What is Ethereum? The Beginner’s Guide

What is Ethereum? It is a platform for smart contracts and Dapps. Ethereum is the leading ecosystem for distributed apps, ICOs, tokens and also for DeFi applications. This an Ethereum beginner’s guide. We’ll go through all key features of Ethereum with history and future developments.

What is Ethereum?

Bitcoin is the oldest and the best-known cryptocurrency in the world. Because it was the first cryptocurrency, it’s also first-generation technology. Bitcoin, Litecoin and almost every single cryptocurrency born in 2010-2014 is first and foremost a digital currency. The role is to function as P2P money.

Ethereum, on the other hand, is something else. It’s the first of the second-generation cryptocurrencies, which are also called platforms, frameworks, or ecosystems. A platform provides a framework for anyone to create their own digital assets or decentralized apps (Dapps) inside it.

Ethereum is by far the best-known platform. Nowadays it has many competitors as well, such as EOS, TRON, and Tezos. The projects are also called third-generation blockchains. They are upgrades to Ethereum and solve the scalability and other issues of the second generation blockchains.

Before we dig deeper, let’s make one important thing clear. Ethereum is the name of the platform, while Ether is the native cryptocurrency used inside it. In practice, almost everyone is talking about buying or selling Ethereum instead of Ether. But if you want to be precise, the cryptocurrency (abbreviated as ETH) is in fact called Ether.

Ethereum is founded by Vitalik Buterin

Ethereum is founded by a Russian programmer called Vitalik Buterin. He described the Ethereum white paper as early as 2013. Back then, Buterin was working for an online newspaper Bitcoin Magazine. He was very much into Bitcoin and knew all about its possibilities and limitations.

vitalik buterin
Vitalik Buterin is the founder of Ethereum.

Buterin argued, that Bitcoin would need its own programming language enabling decentralized applications being built onto its blockchain. Buterin wanted to expand Bitcoin to a more than just a digital currency. The Russian programmer was not alone with his thoughts. Many other platform projects started to develop around this time.

Ethereum was funded with an ICO in August of 2014. It gathered a lot of interest from many OGs in the crypto world. Buterin wasn’t the only founder. For example, Cardano-founder Charles Hoskinson was one of the heavily involved persons in the beginning. The project was launched officially in the spring of 2015.

The new platform really took off in 2016. This is also the time when it faced its worst crisis to date. An ambitious project called The DAO collapsed due to hackers, who took advantage of 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 split the Ethereum project in half. The blockchain was hard forked into two chains as a result. Exactly, what Bitcoin community did in August 2017 when Bitcoin Cash was born. The difference is that Ethereum is, in fact, the new branch.

Many newcomers assume that Ethereum Classic was hard forked from Ethereum, but it’s the other way around. Ethereum was forked out, but it was so much more popular than Ethereum Classic it became de facto Ethereum. The Classic branch has always been like “a little brother”.

Ethereum beginner’s guide

Ethereum founder Vitalik Buterin wanted to create a similar ecosystem, which mobile app developers have. Anyone can build their own app and upload it to the Apple or Google store for end users to download. Software developers must use certain tools and APIs and rules when building their apps.

Ethereum is an ecosystem using blockchain technology. In comparison, Bitcoin is a peer-to-peer currency built on blockchain technology. These are two very different things. Ethereum is a framework for software developers, while Bitcoin is just functioning as digital money and store of value.

What could you build inside the Ethereum framework? Think about any software or system, which requires trust and contracts between two parties. Currency exchange, stocks, selling digital products, etc. Blockchain can be also used in voting, resource control, or supply chain management. What kind of apps can you build on Windows or Android or iOS? Ethereum is like a blank canvas for an artist.

The revolutionary thing in the Ethereum platform was a smart contract. As the name suggests, this is a digital agreement (set of rules) between one or multiple parties. Smart contracts can be used in anything, which requires some automated actions based on certain events. They are like small programs, which are run by the nodes of the Ethereum network.

Read more from our article Smart Contracts Beginner’s Guide or see the video presentation below.

So, anyone can create their own virtual community inside the Ethereum framework. This digital utopia could use its own issued token and have rules programmed to smart contracts. There are endless possibilities really. The gaming industry is one niche, which is expected to have many blockchain applications in the next few years.

All these possibilities are not tied to Ethereum in any way. Just like you can create millions of different apps with Android and iOS. Ethereum is the first platform that really took off in the crypto industry. But nowadays it has many competitors, which are technically more advanced as well.

Go to stateofthedapps.com and dappradar.com to see what kind of dApps have been created for Ethereum already!

Etherem vs Bitcoin – what are the differences?

Let’s look at Ethereum from a technical point of view and let’s compare it to Bitcoin as well. What are the differences between these two?

As mentioned already, Ethereum has designed for a different purpose. Bitcoin is a peer-to-peer currency, it’s a store of value and also digital gold. Ethereum is a platform for smart contracts and decentralized apps. This doesn’t mean that you can’t build programs on top of Bitcoin. You can, but Bitcoin isn’t really built for that purpose like Ethereum is.

When investors argue against Bitcoin and Ethereum, they use very similar arguments. This comes from the fact that both Bitcoin and Ethereum use the Proof of Work consensus algorithm. A PoW system must have physical mining devices to maintain the blockchain. This will lead to high energy consumption and performance bottlenecks, which you can’t just solve by having more powerful miners.

GPU setup for mining cryptocurrency
A mining rig, which can be used to mine Ethereum.

All PoW-based cryptocurrencies require physical miners. They can be ASIC computers (used in Bitcoin) or GPU rigs, like in the picture above. A rig is simply a computer, where you have a lots of GPU cards attached to one motherboard. It is a specially built system to minimize the consumption of electricity.

Even if Bitcoin and Ethereum are both being mined, they use different hashing algorithms. These are often called mining algorithms as well since they decide if the mining requires more CPU or memory consumption. Bitcoin is using the legendary SHA-256, while Ethereum is using an algorithm called ethash. Ethereum mining requires more memory than CPU, which is why it can be done with GPU rigs as well. Bitcoin mining is done 100% with ASIC devices.

If we look at the blockchain throughput, Ethereum is far superior to Bitcoin. Ethereum has a capacity of 15 TPS (Transactions Per Second), while Bitcoin has about half of that. When there is no heavy traffic in the Ethereum network, transactions are actually very fast. New blocks are being mined every 12-15 seconds. Bitcoin block time is 10 minutes.

The block time alone doesn’t tell you what blockchain is faster. For example, when you make a transaction it’s usually from an exchange to a wallet or from a wallet to an exchange. Ethereum transfers are usually available in exchanges after 15-30 confirmations, while Bitcoin needs only 2-3 confirmations. This means that Ethereum transfers are available in ~4 to 8 minutes, while Bitcoin transactions typically take about 20 to 30 mins.

Ethereum throughput will change a bit after the Muir Glacier upgrade, which will raise the mining difficulty gradually. New Ethereum blocks will be “born” every 20-30 seconds in the future.

Ethereum vs competition

As mentioned already, Ethereum is a 2nd generation cryptocurrency platform. Bitcoin was the first generation and Ethereum has also been the first of its kind. All Bitcoin competitors are currently faster, cheaper, and more scalable. We can say the same words of Ethereum. But why are Bitcoin and Ethereum still so much bigger and more popular than their competitors?

Both have a massive advantage called the network effect. This means the advantage of being the first in the market and getting the best brains and developers behind them. Even if there are plenty of competitors for Ethereum, it still has the most apps and developers. Ethereum has been out there for over five years, while EOS, TRON, Tezos, and such have had their MainNets out barely for two years.

eosio-logo
EOS is the biggest competitor for Ethereum at the moment. It also has a massive war chest for development and hiring personnel.

One could argue that Ethereum still has a massive lead in the platform category. The market still believes strongly, that Ethereum will upgrade its “engine room” before it’s too late. The development of Ethereum 2.0 has taken longer than expected, but the market value of Ethereum is still twice as big as all of its main competitors put together.

The main difference between Ethereum and 3rd generation platforms (EOS, TRON, Tezos etc.) comes from the consensus algorithm. Ethereum’s Proof of Work requires physical miners, as we’ve already learned. Third generation platforms are based on Proof of Stake variations, where miners are replaced with validators. There are essentially token holders, who are staking (= locking) a large number of tokens.

If we forget the technical differences, it’s all about getting the best programmers, developers, and Dapps. Think about the differences between Android and iOs. In the end, it’s all about the apps being developed on each platform. The mobile world is a bit different though since the most popular apps are usually built on both platforms. This is not the case in the crypto world.

Each platform tries to get the best developers and support them in building value and applications. There are also lots of developers building the platform and framework itself. Ethereum has currently four times more devs than any other project, which happens to be Bitcoin.

Check stateofthedapps.com and dappradar.com for Dapps built on Ethereum and other platforms.

Ethereum 2.0 explained

Bitcoin was originally founded to be a digital and decentralized alternative for the fiat currencies we’re using. Ethereum was created to be a framework for smart contracts and Dapps. It’s an entire ecosystem full of different applications, contracts, tokens, and also games.

Even if developers are building on Ethereum all the time, the project is in a difficult situation. If someone would create a really popular Ethereum Dapp, it could potentially bring the hole network on its knees. This happened in December 2017, when Cryptokitties caused massive network congestion.

blockchain cuties
Blockchain Cuties is one of the popular Ethereum games.

The whole project is going forward and trying to solve these scalability issues. This solution is called Ethereum version 2.0.

The most significant change will be the new consensus algorithm. Ethereum is going to finally drop the “ancient” Proof of Work method and bring in Proof of Stake, which is currently used by its competitors. This should scale the network to a completely new level.

Ethereum founder Vitalik Buterin has said:

”Ethereum 1.0 is a couple of people’s scrappy attempt to build the world computer; Ethereum 2.0 will actually be the world computer.”

Another important upgraded is sharding, which means dividing the blockchain into smaller units or shards. At the moment, Ethereum nods must store the entire blockchain history when validating transactions. Sharding enables up to 1000x scalability compared to the Proof of Work solution. We are talking about almost real-time transfers.

See the video below, where Vitalik Buterin goes through the Ethereum 2.0 version.

Ethereum 2.0 is not going to be a walk in the park. We are talking about a series of heavy upgrades, which are implemented gradually. Each upgrade brings Ethereum closer to its future state. In 2019, there were three significant hard fork upgrades: Constantinopole, Istanbul, and St. Peterburg. There was also an upgrade called Muir Glacier done in early 2020.

Ethereum will move towards the 2.0 version in small steps. There are three significant milestones before the brand new Ethereum is fully functioning.

 

  1. Beacon Chain. The Ethereum network will first run as a Proof of Work / Proof of Stake hybrid. The Beacon Chain is blockchain running parallel with the Ethereum blockchain to enable this.
  2. Sharding will be enabled next.
  3. eWASM is the upgrade for the Ethereum Virtual Machine (EVM).

The big question is if Ethereum can implement these updates soon enough? The roadmap has already been stretched far further than expected. Ethereum gets a lot of flack especially from the Bitcoin camp, and the pressure starts to build up soon. If Ethereum scaling doesn’t take place, many projects are forced to join the competing platforms.

So far, the cryptocurrency market is behind Ethereum. This can be confirmed by looking at the market cap of the project. It is still the most desirable platform for developers as well. But one thing is certain: the current technical set-up doesn’t meet the market demands. Ethereum 2.0 must be implemented successfully before it’s too late.

Ethereum’s ERC-20 tokens

You might have heard about ERC-20 already. It’s an abbreviation of the words Ethereum Request for Comment. It is a standard defining the coins built inside the Ethereum framework. These are called tokens, not cryptocurrencies. The difference between a token and cryptocurrency is that tokens don’t have a blockchain, but they are built inside an existing framework like Ethereum.

New tokens are typically born through an ICO, which means Initial Coin Offering. This is a way to do crowdfunding in the cryptocurrency world. The number of ICOs exploded in 2017, which was the main reason Ethereum became so popular as well. Other platforms support ICOs as well, so this is not a feature owned by Ethereum alone.

topicolist
ICOs aren’t dead, even if nobody is talking about them. Here’s a list from topicolist.com.

IEOs have become a significant competitor to Ethereum ICOs since 2019. The abbreviation IEO comes from Initial Exchange Offering, which means an ICO hosted by a cryptocurrency exchange. Popular exchanges like Binance started to pick ICOs and launch them on their own IEO platform (Binance Launchpad). IEO had a short-lived boom in early 2019, but they haven’t been that popular since.

Each platform has its own token standard similar to Ethereum’s ERC-20. Binance blockchain has the BEP standard and NEO has NEP. You’ll find all Ethereum-based tokens easily from this coinmarketcap.com list. As you can see, about 90% of tokens are currently based on the ERC-20 standard. The great thing is that you can store these tokens in any Ethereum address.

Ther are also more standards for Ethereum tokens. For example, ERC-721 makes NFTs possible. NFT comes from Non-Fungible Token. This means a coin, which can have individual properties and values. They are mostly used in the gaming world.

Investing in Ethereum

Many crypto investors are currently evaluating and examining everything mentioned in this article. Will the launch of Ethereum 2.0 be a success? Is EOS going to take over the market with their multi-billion dollar war chest?

Ethereum became insanely popular during the ICO boom of 2017-2018. Even if ICOs aren’t completely died, there are also competing platforms now and the exchange-based IEOs. The lack of ICOs has made Ethereum less popular, but there aren’t any ICOs hosted at the moment on the competing platforms either.

The market is still giving a strong support for Ethereum. It looks like DeFi (Decentralized Finance) could do to Ethereum what ICOs did couple of years ago. DeFi is growing fast and almost all services are built on Ethereum.

One thing that is clear and non-disputable: Ethereum is the only significant cryptocurrency besides Bitcoin. These two are completely in a category of their own. It’ll take many years until there will be any serious competitors nearby.

See the video below by Crypto Lark, which is about Ethereum’s future.

If you want to invest in Ethereum, you must have a broad view of the whole platform market. It’s quite a bit different case compared to Bitcoin, Litecoin, and similar currencies, which are mostly about real-time adoption. In this category, the tech part is mostly about network capacity and TPS.

When we look at Ethereum and other platforms, we can’t have such a narrow view. These are ecosystems, which will have thousands and thousands of applications built inside them. It’s quite difficult to compare such a platform to another. It’s like comparing Android and iOS.

An investor must also consider what kind of impact will Ethereum 2.0 have on the market. EOS, TRON, Tezos, and other platforms are also going forward. Are they able to counter Ethereum 2.0 somehow?

What about the Ether token? Ether has a similar role in the Ethereum platform as EOS tokens have on the EOS and Tez has on Tezos etc. Each platform has its own native token, which is used to transfer value and pay transactions. The upcoming Proof of Stake will also bring the role of a staked coin to the table, which is now missing from Ether.

The logic is generally this: when the platform becomes popular, the native token is used more. When you have more applications built, more people wanting to stake, more transactions, more token holders… it’ll all grown the demand of Ether. You can also reverse this: if a platform is not used, nobody will buy the token.

Ethereum price

 

Ethereum is the easiest cryptocurrency to buy after Bitcoin. It’s available in almost every possible cryptocurrency exchange. You can also buy it with fiat currencies from places like Coinbase, Binance Jersey, or Bitpanda. Remember, you are in fact buying Ether tokens.

Ethers are also easy to store because all the major wallets support them. Coinbase is a popular online 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.

The official website is ethereum.org. The official Twitter handle is @ethereum and Reddit discussion can be found at /r/ethereum.

Images: iStock, Pixabay, draglet GmbH [CC BY-SA 4.0], from Wikimedia Commons

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