What is Ethereum? It is a platform for smart contracts and Dapps. Ethereum is the leading ecosystem for distributed apps, ICOs, tokens, and DeFi applications. This is an Ethereum beginner’s guide. We’ll go through all the key features of Ethereum with history and future developments.
What is Ethereum?
Bitcoin is the oldest and the best-known cryptocurrency. Because it was the first cryptocurrency, it’s also first-generation technology. Bitcoin, Litecoin and almost every other cryptocurrency born in 2010-2014 is first and foremost a digital currency. The role is to function as P2P money.
Ethereum is a second-generation cryptocurrency. It is much more than just digital money. It’s an entire operating system for applications built using smart contracts. These are called dapps – distributed apps. Ethereum is like iOS or Android.
There are also other projects in this category. Binance Smart Chain, Cardano, and Solana are examples of well-known dapp operating systems. These are often titled as 3rd generation platforms. The 3rd generation title comes from the scalability and performance levels these blockchains have achieved.
It is also possible to issue tokens on each of these platforms. They all have their own token standard. The most used one is Ethereum’s ERC-20. Binance Smart Chain is using BEP-20.
The best-known tokens are issued on Ethereum. These are DeFi tokens such as Aave and Uniswap. Ethereum has a really strong position in the token market, but the competition is getting more serious now. We’ll get back to this topic later.
The word Ethereum is often used when investors talk about the platform’s native token. That is, in fact, called Ether (ticker: ETH). Ethereum should refer to the project or ecosystem. Ether is used to pay transaction fees in the Ethereum blockchain, also known as gas.
Ethereum is Vitalik Buterin’s project
Ethereum is founded by a Russian programmer called Vitalik Buterin. He described the Ethereum white paper as early as 2013. In fact, there was a small group of founders, but Buterin has always been titled as the founder.
Some readers might not know that Cardano founder Charles Hoskinson and Polkadot founder Gavin Wood were on the core team as well. Both departed quite early to drive their own visions.
Vitalik Buterin was under 20 years old when Ethereum was founded. Back then, Buterin worked for Bitcoin Magazine. He was well aware of the limitations and possibilities of Bitcoin. Buterin reviews the early stages of Ethereum in the interview below.
Buterin argued that Bitcoin needs its own programming language for building decentralized applications. He wanted to expand Bitcoin to be more than just a currency. Vitalik Buterin wasn’t alone. Many other platform projects were launched in 2014 and 2015 too.
Bitcoin is famous for its slow development process. Changes happen rarely and they are difficult to make. This drove Buterin in creating his own cryptocurrency.
Do you know where the word Ethereum comes from? Buterin explains the origins in the following tweet.
Where did the name ethereum come from? pic.twitter.com/0sgo8MmHuG
— Documenting Ethereum 🦇🔊 (@DocumentEther) April 18, 2021
Ethereum was funded through an ICO in August 2014. It gathered a lot of interest from many OGs in the crypto industry and raised about 20 million dollars. This is a small amount compared to funding rounds today, which are in hundreds of millions of dollars.
The genesis block of the Ethereum blockchain was created in July 2015. The platform didn’t really take off until 2016. This is also when Ethereum faced its worst crisis to date. An ambitious project called The DAO collapsed due to a vulnerability in its smart contract.
The aftermath of this hacking caused massive debates in online forums and social media. Should the victims be reimbursed? The crisis literally split Ethereum in half. The blockchain was hard forked into two chains. This is exactly what the Bitcoin community did in August 2017 when Bitcoin Cash was born. The difference is that Ethereum, in fact, is the new branch.
Many newcomers assume that Ethereum Classic was hard forked from Ethereum. It’s the other way around. Ethereum was the hard-forked chain, but it became so much more popular than Ethereum Classic that it became de facto Ethereum.
The ICO, DeFi, and NFT booms
Three have been three megatrends in the history of Ethereum: ICO, DeFi, and NFT. Each of these booms (and busts) strengthened the status of Ethereum in the market. They have also changed the entire crypto industry.
The ICO boom (2017-2018)
Crowdfunding was already a thing in the crypto industry, but ICOs held on the Ethereum platform gained extraordinary popularity in 2017. ICOs raised the price of Ether (ETH) so much that in the summer of 2017 it almost reached the market cap of Bitcoin. Bitcoin’s market share fell from about 85% to 37% in a matter of months (March-June 2017).
The ICO boom made Ethereum a significant project in the crypto industry. Before 2017 altcoins didn’t receive much attention. Thanks to Ethereum, other altcoins gained status in the market that had previously been dominated by Bitcoin.
Justin Sun, the founder of Tron, is in the photo below. Tron was once one of Ethereum’s challengers in 2017-2018. Its ICO was held on the Ethereum platform too. Almost all of Ethereum’s competitors used Ethereum as a platform for their ICOs!
The ICO boom, which started in the spring of 2017, lasted about a year. Ethereum reached its ATH price ($1432) on January 13, 2018. Ethereum’s price did not break this barrier until three years later.
The DeFi boom (2020-2021)
The DeFi boom can be divided into two stages. The first one lasted just a couple of months in the spring of 2020. This means that there was a period of almost two years of silence (Q2/2018 – Q2/2020) in the market after the previous bubble (ICOs) burst.
DeFi comes from the words decentralized finance. The term is an umbrella that covers all decentralized financial applications. These include lending protocols, decentralized exchanges, and many other financial protocols. They operate independently through smart contracts. The end-user communicates with the apps using a Web 3 wallet like MetaMask.
The first stage of the DeFi boom raised a major problem for Ethereum: transaction fees (gas fees) went up significantly. This was due to massive traffic caused by the DeFi apps. Ordinary cryptocurrency transactions cost up to tens of dollars and transactions in decentralized exchanges were in the 100-200 dollar region.
The first DeFi bubble burst in the autumn of 2020, but the sector came to life again in early 2021. At that time, there was also a significant change in Ethereum’s dominance. Competing platforms began to eat its market share. Many popular DeFi apps were launched on BNB Chain and other platforms. Ethereum’s market share dropped from around 97% to 60% in the DeFi sector during 2021.
The image above is from defillama.com. It shows the status of the DeFi sector in October 2022 and tells you how much liquidity is locked in different applications. Ethereum still dominates the market, but there are at least half a dozen strong platforms challenging it. One should also note that there are three Ethereum scaling solutions in the top 10 as well: Polygon, Arbitrum, and Optimism.
The NFT boom (2021)
The NFT boom is the third major bang on the Ethereum platform. NFT (Non-Fungible Token) refers to technology that enables the creation of unique tokens. Digital art is a good example, which can be an image or a video. Each work of art is a unique NFT, which can be stored in a cryptocurrency wallet just like regular cryptocurrencies.
The first part of the NFT boom took place in the spring of 2021, but the sector exploded again at the end of 2021. Investors have paid millions of dollars for Cryptopunks and Bored Apes Yacht Club NFTs. You can view the most popular collections at cryptoslam.io.
The NFT boom has also boosted the popularity of alternative platforms. Their selling point is low transaction costs compared to Ethereum. However, the market is dominated by the OpenSea marketplace which is on the Ethereum platform. Ethereum has a well over 90% market share in the NFT sector.
The ICO boom brought a lot of attention to Ethereum, but it was mainly about raising money and speculating. The DeFi sector introduced useful apps that millions of people use every day. NFTs brought in a lot of speculative money, but the technology is also related to the gaming world and metaverses.
Ethereum is a smart contract platform
Ethereum is a platform for smart contracts and decentralized applications. It could also be described as an operating system, meaning you can compare Ethereum to Android, iOS, or Windows. The main function of an operating system is to provide a framework for developers to build applications. These are called dapps in the blockchain world.
Although Ethereum was the first known smart contract platform, the situation is different today. There are about 20 significant projects competing in the sector. New ones are constantly being launched. All smart contract platforms basically offer the same thing, but differences arise from the technology used, the background team, and the programming languages.
Ethereum needs to attract as many application developers as possible. This group then builds dapps that end users are happy to use. The more developers there are, the more likely a “killer app” will be developed. In addition, the Ethereum platform itself must be developed further.
You can program almost anything on a platform like this. The question is more about what kind of applications are best suited for the blockchain environment. DeFi apps described above are the best examples. In addition, games built on Ethereum can take advantage of the NFT technology and bring in a new kind of play-to-earn mechanism compared to traditional games.
Smart contracts are at the heart of decentralized applications. These are pieces of the program stored in the blockchain that can be assigned different functionality. The video below explains how smart contracts work.
The point of a smart contract is that it is a decentralized program that cannot be manipulated or altered. This piece of code carries out the orders given to it with 100% certainty. No one can delete or destroy a smart contract, as it is stored in a decentralized manner on thousands of nodes on the Ethereum network.
Other smart contract platforms operate on a similar basis as Ethereum. However, Ethereum has the advantage of the network effect. Most of the world’s app developers build apps on the Ethereum platform.
It is important to understand that Ethereum does not compete with Bitcoin. Ethereum is made to solve completely different problems. If you want to compare Ethereum to something, compare it to other smart contract platforms.
Ethereum vs. competitors
Ethereum has often been called a 2nd generation protocol. Bitcoin was obviously the first generation, and Ethereum is in a similar position in its own niche. All of Bitcoin’s (theoretical) competitors are faster and more scalable. The same can be said about Ethereum. Nevertheless, Bitcoin and Ethereum are invincible in their own categories. Why?
Both have the advantage of a huge network effect, which is basically the advantage of the first mover in the market. Bitcoin and Ethereum have gained a huge number of developers and investors behind them over the years. Over time, the gap with competitors will widen even further.
Although other alternatives have been launched on the market, Ethereum’s lead is still massive. Most of the development work is done on the Ethereum platform.
Competing projects are called 3rd generation solutions. This means platforms that scale to thousands of transactions per second. The photo below: Solana is one of Ethereum’s biggest competitors.
The main difference between Ethereum and third-generation platforms has so far come from the consensus algorithm. Ethereum’s Proof of Work required physical miners to run the block production, but this changed in September 2022 when Ethereum transformed to Proof of Stake consensus. We’ll go through the impact of this upgrade (The Merge) in the following chapter.
Even if Ethereum is a PoS platform it still has limited transaction capacity. The network can only process about 15 transactions per second, while competitors have the capacity to handle hundreds or even thousands of transactions per second. This will change in the near future with scalability upgrades. In the meantime, Ethereum is using Layer 2 solutions. Bitcoin has made the same choice with its Layer 2 technology called the lightning network.
There are also differences in programming languages. All Ethereum smart contracts must be written in Solidity, which was developed for this purpose only. Some platforms support other programming languages.
If we forget the technical differences, the main question is of getting developers. You can think about the difference between Android and iOS operating systems. After all, it’s a matter of which platform has the most popular applications.
Each platform strives to attract the best developers and provide them with support in application development. In addition, a huge number of coders are developing the actual system. Ethereum has currently four times more developers than the next project. Which is Bitcoin, by the way.
This article is being updated in October 2022. It was only a month ago when Ethereum made a transition to the next phase which is often been titled Ethereum 2.0. In fact, there is not one upgrade that makes Ethereum so different. We are talking about a long list of smaller and bigger upgrades that have been performed since 2015.
The Merge was the most significant and difficult update to Ethereum so far. It had been prepared for years. There is no doubt The Merge was also the biggest talking point of the year 2022 in the crypto industry. The Merge was executed in September 2022 without any major issues. The most notable change is the shift from Proof of Work to Proof of Stake consensus. In other words, there is no more Ethereum mining.
The graph below gives a good illustration of the process. We have also written an in-depth article on the impacts of The Merge.
The Merge had also another short-term impact: Ethereum’s inflation has dropped about 95% since the network shifted to Proof of Stake consensus. You can check the real-time data at the ultrasound.money website. In fact, a 95% drop won’t be enough, because analysts expect inflation to go negative meaning Ethereum becomes a deflationary currency.
This hasn’t happened yet because the network activity is at multi-year lows. That is all because of the ongoing bear market. The more the network is used, the more transaction fees (ETH) are burned. If the amount of burned Ether exceeds the staking rewards it means the Ethereum supply will shrink.
It’s important to understand that The Merge didn’t solve any scaling issues. Ethereum’s transaction capacity and the average block times are unchanged.
We should also remember that there are many important steps left in the Ethereum roadmap. The scaling update happens next. This means we can expect Ethereum to finally reach proper scalability in 2023. Before that happens Ethereum’s transaction load is reduced with the help of Layer 2 solutions. The most popular ones are Optimism and Arbitrum. Polygon’s PoS Chain is also doing its part.
Ethereum as an investment
Ethereum competes in the category of smart contract platforms. This is the first thing an investor should understand. Although Ethereum and Bitcoin are often put against each other on social media, they have been developed to solve completely different things.
When we look at Ethereum’s niche, we see major changes that have taken place in 2021 and 2022. At least a dozen of serious competitors have gained a decent share of the DeFi market. This has been made possible by the technical shortcomings of Ethereum. Fast and cheap transactions have attracted a lot of users to alternative platforms.
The question is, how does the “next level” Ethereum change the playing field? Will Solana and Avalanche keep their users when they lose they lost the technical advantages over Ethereum?
The status of Ethereum looks excellent in this light. It continues to dominate the DeFi and NFT sectors with outdated technology as well. As Layer 2 solutions become more common and new updates are executed, the situation becomes even better.
It is likely that there will be specialization in smart contract platforms. Some of the projects might focus on games or NFTs. In the future, more and more blockchains will be created to serve just one single application. Smart contract platforms try to do a little bit of everything at the moment.
The Merge update has made Ethereum even more attractive to institutional investors. Ethereum has become ESG compliant with a 4-5% yield on top of that. This is a significant advantage over Bitcoin, which is criticized (for wrong reasons, but still) for its energy consumption. You don’t get any yield for holding bitcoins either.
It’s also easier to invest in Ethereum through other instruments. For example, there were three Ethereum ETFs approved in Canada in early 2021. Ethereum is also getting more investors through Grayscale’s funds. It is the only cryptocurrency besides Bitcoin, which has seen serious money flows from institutional investors.
Ethereum price and how to buy Ethereum
Ethereum is the easiest cryptocurrency to buy after Bitcoin. It’s available in almost every possible cryptocurrency exchange. You can buy it with fiat currencies from places like Binance, Coinbase, or Bitpanda.
Ether is also easy to store because all the major wallets support it. Trust wallet is a popular mobile wallet, while Exodus desktop wallet offers more safety. The most secure way to store your Ether is a Ledger Nano X or Trezor Model T hardware wallet.