What is Ethereum and How Does It Work?

The term ‘Ether’ may not be familiar to you. However, there is a far bigger chance that the term ‘Ethereum’ is familiar. When you hear this term, you may think Ethereum refers to the cryptocurrency, the second biggest by market capitalization. Although this is often branded as the cryptocurrency by those even in the industry, it is technically incorrect. Ether (ETH) is actually the cryptocurrency, and Ethereum is the network it runs on. 

Ethereum

How Does Ethereum Work?

Ethereum is an open software platform created back in 2015. It is built on blockchain technology, which enables developers to build and deploy decentralized applications and smart contracts. 

Thanks to this blockchain technology, the information shared on the platform (through a network of computers called nodes) cannot be manipulated or changed. Also, this technology effectively takes out the middleman in transactions made on the network. So, for example, housing contracts can be drawn up without housing agents, or money transfers can be made without banks.

What Is Ethereum Used for? 

Although it can be used for merchant transactions with its currency ETH, the objective of the Ethereum network was to go beyond this. Smart contracts serve the purpose of enabling the facilitation of contracts on the network, providing specific stipulations are met. Decentralized applications, known as Dapps for short, can essentially be anything that a computer program can be written for. Just as with anything on a blockchain, they are of a decentralized nature and are not controlled by a single entity.

The Purpose of Ethereum Smart Contracts 

Smart contracts are self-executing contracts with the terms for the agreement written into the code on the blockchain. Functions for these smart contracts can include insurance, supply chains, real estate, and gaming. Tokens are formed through smart contracts. These tokens should not be confused with ETH itself. 

Handling transactions and keeping track of the balances of the tokens also come under the responsibility of smart contracts. To receive tokens, ETH must be sent to the smart contract, which will send back tokens in return. ERC-20 is the standard of rules for creating and issuing tokens on the Ethereum blockchain, that all tokens must follow. 

These tokens can take the form of utility tokens and security tokens. Utility tokens are explicitly designed for use on Dapps or to promote a product. A security token, on the other hand, is an investment. These can include shares or even company funds. Security tokens are subject to strict regulatory frameworks, but this isn’t the case for utility tokens. 

Understanding the Application of Dapps 

Dapps are written with a special code that was created especially for Ethereum called solidity. Some of the top Dapps can range from gambling, fundraising (ICOs), DeFi, gaming, social networking, and exchanges. They are not owned by a single entity and cut out the middleman.

On many Dapps on the Ethereum blockchain, users can gain incentives such as tokens.

Here are some of the most well-known Dapps in existence:

  • CryptoKitties: CryptoKitties is one of the first blockchain-based games that was launched in 2017, where users collect and breed digital imitations of cats using smart contracts. They can be sold on the marketplace on the game. Most cats are sold for under the $100 price, but the most expensive cat sold for the astounding price of more than $300,000. 
  • Uniswap: Uniswap allows users to swap ERC-20 tokens, through the use of smart contracts. Users can do this by connecting their Metamask wallets. 
  • MakerDAO: MakerDAO allows users to borrow the stablecoin DAI, with ETH used as collateral. Interest on the loan is paid by the borrower, but if the value of ETH falls too much, it will be sold to pay for the loan. 

History of the Ethereum Network

Bitcoin’s primary purpose was always intended to be that of digital currency, but over time, people started to realize the blockchain technology it underbodies could also be used for other functions. 

Computer programmer Vitalik Buterin was one of these people. Being an early investor in Bitcoin itself, he envisaged more possibilities for its blockchain technology. He initially tried to build Dapps on the Bitcoin blockchain but realized its capabilities at the time were insufficient to do that. 

He then started to work on his own blockchain and in 2013, published the Ethereum white paper. The Ethereum network in its first incarnation, known as Frontier, was launched in July 2015. 

In 2016, there was a major security incident when $50million worth of ETH was stolen. This resulted in the blockchain being split into two. Its original version was carried on as Ethereum classic, while a new chain was made known as Ethereum. On this chain, the theft of the funds was reversed. 

Since then, the network has gone on from strength to strength. There are now over 200,000 tokens and 3,000 Dapps on the Ethereum network. In recent times, the DeFi boom has been at the center of the network’s expansion. Despite the ongoing success story of the network, there have long been calls to expand its capabilities. That’s where Ethereum 2.0 comes into the equation. 

Ethereum 2.0 Prospects

The creation of Ethereum 2.0, a major update for the Ethereum network, came out of calls to improve upon its scalability. These scalability issues have been fundamentally down to its Proof of Work (PoW) consensus mechanism. Although very secure, the mining process involved in PoW takes up vast amounts of electricity, meaning only around 15 transactions per second can be processed. With the increasing amounts of Dapps using the network, this has long been considered far too slow. 

That is why for Ethereum 2.0 (also known as Serenity), there is a move from PoW to Proof of Stake (PoS). It is hoped that this move from mining to staking will not only increase its transaction capacity security significantly but also will make it more secure as it is no longer reliant on computer power. Blockchain technology company ConsenSys puts it like this: 

“Each shard chain is like adding another lane to upgrade Ethereum from a single lane road to a multiple lane highway. More lanes and parallel processing lead to much higher throughput.”

The release date of Ethereum 2.0 has long been mooted, but it is expected to be before the end of 2020. 

What Is Ether?

ETH is a cryptocurrency which acts as the ‘fuel’ of the Ethereum network. It is spent to use apps on the network, and they act as an incentive for miners to process transactions. ETH can also be used to pay for everyday goods and traded on exchanges, such as Bybit.

The Similarities and Differences Between Bitcoin and Ether

Bitcoin (BTC) and ETH share some similarities, as well as some fundamental differences. Let’s first look at how they are similar. 

Similarities:

  1. Both are digital currencies that can be used as methods of payment, traded on exchanges, and stored in hot or cold wallets. 
  2. As both are digital currencies, they can also be both considered as stores of value.
  3. Both are decentralized in nature and utilize blockchain technology.
  4. Both are not issued by a single entity. 

Differences:

  1. Although ETH can be used as a digital currency, this is not its primary purpose. Its primary purpose is to facilitate the operations of smart contracts and Dapps on the Ethereum network. 
  2. Despite the move towards Ethereum 2.0 occurring as a result of, amongst other reasons, not having a high enough transaction capacity on the network, block transactions for ETH are still verified significantly faster (15 seconds rather than 10 minutes) than they are for BTC. 
  3. As smart contracts take place on the Ethereum network, transactions may contain executable code, but any data stored on network transactions for Bitcoin will generally just be notes. 
  4. Although ETH has been created using the same consensus mechanism as BTC (PoW), this is all set to change with Ethereum 2.0, where it will change to PoS. This will mean instead of miners competing against each other in terms of computing power to validate transactions (and receive ETH as a reward for doing so), they will instead stake up their crypto funds as collateral to verify transactions. 

Is Ether a Good Investment?

As with any investment, the words ‘do your own research’ is sound advice. However, what can’t be denied is the very handsome returns you would have made if you’d invested in ETH at the beginning of its life. A $1,000 investment in January 2016 would have made you over 100 fold returns in October 2020. 

Despite being priced way under its highs it reached under the infamous crypto bull run of late 2017, its price has recovered handsomely since the market crash which affected many cryptocurrencies as the COVID pandemic struck in March 2020. The launch of Ethereum 2.0 also puts the investment prospects of ETH in good stead. Although predictions vary, the consensus seems to be bullish for the years ahead. Crypto Research Report for example has predicted the price of ETH to be around the $3,500 mark by 2025. 

Where to Buy Ether? 

The good news is that you don’t have to look very far to buy ETH. You can do so right here on Bybit! In just a few clicks, and for an ultra-low transaction fee, you can buy ETH and have it in your wallet in a matter of minutes. What’s more, you can use a variety of payment methods, including Visa, Mastercard, and bank transfer (depending on your location). 

BUY ETH NOW

The Bottom Line

The Ethereum network so far has been a fantastic success story, and with the dawn of Ethereum 2.0, this looks set to continue. Although it shares some similarities with Bitcoin, it is ultimately like comparing apples to oranges, as they have fundamentally different goals. As with much in the world of crypto, what lies around the corner may be unpredictable, but that’s what makes the ride such a thrill. 

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