Each of us has already heard of Bitcoin and can say at least something about it. However, this time we will not be talking about Bitcoin, but about another cryptocurrency. In this article, you will learn about a cryptocurrency that could be described as the world’s programmable blockchain. It powers applications that everyone can use and no one can remove. It is based on Bitcoin’s innovation, but with some major differences. That’s right, we are talking about the Ethereum cryptocurrency.
Both Bitcoin and Ethereum are digital means of payment where transactions are carried out without payment intermediaries or banks. However, Ethereum can also be used as various other digital assets, meaning that Ethereum can serve you for more than just payments. It is a marketplace for financial services, games, and applications.
Ethereum is therefore based on the concept of blockchain and cryptocurrencies, and if you are not familiar with these, it is worth first getting acquainted with the basics of Bitcoin and blockchain technology. The latter information can be read in the article What is Bitcoin? Everything you need to know about this cryptocurrency. If you are already familiar with this content, we invite you to read this article, where we offer you everything you need to know to start earning with the Ethereum cryptocurrency.
What is Ethereum
“It is the foundation of our digital future. Ethereum is open to everyone. All you need to participate is a wallet.“
Bitcoin was designed to support a unique “peer-to-peer” technology. Bitcoin is essentially a digital means of payment or store of value and is fundamentally intended for transactions. The way Ethereum works is different. Ethereum can still be used for the same purposes as Bitcoin, but it also functions as a general-purpose platform for various applications. To use an analogy, the earliest computers functioned as calculators. They could handle nothing more than mathematics. But when general-purpose computers were introduced, they could do much more than just add or subtract numbers. The same functional leap applies to Bitcoin and Ethereum.
Ethereum is therefore a platform powered by blockchain technology, best known for its native cryptocurrency called Ether, ETH, or simply Ethereum. The distributed nature of blockchain technology is what makes the Ethereum platform secure, and it is precisely this security that allows ETH to gain value. Smart contracts, which originated on the Ethereum platform, represent a core component of the platform’s operation. Many decentralized finance (DeFi) and other applications use smart contracts in conjunction with blockchain technology. In short, a smart contract is code written in the programming language on which Ethereum’s decentralized applications are based.
“As a cryptocurrency, Ethereum has been in second place by market value since January 2022, behind Bitcoin.”
Ethereum is freely open access to digital money and data-friendly services for everyone – regardless of your background or location. It is a technology built by the Ethereum cryptocurrency community for thousands of applications that you can use today.
Back to the beginnings
Vitalik Buterin proposed the Ethereum white paper in 2013, at just 19 years old, and is the founder of the Ethereum network. Vitalik was passionate about the decentralized technology powering Bitcoin and cryptocurrencies, and due to his notorious thirst for knowledge, he began researching Bitcoin and writing articles before becoming co-founder and lead writer of Bitcoin Magazine in 2011.
Vitalik envisioned a decentralized platform language that Vitalik wanted to learn as much as possible, so he traveled the world to meet Bitcoin developers and enthusiasts. During a trip to Israel in 2013, Vitalik came across the projects “CovertCoins” and “MasterCoin,” whose protocols inspired the programmer. At that moment, he realized it would be possible to increase the utility and function of a currency that enables more than just transactions.
Vitalik envisioned a decentralized platform language that could solve any programmed mathematical equation (given the time and memory to do so). However, after presenting his idea, he was rejected by his colleagues and the Bitcoin team, so he set about creating it on his own.
"Vitalik draws his motivation from the belief that powerful people hold far too much power in their hands."
The Ethereum white paper was published shortly after Vitalik’s return from Israel, attracting many investors and a high-quality team behind Buterin. The Ethereum network then launched in July 2015.
What ETH cryptocurrency can do
Ethereum enables far more things than Bitcoin alone.
In 2014, Gavin Wood proposed the programming language Solidity, which was later developed by the Solidity team of the Ethereum project under the leadership of Christian Reitwiessner.
The Ethereum network is a place for developers to build decentralized applications on the blockchain. The network is designed so that applications interact with each other and build and combine new projects. Ethereum introduced smart contracts, which form the “backbone” of decentralized finance.
Smart contracts are computer programs that automatically execute actions that are precisely defined in the program code itself. They were designed to reduce the need for trusted intermediaries between parties, thereby reducing transaction costs while simultaneously increasing transaction reliability. Every smart contract can be thought of as a project that operates according to the rules of the Ethereum network. Each project has a smart contract written in the Solidity programming language, which precisely defines what happens or is executed at any given moment. Once a smart contract is added to the Ethereum network, it is in most cases impossible to revoke or modify in any way. It is recorded in one of the blocks that are formed during verifications using the same system as verifications on the Bitcoin network. It is therefore also accessible for viewing by anyone, which is the essence of blockchain — transparency and the elimination of a third authority, as exists in the traditional banking system. There are countless different use cases for smart contracts, one of which is, for example, a “multisignature wallet,” as well as the execution of a transaction upon a specific event precisely defined in the code, including bets, house swaps, and supply chain receipt confirmation.
The internet has revolutionized many different sectors — Amazon transformed retail, Uber transportation, Airbnb hotels; decentralized finance (DeFi) is reshaping the outdated financial system by opening up fairer opportunities for everyone and giving people complete control over their assets.
In addition to smart contracts and application development, the Ethereum network is currently the largest supporting NFTs – non-fungible tokens, which can be used for gambling, licenses, certificates, games, etc.
What is the difference between Ethereum and Bitcoin cryptocurrency
We can observe that Ethereum is often compared to Bitcoin. While both cryptocurrencies have much in common, potential investors should pay attention to some important differences.
The Ethereum platform was founded with broad ambitions to harness blockchain technology for numerous applications, while Bitcoin was strictly designed as a cryptocurrency.
Ethereum is described as a “world software blockchain,” positioning itself as an electronic software network (ERC-20) with numerous applications. In contrast, the Bitcoin blockchain was created solely to support the Bitcoin cryptocurrency.
The maximum number of Bitcoins that can enter circulation is 21 million. The amount of ETH coins that can be created is unlimited, although the time required to process a block limits how much ETH can be mined each year. At the end of 2021, more than 118 million Ethereum coins were in circulation.
Following the new upgrade (EIP-1559) to the Ethereum network, which was implemented in August 2021, the mechanism for creating new coins changed. Depending on network congestion (the number of transactions and interactions with smart contracts) during a given period, coins can also be eliminated, resulting in what is known as the “burning” mechanism. The greater the network load, the more coins will be burned. For each transaction, a fee must be paid to miners – for verification – as well as a “burning” fee. It is therefore possible that during a certain period, more ETH coins are burned than are newly mined. Some say that in the future, ETH could even become deflationary, as on average more coins may leave circulation than are created. The total fee that must be paid for a transaction (sending, interacting with contracts) is also called a “gas fee” and represents the value of the fee at that moment. The greater the network load, the higher the “gas fee,” and consequently the more expensive the transaction, so it is wise to carry out transactions on the ETH network when the load is lower, if we have that option.
Ethereum and Bitcoin are also similar in that both blockchain networks consume enormous amounts of energy. Each of these blockchains operates using a “proof of work” protocol, which is a methodology that requires significant computing power to confirm transactions. Ethereum is gradually transitioning to a different operational protocol known as “proof of stake,” which consumes far less energy.
Where you can buy Ethereum
ETH can be purchased on exchanges or directly from wallets.
Given the fact that Ethereum is the second largest cryptocurrency after Bitcoin, it is possible to buy Ethereum or use ETH trading pairs on almost all major cryptocurrency exchanges. Investors can therefore use one of the many cryptocurrency exchange platforms to buy and sell Ethereum. Some of the largest markets include:
- Binance,
- Coinbase,
- Bitstamp,
- Kraken.
What is an ETH wallet?
“Wallets provide access to your Ethereum funds and applications. Only you should have access to your wallet.“
Ethereum wallets are applications that allow you to interact with your Ethereum account. Think of it like an internet banking app, but without the bank. Your wallet allows you to read your balance, carry out transactions, and connect with applications.
Your wallet is simply a tool for managing your Ethereum account. This means you can switch wallet providers at any time. Many wallets also allow you to manage multiple Ethereum accounts from a single application. This is because wallets do not have custody of your funds — you do. Wallets are simply a tool for managing what is truly yours.
It is important to understand the differences between some key terms:
- An Ethereum account is an entity that can send transactions and has a balance.
- An Ethereum account has an Ethereum address, just as an inbox in an email client has an address, for example. This can be used to send funds to an account.
- A wallet is a tool that allows you to manage your Ethereum account. It allows you to view your account balance, send transactions, interact with contracts, and more. Most different wallets allow you to create an Ethereum account. So you don’t need one before downloading a wallet.
How to secure your Ethereum
As interest in cryptocurrencies grows, learning best practices when using cryptocurrencies is essential. The crypto world can be fun and exciting, but it also carries serious risks. By investing in advance education and effort, you can reduce the risks that may arise later.
So what can you do to secure your Ethereum?
- Use strong passwords:
Create passwords as long as the password generator or form you are filling in allows.
Use a mix of uppercase and lowercase letters, numbers, and symbols.
Do not use personal information in your password, such as your first or last name.
Avoid common dictionary words.
- Use unique passwords for everything.
- Use a password manager:
Using a password manager takes care of creating strong, unique passwords and remembering them. We recommend using one — most are also free! Among others, you can try Bitwarden, KeePass, LastPass, 1Password.
- Use two-factor authentication and security keys.
- Remove browser extensions.
- Improve your knowledge and understanding of cryptocurrencies.
All of the tips listed above can also be enhanced by using a wallet. Ethereum is not under the control of any government or company – it is decentralized. This means it is open to everyone. But it also means you need to take the security of your funds seriously. With ETH, you are not trusting a bank to look after your money, but rather trusting yourself.
Therefore, if you plan to purchase larger amounts of ETH, it is advisable to store it in a wallet that you control, rather than through exchanges. This is because an exchange can be a fairly likely target for hackers. If a hacker gains access, you could lose your funds. A wallet is therefore a more recommended alternative, as it is under your control alone.
Ethereum 2.0
On August 4, 2020, the Ethereum 2.0 testnet was released to developers, who can navigate the update to report bugs and fix any shortcomings. The test network is called “Medalla”, named after a metro station in Buenos Aires.
The key difference between Ethereum and Ethereum 2.0 is the consensus algorithm, which switches from proof of work to proof of stake.
Simply put, “proof of work” is the consensus algorithm used by Bitcoin and many other cryptocurrencies, which requires mining nodes to use enormous amounts of computing power to solve mathematical equations in a process known as “hashing”. Bitcoin, for example, uses the SHA-256 algorithm. “Proof of stake”, on the other hand, requires far less energy. It also requires “validators” (currently miners) to lock up a stake of their tokens in the network and bet on the next block to be added to the blockchain. Instead of receiving coins for solving complex equations, they receive an amount of coins proportional to their stake. The more ETH they contribute to the PoS protocol, the greater the amount of ETH they earn. To put it simply, the amount of ETH earned as a reward in a PoS protocol ranges within a few percent annually relative to your stake.
The transition from PoW (proof of work) to PoS (proof of stake) creates far more opportunities for growth, with Ethereum having announced sharding as part of the update to help address the currently high gas fees in the network due to heavy congestion.
By splitting large chains (databases) into smaller ones, transactions can be processed in a faster and more efficient manner, preparing for global mass adoption and further partnerships with major companies. Current partnerships include Amazon, Microsoft, JP Morgan, and Coca-Cola.
Why We Need Ethereum
For Ethereum, financial applications are just the beginning. Because the Ethereum blockchain is general-purpose, almost anything can be digitized and distributed on Ethereum. Artists and content creators can monetize their work without intermediaries. Property owners have access to liquidity. Social media users can own their data and sell it at their own discretion. Ethereum is the driving force behind the next generation of internet business.
We are not financial advisors. All information regarding cryptocurrencies is accepted at your own risk. Do your own research as well.
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