Ethereum has been on a tear this year. It’s outperformed bitcoin this year and has hit an all-time high. Ethereum has even won over people like Mark Cuban.
“I have my fair share of bitcoin, but I’m more of an Ethereum maxi,” Cuban said on a recent episode of the Next with Novo podcast. Cryptocurrency “maximalists” are usually regarded negatively in the industry. However, Cuban uses the term to indicate that he prefers Ethereum over other blockchains.
“We’re seeing a rush where there’s a lot of different blockchains that are competing,” Cuban said. “When they start to put smart contracts to work, that’s when we’ll start to see things really level out. After that, it’s going to come down to applications and integrations.”
But, for the uninitiated, what is Ethereum, and how does it work? Well, let’s answer these questions before you jump on the Ethereum-train.
What is Ethereum, and How Does it Work?
First introduced in a 2013 white paper by Vitalik Buterin, Ethereum launched in 2015. It’s a decentralized computing network based on an open-source code, notes Louis DeNicola for Business Insider. A key feature of Ethereum’s network is that it’s built on blockchain technology, just like bitcoin. That means it’s essentially a digital public ledger that enables financial agreements to be verified and stored entirely by computer software — without a third party involved.
“You can think of the applications that can be built on Ethereum much like the apps that can be developed on Apple’s App Store or Google’s Android system,” clarifies Ben Carlson for Fortune. “The biggest difference is there are no giant tech behemoths behind the scenes controlling Ethereum’s network.”
Whenever new data blocks are added, they’re cryptographically “chained” to their parent blocks. In turn, this creates a record of the previous versions that can not be edited.
Today, Ethereum is the second-largest cryptocurrency after bitcoin by market capitalization. Why? Because the Ethereum network can do far more than just handle financial transactions. More specifically, Ethereum extends the capabilities of the Bitcoin blockchain by extending it to host decentralized applications (also known as “dApps”) by creating “smart contracts.”
“Bitcoin was the pioneer of blockchain technology, used to create a peer-to-peer payment system,” explains Jacob Wade, a financial coach, and president of iHeartBudgets. “Ethereum uses similar blockchain technology, but added the ability to create decentralized applications on top of its platform.”
Decentralized finance apps (DeFi) and games have already been launched on Ethereum, including marketplaces for collectibles like digital art and games.
Ethereum vs. Bitcoin.
Again, Ethereum is a secure software platform that’s available to anyone. Bitcoin, on the other hand, is just a currency. However, both rely on blockchain to validate and publicize all transactions of their cryptocurrencies.
There are also two different purposes for Ethereum and Bitcoin. First, to free users from centralized systems with rigid regulations and alarming vulnerabilities, Ethereum built its platform upon blockchain technology.
In contrast, Bitcoin uses blockchain technology to provide a global currency and payment system that connects consumers directly with suppliers. As a result, this lowers transaction costs and removes the need for financial intermediaries like banks.
“To accomplish their goal, Bitcoin’s blockchain completely decentralizes the cryptocurrency by requiring a network of millions of miners to solve complex cryptography puzzles to validate each of its transactions. instead of asking a central power like a bank to verify them,” writes Clifford Chi for HubSpot. “But this thorough decentralization and validation process also makes Bitcoin much slower at confirming transactions than Ethereum.”
Furthermore, the average block mining time for Ethereum is 12 seconds, while bitcoin’s average block mining time is 10 minutes. Why? Ethereum has fewer computers or nodes validating activity than Bitcoin, which has millions of nodes validating transactions.
Is Ethereum the Same as Ether?
“To be fair, the entire concept of Ethereum vs. Ether can get very confusing very fast,” clarifies the district0x Educational Portal.
Again, similar to the Bitcoin blockchain, Ethereum is validated by a network of computers running software known as mining. This process involves a network of computers verifying transactions.
“Bitcoin miners are compensated for their resources by being paid in Bitcoin,” the portal adds. Ethereum miners, on the other hand, are rewarded in Ether. This fee is commonly known as “gas.”
In more precise terms, Ethereum is an open software platform based on blockchain technology. This enables developers to create and execute decentralized applications using smart contracts. Ethereum, however, is powered by the cryptocurrency Ether. Ether is sold on many exchanges, such as Coinbase.
Ether is more of a digital commodity than a digital currency since it functions much like one.
You need Ether to run applications on the Ethereum blockchain, just as you need gasoline to fuel your car. As well as powering smart contracts, Ether is also used to run DApps, generate tokens during ICOs, facilitate transactions on the Ethereum blockchain, and make payments. Thus, Ethereum (or Ether) is also referred to as programmable money.
The Benefits of Ethereum
- There is an extensive, existing network. “The benefits of Ethereum are a tried-and-true network that has been tested through years of operation and billions of value trading hands,” Ken Fromm, director of education and development at the Enterprise Ethereum Alliance, told Forbes. “It has a large and committed global community and the largest ecosystem in blockchain and cryptocurrency.”
- It has a wide range of functions. For example, as well as serving as a digital currency, Ethereum has been used to execute smart contracts and store data for third-party applications. Moreover, artists have sold their work through the blockchain via nonfungible tokens, or NFTs.
- Constant innovation. It is an open-source platform with a large community of developers constantly working on improving the network and developing new applications. “Because of Ethereum’s popularity, it tends to be the preferred blockchain network for new and exciting (and sometimes risky) decentralized applications,” adds Boaz Avital, head of product at Anchorage.
- Eliminates intermediaries. Through Ethereum’s decentralized network, users can eliminate third-party intermediaries. This includes lawyers who write contracts and interpret them, banks that facilitate financial transactions, and companies that offer web hosting services.
The Disadvantages of Ethereum
- Increasing transaction costs. With Ethereum’s increasing popularity, transaction costs have increased. The Ethereum network’s transaction fees have reached a record high of $23 per transaction in February 2021. That’s great for miners, but not for users. Because Ethereum does not reward transaction verification, like Bitcoin, the fee must be paid by the parties participating in the transaction.
- Cryptocurrency inflation is possible. The number of possible coins isn’t limited by Ethereum’s annual limit of 18 million ether. However, a lifetime limit applies to releasing Ether. As a result, Ethereum might have more value as an investment than dollars and may not appreciate as much as Bitcoin since there’s a lifetime limit for each coin.
- Developing software requires a steep learning curve. As developers migrate from centralized processing to decentralized networks, Ethereum can be challenging to learn.
- The future is uncertain. It’s promising that Ethereum 2.0 will offer new features and be more efficient as it continues to improve. However, this significant change to the network makes use of current apps and deals uncertain. “Many new validators will be required for Ethereum 2.0 to function,” says Gary DeWaal, chair of Katten’s Financial Markets and Regulation group. “The question is will the migration work? There are a lot of new elements that have to fall into place!”
Should You Invest in Ethereum?
The cryptocurrency market is highly volatile and speculative, states Ryan Haar for NextAdvisor. But, WalletInvestor is projecting a one-year forecast of $6,394.27 and a five-year forecast of $16,503.80 for Ethereum.
With that in mind, before investing, consider your risk tolerance. What’s more, experts recommend that if you do invest in cryptocurrency, you stick with Bitcoin and Ethereum.
It’s advised that you don’t invest more than 5% of your total portfolio. Moreover, you should only invest what you’re okay with losing. And, don’t sacrifice other goals like paying off debt or saving for retirement.
Despite experts advising investors to stay with well-known coins such as Ethereum, this type of investment always carries some risk. After all, the long-term performance of cryptocurrency is unknown as it is a new asset class. However, you can avoid this risk by investing through a traditional retirement account, such as a 401(k) or IRA, or by sticking with a classic index fund.
How Can You Buy Ethereum?
If you believe that Ethereum can help diversify your investment portfolio, here’s how you can purchase it;
- An exchange. You can buy cryptocurrency through sites like Coinbase or Kraken using U.S. dollars.
- An ETH wallet. Here, you can store digital currency. You can also send or receive ETH using the public address of your wallet.
Listed below are a few options for buying ETH and how each method involves the exchange and wallet.
- Online stock brokers. One of the easiest ways to obtain cryptocurrency is to buy it from an online brokerage, but it can have serious disadvantages. For instance, you may not be able to move coins in and out of your account.
- Crypto brokerages with hosted wallets. A cryptocurrency broker with a hosted wallet lets you purchase ETH and other coins in U.S. dollars and store them safely in that brokerage’s wallet. It simplifies the buying process and makes it easier for investors new to cryptocurrency to send and receive coins.
- Centralized exchanges and non-custodial wallets. You have greater control over your wallet and funds by using this more advanced method of buying, holding, and trading crypto. Setting up a personal Ethereum wallet for storage and purchasing Ethereum on a centralized exchange, Binance.US or Coinbase Pro, is one way to achieve this.
- Decentralized exchanges. A decentralized exchange, or DEX, allows you to trade your Ethereum in your own wallet. Since there is no third party when using a DEX, so it is the purest way of trading cryptocurrencies. Centralized exchanges require you to make deposits into a trading account before trading coins or dollars. DEXs, however, allow you to trade directly with a buyer or seller and retain control over your funds. DEXs can be confusing and aren’t recommended for newbies.
Image Credit: Ethereum; Thank you!