Ethereum is frequently referred to as the second most popular cryptocurrency after Bitcoin. However, unlike Bitcoin and most other virtual currencies, Ethereum is intended to be much more than a medium of exchange or a store of value. Ethereum, on the other hand, describes itself as a blockchain-based decentralized computing network. Let’s take a closer look at what that means.
What is Ethereum?
Ethereum is a blockchain-based software platform that can be used to send and receive value globally using its native cryptocurrency, ether, without the intervention of a third party. However, it is capable of much more.
Ethereum, which was first proposed in 2013 by Russian-Canadian computer programmer Vitalik Buterin, was intended to expand the utility of cryptocurrencies by allowing developers to create their own special applications. These Ethereum-based applications, known as “decentralized applications,” or dapps, are self-executing due to the use of smart contracts, as opposed to traditional apps.
Smart contracts are code-based programs that are stored on the Ethereum blockchain and perform specific functions automatically when certain conditions are met. This can range from sending a transaction when a specific event occurs to lending funds once collateral is deposited into a designated wallet. All dapps built on Ethereum, as well as all dapps built on other blockchain platforms, are built on smart contracts.
What does Ethereum do?
Ethereum can power a variety of applications that perform a variety of functions:
- Currency – If the digital currency is accepted as payment, you can use a cryptocurrency wallet to send and receive ether as well as pay for goods and services. Some platforms, such as Coinbase, even allow you to store your coins in a digital wallet, making them less vulnerable to hackers in theory.
- Smart contracts – Smart contracts can be developed and deployed on Ethereum. A smart contract is a simple computer program that allows two parties to exchange any valuable item. It might be cash, stocks, real estate, or any other digital item that people desire to trade.
- Digital apps, or dapps – Users can use Ethereum to play games, invest, send money, maintain an investment portfolio, and follow social media, among other things.
- non-fungible tokens – These tokens, which are based on Ethereum, can be used by artists and others to sell art or other things directly to purchasers via smart contracts.
- Decentralized finance – Some persons may be able to bypass centralized (government) control over the transfer of money and other assets by using Ethereum.
How does Ethereum works?
Ethereum, like Bitcoin, has its own blockchain, which is maintained by a global network of over 2.4 million computers known as “nodes.” Anyone with the necessary hardware, skills, and time commitment can host an Ethereum node and participate in network validation.
On the Ethereum network, there are three different types of nodes.
- Full nodes – These copy and verify all Ethereum blockchain transactions, as well as execute smart contract instructions known as opcodes. Miners should not be confused with full nodes.
- Light nodes – Light nodes keep only a partial record of the blockchain and rely on full nodes for the remainder of the information. These nodes, as the name implies, can run on smaller devices like mobile phones and do not need to be on all the time.
- Full archives nodes – These are used by tools like block explorers to preserve the whole history of the Ethereum blockchain, including past “states” – or the information on the blockchain.
To understand the difference between miners and full nodes, imagine miners as archaeologists out in the field unearthing historical artifacts and full nodes as administrators at a national museum who keep track of all the archaeologists’ findings. The primary distinction between a full node and a full archive node is that a full archive node performs all of the functions of a full node while also compiling an archive of all previous states.
Miners are responsible for discovering new blocks on the Ethereum network. These are similar to digital boxes that hold transaction data and other information. Miners compete with specialized computing equipment for the chance to be the next person to add a block to the chain and receive transaction fees (from the transactions they add to the block) and “block rewards” for their efforts.
When a new block is discovered, new ether tokens are created and distributed to the successful miner as a reward for their efforts. Once a block is added, the rest of the mining network checks it to ensure that the balances are correct and that the transaction isn’t a “double-spend,” which means that no one is attempting to spend money they don’t have. The final data is then recorded by full nodes.
Unlike Bitcoin, however, Ethereum full nodes must also keep track of the current state (information) of all of these apps, including each user’s balance, all of the smart contract code, where it’s kept, and any changes made. As a result, compared to a bitcoin node, running an Ethereum node takes substantially more storage and is significantly more expensive.
Ether and Ethereum: What’s the Difference?
Ether is a digital currency that can be used to conduct financial transactions, make investments, and serve as a store of value. The Ethereum blockchain network is where Ether is stored and exchanged. However, as previously stated, in addition to ETH, this network offers a variety of other services.
Over the Ethereum network, data can be stored and decentralized apps can be run. People can host software on the Ethereum blockchain rather than on a server owned and controlled by Google or Amazon, where data is controlled by only one company. Consumers have complete control over their data and full access to the app because there is no single authority regulating anything.
Self-executing contracts, also known as smart contracts, are one of the most intriguing use cases for Ether and Ethereum. As in any other contract, two parties agree to deliver products or services in the future. Unlike traditional contracts, no lawyers are required.
Ethereum Benefits
- Existing network with large size. “The benefits of Ethereum include the fact that it is a tried-and-true network that has been put to the test over years of operation and billions of dollars in value trading hands,” Fromm adds. “It has the most comprehensive ecosystem in blockchain and cryptocurrency, as well as a large and dedicated global community.”
- A wide range of functions is available. In addition to being used as a digital currency, Ethereum can be used to perform various types of financial transactions, execute smart contracts, and store data for third-party applications.
- Constantly evolving. The Ethereum developer community is constantly looking for new ways to improve the network and create new applications. “Because of its popularity, Ethereum tends to be the preferred blockchain network for innovative and exciting (and sometimes dangerous) decentralized applications,” Avital observes.
- Avoids the use of middlemen. The decentralized Ethereum network promises to free users from third-party intermediates like attorneys who draught and interpret contracts, banks who operate as financial intermediaries, and third-party site hosting providers.
Ethereum Disadvantages
- Costs of transactions are increasing. Because of Ethereum’s growing popularity, transaction fees have risen. Ethereum transaction costs, also known as “gas,” reached a new high of $40 per transaction in January 2022, which is great if you’re trying to make money as a miner but not so great if you’re trying to use the network. This is because, unlike Bitcoin, where the network rewards transaction verifiers, Ethereum requires individuals involved in the transaction to pay the fee.
- Inflationary potential for cryptocurrency. While Ethereum has an annual limit of 18 million Ether, there is no limit on the number of currencies that can be created over the course of a lifetime. As a result, as an investment, Ethereum may behave more like dollars and may not appreciate as much as Bitcoin, which has a strict lifespan limit on the number of units.
- Developers have a steep learning curve. Ethereum can be difficult to grasp as developers shift away from centralized processing and toward decentralized networks.
Closing thoughts
Speculators can invest directly in cryptocurrencies like Ethereum, but they can also invest in companies that stand to benefit from the shift to digital currency.
Whether you’re trading Ethereum, Bitcoin, or any other cryptocurrency, you must be aware of the dangers, which include the possibility of losing your entire investment. Given the volatility and other hazards associated with cryptocurrencies, investors should proceed with caution. Those who want a taste of the action should not put more money at risk than they can afford to lose.