereum nodes ensure that the network is decentralized. The nodes are connected to the Ethereum network using several computers that are distributed across the globe. The system is therefore protected against attacks. In any case, if a computer was attacked and went down the remaining thousands of computers that remain, hold the network.
Being decentralized, the Ethereum blockchain runs the Ethereum virtual machine (EVM). The nodes hold a copy of the computer and for any update on the copy, each node must first verify.
All transactions are stored on the blockchain after validation by the miners. Once stored, the blocks are added to act as a history of transactions.
Ethereum uses proof-of-work consensus to verify the transactions. Verification happens when miners prove that the block is unique by solving complex mathematical puzzles and finding a 64-digit code that is usually unique to each blockchain.
Once they find the code they broadcast the block to the whole blockchain for the public’s view. Just like Bitcoin, a confirmed and stored block cannot be changed in any way whatsoever.
The miners subject their computer’s power to the validation process. The computer’s power is what is referred to as proof of the validation work. Once a miner manages to solve the mathematical puzzles he/she is rewarded with ETH for their efforts.
So where does more ETH come from?
Once a user has initiated a transaction they pay gas fees, which is a transaction fee. The miners who validate the transaction will receive the gas fees.
ETH utility tokens, therefore, enter into circulation as a result of the rewards the miners receive. Once the network upgrades to proof of stake, staking will also be a way of bringing more tokens into circulation.
What is Ethereum 2.0 (Eth2)?
Well, as I mentioned earlier, Ethereum will be upgrading to Ethereum 2.0. The goal of the upgrade is to improve the scalability of the Ethereum platform. The traditional Ethereum network will merge with the Beacon chain to form the Ethereum 2.0. No changes will be done on the Beacon chain, only that it will create room for key modifications for the Ethereum blockchain such as sharding.
Sharding is simply the process of distributing the Ethereum transactions over several smaller blockchains. The Ethereum validators will then be running each small Ethereum network. They will be storing information on that particular shard instead of information on the whole Ethereum network. Sharding will help the Ethereum network to be less congested and validators will have more accessibility.
Ethereum 2.0 eliminates the energy-intensive mining process. Miners will be replaced by validators when the proof-of-stake consensus is finally introduced.
To become a validator in the Ethereum blockchain, Ethereum 2.0 requires users to stake not less than 32 ETH as soon as it is launched. When a validator leaves their computers connected to the Ethereum network, they will be rewarded with ETH for their efforts.
Ethereum 2.0 will make use of the proof-of-stake consensus protocol which is faster and will improve the accessibility of the blockchain network. POS does not require validators to own extensive computer hardware that consumes a lot of power when mining.
Accessibility to the Ethereum blockchain will make it grow. As more validators crop in, more blocks will be validated and the more decentralized the Ethereum network will be. This will eventually increase the security of the network.
Ethereum 2.0 is set to launch in August, to upgrade the Ethereum Mainnet to improve scalable performance.
How can I buy Ether?
However, the platforms that offer cryptocurrency trading, buy, and selling services. These are the cryptocurrency exchange platforms. These platforms range from simple dashboards with beginner-friendly user- interfaces to complicated dashboards for expert traders.
Examples of cryptocurrency exchange platforms include the likes of Coinbase, Kraken, Gemini, and Binance just to name a few.
The platforms come with different features such as pricing and security modifications. It is only right that you do your research before investing in these platforms.
To buy your Ether you will need to follow these steps;
- After doing some research, select a crypto platform that fits your needs. After doing so you will provide personal data and get your identity verified while creating your exchange account.
- Once verified you will have to connect your bank account to the newly-opened exchange account. You will be funding your exchange account through a wired bank account. Some people will use debit or credit cards. Though this comes with a disadvantage as the credit and debit cards charge a certain amount as a fee for transaction execution.
- Once you fund your exchange account you will buy your Ether tokens by exchanging them with the US dollar.
You will most likely purchase the ETH tokens as shares of a single ETH digital currency. After purchasing your tokens they will be displayed in terms of the percentage of a whole Ether coin.
You can leave your ETH investment in your exchange account. This is only recommended if you have little investments. If you have large amounts of investments in your Ethereum account it is only wise to transfer them to a digital wallet.
Digital wallets help to store your private keys which give you access to your digital assets, ETH in this case. The private keys, which comprise a sequence of phrases, act as your password to your Ethereum investment.
You can also purchase Ether from online crypto brokerages such as Robinhood.
Pros and Cons of Ethereum
Pros
There are three main advantages to opting for Ethereum. These are as follows:
- Lower inflation risk: Ethereum constitutes a strategy that helps the blockchain network to resist tampering. this helps to reduce the risk of the value of your crypto plummeting.
- Liquidity: Ethereum can easily be exchanged and this liquidity makes it attractive to most investors.
- Volatility: Ethereum’s volatility in the marketplace could be good. Smart investors can identify patterns and profit from the volatility.
- Lack of censorship. The Ethereum nodes are distributed all over the world. This eliminates censorship from a central authority. This gives users complete control over their data.
Cons
There are also three main cons of Ethereum, which are:
- Scaling Issues: Ethereum serves as a ledger meaning that it can be susceptible to some breakdowns and hacks.
- Complicated programming language: Ethereum’s native language can be difficult to understand and there aren’t many resources to help people learn it.
- Volatility: As much as volatility can be an advantage for some, that makes Ethereum a risk for others. Ether’s (ETH) price has fluctuated a lot in the past and may continue to do so.
Ethereum use cases
Etherium had several real-world use cases and we are going to have at some of its uses.
- Building Decentralized Finance (DeFi). Ethereum is commonly known for the creation of various decentralized applications such as smart contract-powered loans, the minting of stablecoins, and decentralized exchanges. A popular DeFi project that is built on the Ethereum blockchain is MakerDao.
- As a means of payment. Ethereum smart contract functionality facilitates the exchange of anything valuable without any risks. With Ethereum, it is possible to have a record of the transactions in computer code instead of having an agreement written on paper.
- Used in voting systems. It is common to have results of pools altered in a democratic system of government. Ethereum has a decentralized system where nobody is in control of the network. So no alterations can be made. Transparency is also key to providing a fair democratic process.
- Digital identity. Ethereum makes it possible to verify data in a transparent way. It can therefore be used to provide digital identity. Many companies are already leveraging this.
- Used for shipping. With Ethereum, it is easy to track an asset effectively despite the type of supply chain. The shipping industry is making use of this factor.
- Applied in the health sector. If well utilized in the health sector, Ethereum makes it possible to store, access and share records of patients. It is also possible for doctors to monitor and share health progress with a patient on wearable devices.
- Used in banking systems. Ethereum’s decentralized nature makes it favorable for the banking industry. This is because the blockchain is almost immune to hackers. The banking industry and several other financial institutions are utilizing Payment systems based on Ethereum as a way of making payments and paying remittances.
The future of Ethereum
The switch to the proof-of-stakes protocol, which allows ETH holders to verify transactions with other tokens in exchange for ETH, is part of significant improvements to Ethereum.
The upgrade also provides scalable capacity for Ethereum to support growth and addresses congestion that drives up gas costs.
Several prominent companies continue to embrace Ethereum as part of their platform. The chipmaker announced that it would be building and operating an underlying network for Ethereum-based data centers.
