What is Ethereum and how does it work?
Ethereum or shall we say “Ether” is the second most renowned cryptocurrency next to Bitcoin and is attracting a lot of attention from both avid crypto investors and regular companies which seek further development for their business through the Ethereum network. It is needless to say that this crypto project is indeed a successful one and the more support it gets, the more application it will have in everyday activities.
For those who only look forward to trading Ethereum and gaining profit from it, it may be more than daunting to find out that there is so much more to the Ethereum platform. That’s why it is important to make a difference between the Ethereum network and the cryptocurrency “Ether”. The first enables the programming and deploying of smart contracts and the latter is the incentive all participants in the network receive.
The world of Ethereum is a blessing for everyone favouring decentralized finance and decentralized applications (dapps), which allow people to take charge of their independence from the traditional practices imposed by monopolists. Not only can you take advantage of what other people create and offer through the platform but even you yourself can make smart contracts for personal use.
In the following article the reader will be completely immersed into uncovering the most important questions concerning the topic of ETH like the workings of the Ethereum network, the benefits it provides to society, the value of Ether and how everyone can take part in the crypto world by investing in ETH.
Who invented Ethereum?
Vitalik Buterin and Gavin Wood are the great minds behind the Ethereum blockchain, however Buterin is the one who is mainly in the limelight, since Wood actually left the Ethereum Foundation back in 2016. The idea came up in late 2013 and the actual platform was released in 2014. Both inventors were involved in the crypto world before starting their mutual project – Buterin had created Bitcoin magazine and Wood had been researching and developing the blockchain technology.
It is important to mention that the Ethereum we have now is the updated version from 2016. Ethereum Classic is the original Ethereum blockchain and its native coin (ETC) and they were the foundation upon which the latter version of Ethereum was developed. Nowadays ETC still exists, has similar features with its descendant but unlike ETH it has a limited supply of coins.
What is the purpose of Ethereum?
Although at the turn of the 2010’s Bitcoin had already started to gain attention, it’s blockchain technology had limited functions, which meant that there was a lot of room for improvement, that’s where the co-founders of the Ethereum blockchain chipped in. They wanted to create a platform, which completed tasks beyond the regular transaction execution. The Ethereum community has grown immensely because of the opportunities the platform has created like:
- a special programming language upon which decentralized apps can be established;
- setting up smart contracts;
- creating other cryptocurrencies.
Just like any other decentralized project Ethereum was built on the idea to make financial dealings easier and more private by eliminating any centralized authority, which would have otherwise had control over anyone’s business. In order to do so, there had to be a form of agreement that people would have to come to terms with, that way if both parties consent to the given requirements, then the deal between them would be automatically completed. That’s how the “smart contract” came to life – it enables users to make deals without the need of a third-party. The pieces of code comprising the contrat have structured the requirements which have to be met, in order the transactions to go through.
The main goal of Ethereum is to decentralize the Internet. Although the World Wide Web doesn’t belong to anyone on paper, it has been monopolised by digital giants like Google, which has made it hard for the common people to use non-authorized Internet services.
How does Ethereum work?
The most significant explanation, which defines best the way the Ethereum platform works is that many independent computers (also called nodes) are connected together to run one supercomputer, which runs the Ethereum blockchain and enables the programming and deployment of smart applications.
As of now the network uses the Proof of Work consensus mechanism, which is why many similarities can be found between the way the Bitcoin and Ethereum blockchain function. There are blocks, which have to be mined in order for Ethereum transactions to be validated. That’s why it is up to the miners to guess the hash function of each block, which when unlocked will enable them to verify the transactional activity on the distributed ledger. All participants on the network have access to the recorded information on the blockchain.
Every time a user initiates a transaction they have to pay the so-called “gas fee” to the miner as a way to incentivize their work and ensure the further functioning of the blockchain network.
The Ethereum network has announced that in the upcoming year of 2023 it would transition from PoW to the Proof of stake consensus mechanism, which would put an end to mining Ethereum. Every holder of the cryptocurrency, who has a certain amount of it (in that particular case 32 ETH), gets to stake it and become a validator of Ethereum transactions. After you have staked the needed ETHs, you can start earning rewards for your participation. If in the mining process the miners have to compete who will unlock a certain block first, in proof of stake the validator of each block is actually being randomly chosen. You can also join a staking pool where you can join assets with other people and then separate the rewards equally.
Since the mining process requires a lot of computing power and electricity and PoS doesn’t, it is way more eco-friendly and efficient, too. Cutting down the use of electrical power is good for both the planet and the very people who take part in the crypto market, because they don’t have to invest in high-end mining rigs, in order to ensure the success of their work.
What are smart contracts?
Smart contracts are pieces of code, which ensure that if the “if’s” in one deal are met, the “then’s” will result in a successful transaction, therefore a formal agreement of some sort is completed digitally. Just like a traditional contract, the smart contract is created to handle the administrative, performance and payment aspects of one deal.
Everyone who wants to create a decentralized application of this kind can learn the special programming language Solidity, which was developed by one of Ethereum’s co-founders – Gavin Wood. The tricky part about programming such a smart contract is that once it’s brought into action on the platform, no one can control it, even the person who wrote the code in the first place. That means that you cannot edit it, if there’s faulty coding.
Once the pieces of code have been written in accordance with the programmer’s goal, the Ethereum Virtual Machine is what enables the dapp to activate itself on the Ethereum blockchain.
What is the Ethereum Virtual machine (EVM)?
The process of unlocking new blocks also enables the update of the Ethereum Virtual machine, which is responsible for the deployment of decentralized applications onto the platform.
EVM is a vital component of the Ethereum network because it executes the deployment of smart contracts on the platform. That means that if you want to create a smart contract, you have to write it in Solidity (the programming language created by ETH’s inventors) and then compile that code in bytecode, so that the EVM can “process” it and therefore activate it for others to use.
Since Ethereum will phase out of its current consensus mechanism, that means that the EVM will also be changed with another virtual machine – eWASM, which will be more compatible with the upgrades of Ethereum 2.0.
How to buy Ethereum?
As soon as you get set on purchasing ETH, you need to make sure that you have a crypto wallet, which will keep your digital currency secure. Depending on the amount of ETH you want to add to your investment portfolio, there are plenty of crypto exchanges like Crypto.com, Bittrex and Binance that would be a good starting point. If you feel comfortable, you can totally use the wallet provided by the exchange or download a free hot wallet in the form of an application to your phone or computer and get started on your crypto journey.
After you have selected the wallet you want to work with and have made sure that it can store Ether, then it’s time to get your Ethereum address. This address comprises of 40 symbols (letters and numbers) and it always starts with “0x”. It will allow the user to connect with the Ethereum blockchain and send their ETH to their wallet.
Finding the proper place to buy ETH is very important, especially if you’re just starting out in this field. It is recommended that beginners should make their first crypto purchases through a platform providing such services, rather than buying directly from another individual.
There are two types of crypto exchanges you can buy ETH from:
- Trading platforms – these exchanges connect people who want to buy crypto with those who wish to sell it. They are perfect for experienced crypto investors because of the more trading options they offer. Binance is probably the most used exchange for buying and trading ETH.
- Brokers – sell crypto coins directly to the user but have higher fees. However, they’re still better for beginners due to the convenient and fast process. One of the most suggested platfroms providing such brokerage services is Cex.io.
Remember that you don’t have to purchase one ETH, just like other popular cryptocurrencies 1 Ether consist of 1000 000 Szabo, which means that you can buy the exact amount you can afford at that moment in time.
How to store Ethereum?
The most important step when dealing with crypto is to make sure you store it in a safe environment after you purchase the coins of choice. You shouldn’t leave your assets in the exchange, especially if you possess greater amounts. That’s why we suggested that you have a crypto wallet before you start eyeing good investment opportunities. Here are the two types of crypto wallets you can choose from:
- Software wallet – suitable for smaller amounts of ETH and crypto in general. Most of them are free and user-friendly. The most appropriate hot wallet for beginners, who want to invest in ETH has to be Exodus.io.
- Hardware wallet – since it stores your assets offline in a specific USB device, this type of wallet should be used for larger amounts of cryptocurrency. The Ledger Nano X is one of the highly rated cold wallets, which can store not only ETH but many other cryptocurrencies, too.
The hot storage wallets are most often free and also easy to manage, however they are connected to the Internet which makes them not so suitable for larger sums of crypto. Cold storage wallets, on the other hand, are completely offline, which makes it way harder for the hackers to break in, unless they have stolen the actual wallet. But these gadgets are definitely more expensive compared to the regular software wallets.
It’s best to consider the given pros and cons of both types of storage options and don’t compromise with the level of security you want to opt for!
What can you do with ETH?
If you’re not an ambitious programmer who wants to create smart contracts for their business, then chances are you just want to invest in crypto to make a passive income from it. And although most people still believe that crypto has no valid application in the real world, we’d have to prove them wrong because there are many ways you can use your ETH, apart from selling it the moment its price reaches a peak.
Invest in a crypto interest account
If you want to earn some passive income on top of the crypto you already have, then you can lock your assets on a platform like Crypto.com and therefore receive rewards. You can get in return up to 6% but it all depends on the amount of ETH you have staked.
This is a good option for people who don’t want to trade and want to simply hold onto their ETH but still make some profit, without having to constantly check the ever fluctuating price rates.
Get a crypto debit card
You can now get a crypto debit card from the BlockFi platform, which is actually issued by Visa. Thanks to this partnership you can spend your crypto in many global marketplaces and also pay without any concerns over high fees. This card has made purchasing consumer goods in physical stores so much more convenient. Plus, by using your BlockFi card you can also get additional crypto rewards.
Some love them, others think of them as a waste of money. It is though undoubtedly obvious that the NFT marketplaces have been booming with a lot of hype over the past couple of years, which have led more and more people to think that these tokens are not just a short-term trend. And if you want to support independent artists, there’s no better way than to actually purchase their digital work after browsing through the endless jungle of diverse pixel art. The Ethereum platform supports NFT creators by enabling them to sell their artwork through their website and also rewards participants with these unique tokens, too.
Purchase services and consumer goods with Ether
Yes, just like Bitcoin Ether is just as popular and recognized as an actual payment option. That means that more and more businesses have started to accept cryptocurrencies as a legal tender for what they offer to their customers. Here’s a list of goods and services you can pay for with ETH:
- Buy gift cards – the eGifter app allows you to purchase gift cards for stores like Target, Lowe’s, Macy’s, Dunkin’ Donuts and even Uber all with your ETH.
- Convenience store chains like Whole Foods and other big U.S retailers like Home Depot and Bed Bath and Beyond now have a partnership with the payment processor Flexa, which also accepts ETH.
- Book a holiday – Travala, Trippki and CheapAir allow their customers to pay for booking services with ETH.
There are many other businesses both corporate and independent which are open to the idea of enabling crypto payments, however these do operate mainly in the developed Western side of the world, where there are more crypto holders.
Why people like Ethereum?
Unlike Bitcoin Ethereum attracts the attention not only of people who want to make easy money but mainly of those seeking Web3 solutions for their day to day financial tasks. The all-purpose blockchain network provides a myriad of features which allow the user to take part in a community which is driven by making the Internet belong to the people using it and not to commercial corporations which are striving to create a monopoly on most online services and therefore disadvantage independent online projects. Here are a few reasons why people favor Ethereum:
- The flexibility of the platform and its many functions – from enabling fast and easy peer-to-peer transactions to creating smart contracts.
- The open-source blockchain is secure and reliable.
- Inclusivity and transparency on the network.
- The given Ether tokens are just a perk not the main goal of the platform’s participants.
Should you buy Ethereum?
Although Ethereum was not created with the same purpose as Bitcoin, it has still managed to track a lot of attention, which has resulted in the increasing value of the Ethereum cryptocurrency – Ether. It is always risky to invest in crypto because of how volatile it is. That’s why you can never be 100% sure that you will profit off of the currency you purchased.
Before you decide whether or not to invest in ETH, it’s always good to look at the statistics showcasing the previous change in value of the cryptocurrency. During the ICO in 2016 one Ethereum cost only $1 and in late 2021 reached an all time high coming at $4, 892 per coin. However, the year of 2022 has not been good for the global economy and as inflation takes over all business sectors, the crypto markets are severely affected, too.
As of the summer of 2022 one ETH costs a somewhere around $1200 which may seem bad compared to the surge in last year, but it is actually great for first time investors. It is always better to buy a certain cryptocurrency when its price is going down and then just wait for it to surge again. ETH has the potential to recover from almost any economic collapse, because it is connected to the Ethereum platform, which serves not only as a money making machine, but rather as a helpful financial and management tool for individuals and even corporations.
Buy while the prices are low, hodl for as long as it takes and then make a great profit after the value increases. That’s how the participants in the ICO were able to earn way more than they had initially invested. And if you aren’t that patient, you can always deposit your assets and get a certain percentage in return. But it is more than obvious that regardless of how much ETH you have in your wallet, there are many ways you can utilize it and the best possible scenario is to be able to use it more instead of the regular fiat money.
*This article is aimed at non-professional readers interested in basic information about cryptocurrencies and is not eligible for academic use!
Zornitsa is the Editor-in-chief at Coinlabz. She is involved in researching the impact of blockchain technology and the way crypto is transforming peoples’ perceptions of finances.