Cryptocurrencies
22
Feb
ethereum

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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 DeFi applications. This is 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. 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 2nd 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 in the core team as well. Both departed quite early to drive their own visions.

Below is a picture of Vitalik Buterin from 2015. He was under 20 years old when Ethereum was founded. Back then, Buterin worked for the Bitcoin Magazine. He was well aware of the limitations and possibilities of Bitcoin.

vitalik buterin
Vitalik Buterin is the founder of Ethereum.

Buterin argued that Bitcoin needs its own programming language for building decentralized applications. Buterin wanted to expand Bitcoin to be more than just a currency. He wasn’t alone. Many other platform projects were started around 2014 and 2015.

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. But, why “Ethereum”? See the tweet below.

Ethereum was funded with an ICO in August of 2014. It gathered a lot of interest from many OGs in the crypto industry and raised about 20 million dollars. This is a small number 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 was so much more popular than Ethereum Classic it became de facto Ethereum.

The ICO, DeFi, and NFT booms

Three have been three megatrends in the history of Ethereum. The first one was the ICO boom in 2017.

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 world of cryptocurrencies. Before 2017 altcoins didn’t receive much attention. Thanks to Ethereum, many altcoins gained status in the market that had previously been fully dominated by Bitcoin.

Justin Sun, the founder of the TRON project, 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 Ethereum’s competitors used Ethereum as a platform for their ICOs.

what is tron | justin sun
Justin Sun’s TRON was one of Ethereum’s competing platforms, which also held its ICO on Ethereum in 2017.

The ICO boom, which started in spring 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 next big thing was the DeFi boom in summer 2020. Between these two booms, there was a quiet building period and a bear market in the crypto industry.

DeFi comes from the words decentralized finance. It basically means 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 Web3 wallet like MetaMask.

The DeFi boom brought one major change: Ethereum’s gas fees went up significantly. This was due to massive traffic caused by DeFi apps. Ordinary cryptocurrency transactions cost up tens of dollars and transactions on decentralized exchanges were in the 100-200 dollar region.

The DeFi bubble burst in the autumn of 2020, but the sector came to life again at the beginning of 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 Binance Smart Chain and other competing platforms. Ethereum’s market share dropped from around 97% to 60% in the DeFi sector during 2021.

defi-tvl

The image above is from defillama.com. It shows the status of the DeFi sector in February 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.

The NFT boom is the third major boom on the Ethereum platform. NFT (Non-Fungible Token) refers to technology that enables the creation of unique tokens. A good example of this is digital art, 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 really exploded 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.

bayc

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 extremely popular at the moment. Its biggest issue is outdated technology, which needs to be upgraded to meet demand.

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 the 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 is a so-called 2nd generation protocol. Bitcoin was obviously the first generation, and Ethereum is in a similar position in its own niche. All 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.

solana.com

The main difference between Ethereum and 3rd generation platforms comes from the consensus algorithm used. Ethereum’s Proof-of-Work still requires physical miners, while the next-generation platforms are using a Proof-of-Stake consensus.

The PoS model has validators instead of miners. Anyone can become a validator by staking cryptocurrency. This means practically locking the coins into the blockchain. The downside of the PoS model is the loss of decentralization. There are often only tens, or couple hundred validators compared to the thousands of nodes of Ethereum.

Proof of Work’s big issue is its low transaction capacity. Ethereum handles only about 15 transactions per second while competing platforms have a capacity of up to thousands of transactions per second. This will change in the near future, though. More on that in the next chapter.

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 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.

Ethereum 2.0 and EIP-1559

Ethereum has a successful history, but its future is determined by Ethereum 2.0. This consists of years of development, which is reaching now its final stages.

Let’s make one point here before we go further. A couple of weeks ago, the Ethereum community announced that there was a desire to abandon the term Ethereum 2.0. You can read more about this from our news article. We still use the term Ethereum 2.0 in this guide because it describes well the new Ethereum.

Ethereum 2.0, therefore, refers to the new generation Ethereum, which moves from the Proof of Work consensus algorithm to the Proof of Stake consensus. This update will bring Ethereum to the same level as competing alternatives in terms of transaction capacity.

The founder of Ethereum, Vitalik Buterin, has stated himself:

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.

Ethereum 2.0 brings a completely new blockchain, which started in December 2020 under the name Beacon Chain. At the moment, Beacon Chain has no functionality yet. However, about 9.5 million Ethers have already been staked at the time of writing. These stakers are the validators of the future Ethereum 2.0 network.

The Proof of Work -> The Proof of Stake transition is called The Merge. It will take place around mid-2022.

ethereums upgrade path

However, Ethereum’s transaction capacity is not yet growing significantly with the Proof of Stake consensus. This happens with the introduction of sharding around 2023. Sharding allows the blockchain to be split into smaller units, also called shards. This technology is already used by Zilliqa.

There have also been a couple of other important updates on the way to version 2.0. One of these is the EIP-1559 update that was completed in the summer of 2021. It changed the way the Ethereum network handles transaction fees. Since EIP-1559, most of the transaction fees have been burned. This has made Ether a deflationary currency at times, meaning that more tokens have been burned than new ones have been issued.

Another big step has been the growing popularity of Layer 2 solutions. Their development has been boosted by the aforementioned congestion of the Ethereum blockchain and the high transaction fees. Arbitrum is currently the leading Layer 2 extension of Ethereum. You can check the ranking list at l2beat.com.

Bitcoin’s lightning network is the best-known Layer 2 solution on the market. Its purpose is also to provide faster and cheaper transactions compared to Bitcoin’s blockchain (Layer 1). Ethereum’s Layer 2 solutions do exactly the same thing.

In addition to Layer 2 solutions, sidechains such as Polygon have also entered the market.

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. At least a dozen of serious competitors have gained a decent share of the DeFi market. This has been made possible by the poor performance of Ethereum. Fast and cheap transactions have attracted a lot of users to alternative platforms.

The question is, how does the “2.0 version” of Ethereum change the market? Will Solana and Avalanche keep their users when they lose their best competitive edge, which is the transaction capacity?

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 technology is brought out, the situation becomes even better.

It is likely that there will be specialization in the smart contract platforms. A good example of this is Terra, which is driven by its algorithmic UST stablecoin. One of the platforms might focus on games, the other on the metaverse, the third on something else. At the moment, it is difficult to see any platform threatening Ethereum’s status, at least not in the near future.

The previously mentioned EIP-1559 update and the transition to Proof of Stake are good things for an Ethereum investor. It’s hard to see the popularity of Ethereum staking dropping when The Merge finally takes place. All these staked ETH tokens are locked out of the market making the supply smaller.

When we add the burning of tokens (EIP-1559) to this picture, Ether looks even more attractive.

The image below is from ethereum.org, where you can read more about Ethereum’s staking.

ethereum staking

It is also worth remembering the traditional investment world. In Canada, as many as three Ethereum ETFs were approved in 2021. Ethereum also receives institutional investments through Grayscale funds. Along with Bitcoin, this is the only cryptocurrency that receives significant attention from institutional investors.

The main risks of Ethereum are related to the previously mentioned updates. Ethereum developers need to get The Merge out and transaction capacity needs to be improve with Layer 2 solutions before sharding is introduced. Updates for 2022 and 2023 will significantly improve Ethereum if they are brought out as planned.

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.

Buy Ether from Binance

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.

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

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