Cryptocurrencies

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 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 Elrond 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 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 know that Cardano founder Charles Hoskinson and Polkadot founder Gavin Wood were in the core team of Ethereum. 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 would need its own programming language enabling decentralized applications. Buterin wanted to expand Bitcoin to be more than just a digital currency. He wasn’t alone. Many other developers felt the same.

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 world and raised about 20 million dollars. This is a small number considering the biggest ICOs of the 2017-2018 boom market.

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 Classic branch has always been like “a little brother”.

Ethereum megatrends: ICOs and DeFi

There are two megatrends (booms) we should mention from Ethereum’s history. The first one was the ICO boom of 2017-2018.

Money had been raised in the crypto world before, but ICOs held on Ethereum reached massive popularity in 2017. The ETH token also “mooned” so much it almost reached Bitcoin! The market dominance of Bitcoin crashed in March-June 2017 from 85% to 37%.

During the ICO boom, Ethereum really hit the mainstream. Prior to that, Bitcoin had an 85-90% dominance of the market. Other altcoins gained popularity as well with the rise of Ethereum.

The ICO boom of 2017 lasted about one year. Ether (ETH) reached its ATH on January 13th of 2018, which marks the top.

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 DeFi boom took place in the summer of 2020. We are talking about Decentralized Finance, meaning distributed apps with a focus on financial services. The most popular ones are loan services, decentralized exchanges, and yield aggregator apps.

DeFi apps are completely independent protocols. A user is communicating with smart contracts using a Web3-compatible wallet, such as MetaMask. There is no KYC or customer service. Everything runs autonomously.

The DeFi boom had a significant impact on Ethereum. This is because the apps became so popular and there were so many with billions of dollars of value locked in. DeFi apps caused average Ethereum transaction fees to jump to tens of dollars.

Even if the DeFi bubble popped in 2020, it only had an impact on the token prices of DeFi protocols. The actual apps remained popular and volumes kept growing. The Ethereum network has been seriously clogged since the summer of 2020.

An important step was taken in December 2020 towards a more scalable Ethereum. This is when Ethereum 2.0 Beacon Chain was launched. This is the blockchain of the Ethereum 2.0 version, which should launch properly in 2022-2023. In meanwhile, there will be updates like EIP-1559, which try to solve the gas problem.

The best solution to Ethereum’s scaling issues is Layer 2. The most popular one being Polygon. It makes it possible to clone (copy) existing Dapps from Ethereum to Polygon blockchain. Users can use the same old app but switch the network to Polygon and enjoy close-to-zero gas fees.

Ethereum is a platform for Dapps

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

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 previously mentioned DeFi apps are great examples. You can check a list of the most popular DeFi apps from here. There are also games and NFTs. The list goes on and on.

The revolutionary thing with Ethereum was the smart contract. Read more from our article Smart Contracts Beginner’s Guide or see the video presentation below.

A smart contract is a program, which executes commands given to it. It is not especially smart and it’s not really a contract either. Hence, the name is quite misleading.

What makes smart contracts so great is the fact they enable distributed apps being built, which cannot be altered by anyone. It means they cannot be turned off either by shutting down a server. They are stored on thousands of Ethereum network nodes. Smart contracts are the building blocks of distributed apps (Dapps).

In the end, Ethereum is just a framework for software developers. It is up to each developer if they want to create the next killer Dapp on Ethereum, EOS, or Binance Smart Chain. Each platform has its pros and cons.

The big advantage of Ethereum is the network effect it has. Most Dapp developers are building on Ethereum. There is a massive global community giving support for new developers and Dapps.

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

Etherem vs Bitcoin

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 created for that purpose.

When investors argue against Bitcoin and Ethereum, they use similar reasoning. 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.

Even if Bitcoin and Ethereum are both mined, they use different hashing algorithms. These are often called mining algorithms 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 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 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.

In the future, Ethereum will move to Proof of Stake consensus. We mentioned already the Beacon Chain, which was launched in December 2020. This will increase the transaction capacity of Ethereum by 100x. More of this later in this article.

Ethereum vs other platforms

As mentioned already, Ethereum is a 2nd generation 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 use the same words to describe Ethereum’s position in the market.

Why are Bitcoin and Ethereum still more popular than their competitors? Doesn’t tech matter?

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. Over time, this advantage usually gets bigger.

Even if there is more competition, the advantage of Ethereum remains massive. Most of the development is done on Ethereum. Most of the liquidity is on Ethereum, and so on.

Competing protocols are called 3rd generation solutions. This means platforms with a transaction capacity of over 1000 TPS (Transactions Per Second). EOS is one such platform.

eosio-logo

The main difference between Ethereum and 3rd generation platforms is 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.

Each platform supports different programming languages. If you want to write code on Ethereum, you must learn Solidity. This is a language built on this very purpose. Other platforms have their own languages and some of them support even multiple ones.

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 which operating system has the most popular apps. Which platform has the killer app everyone wants to use?

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.

Ethereum 2.0 explained

Ethereum has been a success, no doubt about it. Is it going to remain successful? This is decided by version 2.0. This is a process, which started when the current blockchain was launched in 2015. Now we are getting to the final stages.

See the video below for more information.

Ethereum 2.0 is a completely new blockchain titled Beacon Chain. The Beacon Chain will run parallel with the current Ethereum blockchain until the 2.0 version is fully launched.

The biggest change comes from mining. Ethereum 2.0 is moving away from a Proof of Work to a Proof of Stake consensus algorithm. It means there will be no more physical miners. They are replaced by validators and staking.

Ethereum 2.0 was officially launched in December 2020 with the previously mentioned Beacon Chain. Even if we use the word “launched”, it doesn’t have any features. It’s basically an empty blockchain running and being staked until the apps arrive in 2022-2023.

This is also when the staking became available. 32 ETH is required from anyone who wants to become a validator. Staking is compensated with a yield of about 5% APY.

This step must be taken before Ethereum can become a 3rd generation platform and scale on the level required. All other serious platform candidates run a similar Proof of Stake consensus model. Proof of Work is simply not good enough anymore.

Vitalik Buterin has said 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.”

Sharding is another important word when we talk about Ethereum 2.0. It means dividing blockchain into smaller units (= shards). At the moment, Ethereum nodes must store the entire blockchain history when validating transactions. Sharding enables up to 100x scalability compared to the Proof of Work solution. We are talking about almost real-time transfers.

Ethereum 2.0 is not 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. In 2021, Berlin and London hard forks. Ethereum 2.0 will be hopefully ready in 2022 or 2023.

Before the 2.0 version is ready, Ethereum will be scaled using Layer 2 solutions. This means cloning apps to a parallel (side) chain, which is EVM compatible. The most popular solution is Polygon.

Ethereun’s Layer 2 scaling will be one of the hottest topics of 2021 and 2022. Many popular DeFi protocols are already joining forces with Polygon and Optimisim. There will be more and more partnerships published over time.

Ethereum as an investment

Many investors are trying to price in the previously mentioned upgrades. Will Ethereum 2.0 launch in time? How much market share is Binance Smart Chain or Cardano going to get until the 2.0 is out?

A similar conversation was a hot topic 4-5 years ago around Bitcoin. There were plenty of new altcoins in the market offering cheaper and faster transactions. Bitcoin weathered the storm and strengthened its position even further by re-branding to digital gold.

This doesn’t work with Ethereum because the use case is so different. Ethereum cannot re-brand to digital silver and hope that people wouldn’t care about high gas fees. Ethereum will be successful through successful Dapps. These applications must be cheap and fast to use, so they can reach mass adoption.

The year 2021 was the first in history when Ethereum has been truly challenged. Binance Smart Chain has reached significant adoption and liquidity. It has fast and cheap transactions, which lure small investors away from Ethereum.

Below, there is an image from defillama.com. It ranks DeFi protocols by TVL – Total Value Locked. As you can see, there are several Binance Smart Chain apps in the top ten.

defillama tvl

BSC is not the only game in town challenging Ethereum. Cardano and Polkadot aren’t far behind. There are probably a dozen different 3rd generation platforms trying to become the next “Ethereum Killer”. The 2.0 version must come out sooner rather than later…

In the short run, Ethereum might keep losing market share to its competitors. But, what chances the competitors really have in the long run? Once Ethereum is scalable, other platforms have very few advantages left. If any.

What is the Ether needed, then? The role of the ETH token is no different from competing platforms. Each platform has its own native token. This is used for paying transactions and moving value inside the platform. Miners or validators get their fees & block rewards paid with the native token.

The common argument is that the native token becomes valuable when the popularity of the platform grows. The more applications there are, the more transactions are done. More transactions mean more token demand. Popularity grows also the number of validators (stakers), which locks the token out of the market. This will reduce the supply, which helps the price go up.

If nobody is using the platform, there is no demand for the token either. This won’t be a problem for Ethereum, though. The staking of the 2.0 version is also running. There are millions of ETH tokens locked in and more validators join the Beacon Chain every week.

Don’t forget traditional investors either. There were three Ethereum ETFs approved in Canada in April 2021. Many institutional players are investing in Ethereum through Grayscale’s fund. Ethereum is the only cryptocurrency besides Bitcoin, which attracts serious institutional money.

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. Trustwallet 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.

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

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