What is Ethereum? The Beginner’s Guide

Ethereum became the household name in the crypto scene during the year 2017. A massive ICO boom led to hundreds of new Ethereum based tokens being created. This article is a beginner’s guide to Ethereum – the second generation crypto platform. What is Ethereum? This article will give answers to the most commonly asked questions.

What is Ethereum? The best-known crypto platform

Bitcoin is the best known cryptocurrency in the world. Hence, 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 a 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 an environment 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, NEO or Cardano.

The projects mentioned above are also titled as third generation cryptocurrencies. They are upgrades to Ethereum and solve the scalability and other issues (like mining) of the second generation blockchain.

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 [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. The project was launched officially in the spring of 2015.

The new platform really took off at 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 code. The aftermath of this hacking caused massive debates in the online forums and social media. Should the victims be reimbursed?

The crisis split the Ethereum project in half. The blockchain was hard forked to 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 that it became the de facto Ethereum. The Classic branch has always been like a little brother afterwards.

Ethereum beginners 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 the 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 Ethereum platform was a smart contract. As the name suggest, 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.

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.

Every platform has a bit different approach, but the main idea is the same. They give a home to decentralized apps. Each platform uses different consensus algorithm and programming language. Some support also many languages. The one Ethereum uses is called solidity.

There are also differences in the network capacity and each project is run by a bit different fintech company and/or community. Ethereum is really the project of Vitalik Buterin, who makes the ultimate decisions on the future steps.

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

Ethereum, Ether and gas

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

blockchain cuties

There is one native currency fueling the Ethereum platform, and it’s called Ether. As mentioned before, people are actually talking of “buying Ethereum from Coinbase”, when in fact they are buying Ether. This is also due to the fact that the ETH token is simply titled as Ethereum everywhere.

Ether works as a digital fuel. It’s needed every time a transaction is made or a dApp is run. For example, if you want to send an ERC20 token (the standard used in the Ethereum platform) from one address to another, you need to also have some Ether in your account to pay the ‘gas’ needed.

This is no different from other cryptocurrencies. If you want to send Bitcoin to your buddy, there’s also a transaction fee paid in Bitcoin. This fee is called gas in the Ethereum platform, but it’s in fact just the same old Ether. Gas is basically a resource management system. More complex dApp you create, more gas it’s going to consume.

Some competing platforms have created another token for this purpose. The idea is to keep the gas price more stable even if the native currency would be volatile. For example, NEO platform has a token called Gas, which you can also buy from an exchange.

Ethers are also used to participate in ICOs. These new and exciting crowdfundings were the reason why Ethereum platform became so hot in 2017. In fact, many of the top crypto projects were originally ICOs in the Ethereum platform. EOS, Tron, ICON and VeChain to name a few. These were first ERC20 tokens in the Ethereum blockchain until their own MainNet was launched.

Ethereum is technically outdated

As mentioned in the beginning, Ethereum is second generation as a technology. There are already third generation platforms on the market, which are also titled as “Ethereum killers” (such as Cardano). But what do these generations mean in practice? Let’s find out.

The thing is that Ethereum is simply old tech. Crypto industry moves so fast, that 5+ year old ideas need to be upgraded. Rivals offer faster blockchains, better scalability and also modern consensus algorithms.

Ethereum is still using the Proof of Work consensus algorithm, just like Bitcoin. This refers to the method used in creating new blocks to the blockchain. In a PoW system, new currency is also minted while mining new blocks. If you want to learn more of the Proof of Work consensus, please refer to our Bitcoin Beginner’s Guide.

Proof of Work is also used by other older projects, such as Litecoin. The good thing is that PoW has proven its worth and reliability. The down side is the need for mining machines and extremely high energy consumption.

ethereum mining rig
Ethereum mining rig.

Practically all third generation rivals are using Proof of Stake, where coins are pre-minted in the ICO. No physical mining work and equipment is needed, because blockchain is maintained through software in the network.

Ethereum is also far behind its rivals in the network capacity. It is the only really battle tested platform, though. There are also thousands of cryptocurrencies and dApps created inside the Ethereum framework, which is up and running every day.

Many of these third generation projects are more like ideas on paper. They haven’t been really tested in high traffic. Ethereum is still far superior to its rivals, when we look at the market value. It has also the most resources. But this status is slowly changing – especially when projects like EOS have managed to get a billion dollar war chest from investors.

Ethereum will move forward in the near future. It’ll leave the Proof of Work consensus for a modern Proof of Stake algorithm called Casper. One important step towards this was the Constantinopole hard fork in early 2019.

So far the development hasn’t gone as fast as many have hoped. New launches have been delayed many times, which has made developers and investors frustrated. People have argued that Ethereum is simply being left behind by its rivals, but so far the market valuation disagrees.

Ethereum’s ERC-20 tokens

The ERC-20 standard was mentioned briefly in the previous chapters. ERC comes from the words Ethereum Request for Comment. It is a standard defining the tokens built inside the Ethereum framework.

New tokens (with any value) are created through ICOs – Initical Coin Offerings. This is a crowdfunding campaign organized in the crypto world. As mentioned earlier, ICOs were the big reason behind the boom of 2017. Nowadays ICOs are no more just an Ethereum thing. Any platform can have their own token funding campaigns.

The year 2019 has seen IEOs emerge as the competing product. IEO comes from Initial Exchange Offering, which means crypto exchanges have started to run ICOs. Exchanges like Binance are picking the best ICOs from the market under their umbrella offering visibility and token listings. The whole ICO concept is thoroughly explained in this article: What is an IEO?

The competition has got even worse after Binance launched their own blockchain in April of 2019. Now they have started to lure projects to move from Ethereum to Binance blockchain. One such project is Mithril, whose token used to be an ERC20 in the Ethereum blockchain.

Each of Ethereum’s competing platforms have their own token standard.

You’ll find all Ethereum based tokens from this coinmarketcap.com list. As you can see, almost all the popular ones are still Ethereum tokens. These can be stored in any Ethereum wallet. A popular hardware wallet Ledger Nano S and easy Chrome add-on MetaMask are popular choices. You’ll need MyEtherWallet application when making a transaction.

There are also other type of tokens than ERC-20. The most important alternative is ERC-721.

“The ERC-721 standard was introduced to allow anyone to create tokens on Ethereum that are completely unique from one another. No two ERC-721 tokens are alike, and they can be thought of as one-of-a-kind collectables. CryptoKitties is one project utilizing ERC-721 tokens that gained mainstream attention in 2017 and 2018.” (Source)

ERC-721 enables creation of a unique token, which is very useful in the gaming and finance world. All ERC-20 tokens are fungible, meaning they are interchangeable without any unique preferences. Just like fiat currencies.

Investing in Ethereum

If you want to invest in Ethereum, you need to have a broad view to the crypto market. Platform projects are very different from currency projects in this sense.

When thinking of Bitcoin or Litecoin, it’s mostly speculating the real world adoption. If Amazon or Apple adopts Bitcoin it’s a big thing. Or if there are finance products like Bitcoin ETF or futures available.

Ethereum is an ecosystem for thousands of different applications. You need to see it like Android or iOs or Windows. It’s not easy to know, if Ethereum platform will have more popular applications than EOS or Tron for example. There are many different things to consider. The reputation of the platform, the programming language used, support for developers, future improvements etc.

All platforms are offering roughly the same package as Ethereum, from the technical point of view. They all have dApps and smart contracts. It might be the case we’ll have a handful of leading platforms supported by local ones, which are popular in certain countries. ICON is an example of a platform developed in South Korea.

Ethereum real-time 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, CEX or Bitpanda. Remember, you are in fact buying Ether tokens.

Ethers are also easy to store, because all the major wallet softwares 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 or Trezor 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