What Is Ethereum? A Definitive Guide For Beginners

You may have heard a lot about Ethereum, but what is it?

Ethereum is a decentralized, open-source blockchain platform. It helps in building decentralized platforms(dApps) and smart contracts.

This article will cover all that and more.

Short History of Ethereum

The founding concepts of Ethereum (cryptography, peer-to-peer networking, decentralization, etc.) are not new. However, it was not until 2008 that these components were combined to build a functional and unique product, i.e., Bitcoin.

Ethereum has been present in a usable format since 2015, making it a fairly recent platform.

In 2011, Vitalik Buterin, a Russian-Canadian boy, heard about Bitcoin. He then became a leading writer for a magazine called Bitcoin Magazine that he co-founded.

In 2013, Buterin talked to various developers globally who were experts in blockchains like computer science, mathematics, economics, engineering, and law. Shortly after that, he published a white paper that proposed Ethereum.

The following year, Buterin received the Thiel Fellowship of $100,000. He dropped out of The University of Waterloo to continue working on Ethereum full-time. Ethereum went live in 2015, and in 2017, it rose to a cap rate of 36 billion dollars.

Buterin intended to use a similar decentralization as Bitcoin to do more than use Ethereum as a currency. He could do this by incorporating a programming language into the ETH blockchain.

The central ETH founding team was made up of Vitalik Buterin, Anthony Di Iorio, Charles Hoskinson, Mihai Alisie, and later Joseph Lubin.

Currently, Buterin also works on Ledger’s Editorial Board, a peer-reviewed scholarly journal that publishes research articles on blockchain technology and cryptocurrencies.

what is ethereum

What is Blockchain?

Blockchain forms the basis of all cryptocurrencies. When Bitcoin first appeared in 2009, it was the first cryptocurrency. Its goal was to create a universal yet decentralized currency.

Bitcoin would not need any financial institutions acting as intermediaries. However, safe and secure transactions would still take place, thanks to blockchain. When you understand Bitcoin, other cryptocurrencies become more straightforward.

The blockchain is a decentralized digital ledger. It continuously records and verifies records. Blockchain tracks and verifies any Bitcoin transactions, and the ledger is maintained by global nodes, making it incorruptible. Each new block added to the network is constantly validated.

Similarly, Ethereum is a distributed blockchain network. However, Ethereum differs from Bitcoin in that Ethereum concentrates on running an application’s programming code. Bitcoin uses blockchain to track the digital currency’s ownership, making it a peer-to-peer electronic system.

How Ethereum Works

Like Bitcoin, Ethereum’s network exists on a network of computers globally(nodes), not on a centralized server. This means the network is decentralized, and attackers cannot take the system down. If one node goes down, it does not affect the network.

Ethereum is a decentralized system that runs the Ethereum Virtual Machine (EVM). Each node has a copy of the EVM. Any interactions should be verified so that all nodes can update their transaction copy.

Transactions are stored in blocks on the Ethereum blockchain. Miners validate the blocks before they let them into the network. They act as the digital ledger or transaction history.

The act of mining to verify these transactions is also called the proof-of-work consensus method. Each block contains a unique code with 64 digits that identifies it.

Miners use their computer power to locate the code, proving its uniqueness. The miner’s computer power is proof of the work done. Their payment is in ETH (Ether), which is Ethereum’s native cryptocurrency.

Just like Bitcoin, all transactions on the Ethereum blockchain are public.

Miners let the rest of the network know about the completed blocks. They confirm the changes and add the blocks to everyone’s ledger copy. Any confirmed block is tamper-proof, which serves as a history of all the transactions for anyone to check.

The ETH used to pay the miners comes from the transaction fees called “gas.” The miner who validates the transaction gets the fee, which ensures future security by incentivizing mining.

The gas acts as a limit and restricts the actions a user can make for every transaction. It also acts as a deterrent to network scams.

ETH is a utility token than it is a value token, making its supply infinite. Ether is constantly in circulation as miner rewards. Ether will continuously be in demand, which means inflation cannot devalue the asset such that it’s unusable.

What Makes Ethereum Unique?

Ethereum was the pioneer of smart contract platforms.

Smart Contracts

Smart contracts are strings of code that automatically execute commands when specific predetermined terms are fulfilled. 

For instance, a smart contract would state, “Pay Anthony $20 if he does A or B by August 20, 2021,” and it would pay Anthony as soon as he meets the conditions.

Instead of needing a centralized authority to approve or disapprove a transaction, the contracts are independent. This makes the process more objective and practical.

Currently, Ethereum is the second-largest cryptocurrency after Bitcoin. It has attracted the attention of cryptocurrency enthusiasts and investors.

Ethereum is also unique for hosting different cryptocurrencies or tokens via the ERC-20 compatibility.

Ethereum Use Cases

Ethereum is also called “The Mother of dApps.”  This is for its value addition to various industries via its many unique solutions to issues.

ETH powers the Ethereum blockchain and allows developers to build new ETH-based tokens. These tokens power the dApps via smart contracts.

The most commonly used are ETH-based cryptocurrencies, which are built on a token called the ERC-20.

There are several use cases of Ethereum:

1. Enterprise Ethereum

Enterprise Ethereum is customized networks and software based on Ethereum and is created for businesses and private corporations. The enterprises have total authority over the validators, users, and architecture.

Large corporations like Microsoft are already using Enterprise Ethereum to create a platform that tracks luxury items.

2. Non-Fungible Tokens

Non-fungible tokens (NFTs) are digital assets or tokens but cannot be exchanged with another item. For instance, you can exchange a dollar for a dollar or Ether for Ether. You cannot exchange a digital asset; thus, the name is non-fungible.

An NFT is more valuable than a crypto coin because it can store information. An NFT could be an art piece or music file. Instead of buying a physical art piece, you receive a JPG file.

3. Stablecoins

Stablecoins are a form of cryptocurrency but tied to an asset like the U.S dollar or gold, whose value fluctuates very little.

Most Stablecoins use the U.S dollar as a benchmark. Still, others are similarly tied to various fiat currencies like the Yen or Euro.

4. Decentralized Finance

Decentralized finance or DeFi is another use that has made Ethereum help grow.

DeFi platforms are revolutionizing conventional financial services and products. They include decentralized, censorship-resistant, and programmable features to create new and revolutionary financial products.

These products include P2P (peer-to-peer) borrowing and lending, decentralized exchange (DEX), interest earned on crypto holdings, etc.

Ethereum is used in many sectors, from real estate, entertainment, and healthcare, to create trust and efficiency. It can also be used to make the access of various services more democratic.

For remittances, cross-border payments are more straightforward.  You can remit the amounts direct, fast, and cost-effectively via a P2P protocol such as Ethereum.

Ethereum’s blockchain ledger is tamper-proof and assures supply and logistics managers on the origin of products via blockchain cryptography.

The managers can track how a product travels on the blockchain, all the way from the manufacturer to retail checkout. On the other hand, it’s easy for the customer to tell if the product is genuine.

What is Proof of Work?

Proof of Work (PoW) is a mechanism that enables the decentralized Ethereum network to agree on issues like the order of transactions and account balances. This prevents the user from spending coins twice.  

PoW also ensures the Ethereum network is secure and impossible to overwrite or attack.

What is Proof-of-Stake?

Proof-of-stake (PoS) is a consensus mechanism that blockchain networks use for a distributed consensus. To become a validator, users have to stake their ETH.

Validators perform a similar role to miners in POW. They order transactions and create new blocks so that the nodes can come to a uniform consensus on the network’s state.

To become a validator, a user has to stake 32 ETH. The choice of validators to create blocks is random. They check and confirm blocks someone else created.

What is ETH?

Ether or ETH is the cryptocurrency used on the Ethereum network. Currently, the Ethereum price is $3,753.01, and with a 24-hour trading volume of $30,306,505,283. The maximum supply of ETH coins is unavailable.

In August 2020, 112 million ETH coins were in circulation. 72 million of these were issued in the initial block. Of the 72 million, 60 million went towards the first contributors in the 2014 crowd sale that had funded the Ethereum project. 12 million went to the development fund.

The rest of the amount is in block rewards for miners on the network. Initially, the reward was 5 ETHS for each block but later dropped to 3 ETHS, then 2 ETH.

What is ETH 2.0?

Ethereum 2.0, also known as ETH 2.0 or Serenity, is an Ethereum upgrade on various levels. Its main aim is to up Ethereum’s transaction capacity, make Ethereum more sustainable, and reduce the fees.

To do this, Ethereum has to switch its consensus mechanism from PoW to PoS PoW needs computers to compete to process transactions to get a reward. This process is time-consuming and uses a lot of energy.  

When Ethereum upgrades to ETH 2.0, it will shift to PoS and allow for lower fees and quicker transactions.

Ethereum Price Predictions in 2021 to 2022

The price of Ethereum dropped between May and July 2021 but is improving.  Ethereum’s price might get to $4,362.35 as it had in May 2021.

This could happen over the next three months, from September to November.  By the start of 2022, Ethereum could go past the $5000 mark.

All these are just predictions of course. For the current market price of ETH, you can check CoinMarketCap.

How to Buy Ethereum

The easiest way for anyone to buy Ethereum is via a cryptocurrency exchange.

You need an Ethereum wallet to store your Ether. You can either download a software wallet or purchase a hardware wallet, which is more costly but more secure.

Exchanges offer various payment methods such as wire transfers, debit/credit cards, or PayPal. The exchange charges you a deposit fee, which is lower when you do wire transfers, and much steeper with credit cards.

The most popular currency is the USD, although most exchanges will take Euros. Some accept the Japanese Yen or the British Pound Sterling.

Confirm your currency is acceptable before you do any transaction. Whereas most exchanges ask for the USD, they will convert your current currency to USD, which costs you extra.

To buy Ethereum in the United States, you can use these exchanges:

In Canada, some options include:

Best Crypto Wallets for Ethereum

These are some of the best Crypto wallets:

  • Trezor One: This is a hardware wallet and has the best security compared to the rest. It supports over a thousand cryptocurrencies. It is compatible with Windows, Mac OS X, and Linux.
  • Metamask: This is a software wallet that you can download as a Chrome extension tool.
  • Exodus: This is a software wallet compatible with Windows, Linux, and  Mac OS
  • Ledger Nano S: This is a hardware wallet. This wallet’s operating system (OS) is BOLOS, which is integrated into a secure chip.
  • Mist: This is a software wallet that is open source, and you can download it for free

As mentioned, hardware wallets are more secure, but it is up to you to choose what you want. Remember, this is an investment, and you want it where it will be the safest.

Is Ethereum a Good Investment?

If you are interested in Ethereum, you must understand digital currency and how the price is arrived at. Do your due diligence before you invest. 

Remember, ETH is not a currency like fiat currencies. Ethereum is the blockchain platform where the native currency to the platform can be used.

Like any investment, start small and slowly build your way up. Only invest what you can afford to lose.


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