What is Ethereum, and How does it Work?
You might have heard the name “Ethereum” whether you are new to crypto or are a seasoned cryptocurrency investor. Ethereum is an open-source blockchain platform that powers the cryptocurrency “Ether.” Ether is the second largest digital currency in terms of market capitalization, excelled only by bitcoin. It holds a 17% market share of the total $1.2 trillion crypto market.
Ethereum is the primary competitor of bitcoin, but they differ from each other. One significant difference is that while Ether and Bitcoin serve as a store of value, the Ethereum platform also supports the development of smart contracts and decentralized applications on its blockchain network. It enables the developers to have more control over their apps and data.
As such, Ethereum offers more to the community than a traditional store-of-value cryptocurrency. Here’s what you need to know about the Ethereum blockchain and its underlying technology:
What is Ethereum:
Inspired by Bitcoin, Vitalik Buterin and seven others co-founded the Ethereum cryptocurrency in 2015. It started as a digital currency but has since become a decentralized platform for applications and smart contracts. This capability is the primary difference between Ethereum and other popular cryptocurrencies such as bitcoin. It is also the reason why the price of Ethereum altcoin gained momentum even though other cryptocurrencies failed to make an impact in the crypto market.
The blockchain network of Ethereum has become so popular these days that even some newer cryptocurrencies are based on the Ethereum blockchain network. However, it is still not without its own set of risks. Like all other cryptocurrencies, the price of Ethereum altcoin is highly volatile, and it can fluctuate from 5% to 10% in a day. You can check the ETH/USD price to see the value of Ether in the current market.
How does Ethereum Work?
Ethereum is based on a blockchain network that stores and verifies each transaction completed on the network. The network is a distributed system of thousands of computer systems (miners) that solve complex mathematical problems to unlock Ether coins. Its blockchain network is decentralized, meaning central banks do not regulate it. You might wonder if this unregulated transaction poses a security risk to the investors’ money. However, it is certainly not the case. Because the network is decentralized and distributed among thousands of computer systems (miners) worldwide, it is almost impossible to hack or alter the apps and information on the network.
Ethereum powers a variety of different decentralized applications and offers several features to investors and developers alike:
- Digital Currency – The primary function of Ethereum is to serve as a store of value. You can sell/purchase Ether or use digital tokens to buy items with a digital wallet. You can also use it to complete transactions on the Ethereum blockchain network, such as enforcing a smart contract or buying an NFT token.
- Decentralized Applications – Ethereum supports digital apps on its blockchain networks. With Ethereum, you can play games, earn rewards, send money, invest, follow social media, and more.
- Smart Contracts – Another essential feature of the Ethereum blockchain network is that it enforces digital contracts once pre-set conditions are satisfied. The good thing about these contracts is that no third party is involved so that you can save some money on lawyers’ fees.
- Non-Fungible Tokens – NFTs, non-fungible tokens are financial securities or cryptographic assets. Artists use them to sell their digital artwork on the Ethereum blockchain network. Many influencers and celebrities have recently started digitalizing their memories and artworks to sell on the network.
- Decentralized Finance – Decentralized finance is an emerging concept, and it means investing in digital assets with no or few regulations established by any central bank. Some people invest in digital altcoins to avoid central banks’ control of money and other financial products.
Where do Ether coins come from?
Ether, the native cryptocurrency powered by the Ethereum network, is created by mining. More than 120 million Ether coins are available in the market as of April 2022. Although anyone can mine more altcoins, there is a limit on mining Ether coins in a year. This limitation is in contrast to Bitcoin, where there can only be 21 million altcoins that people can mine. The unlimited supply of Ether coins keeps the price from jumping as high as bitcoins.
Ethereum also knows its digital currency’s shortfalls, which is why it is moving from an energy-intensive proof-of-work mechanism to a proof-of-stake mechanism.
Move Towards Ethereum 2.0
Ethereum is upgrading its network from a proof-of-work protocol to a proof-of-stake protocol. This new protocol is called Ethereum 2.0, and the move is called “the Merge.” It means that once the Ethereum network is converted to a proof-of-stake mechanism, no one can mine more Ether coins. Instead, Ether coins would be staked, and the owners of significant stakes will be able to validate coins. This way, the supply of Ethereum can be controlled, and the owners of stakes would earn rewards for validating coins and increasing the price of Ether coins.
Should You Invest in Ether?
Ethereum has gained popularity in recent years thanks to its utility in digital contracts and decentralized apps. Many people have made a fortune by investing in Ether coins, while others have lost their life savings. Whether to invest in Ether coins or not solely depends on how much risk you are willing to take.
If you are ready to invest in a high-risk asset, investing in Ether coins can benefit you. You can buy ether coins because it serves as a store of value, and you can use them to purchase items or can earn profit by selling them when the price increases. Another significant benefit of investing in Ether coins is its move towards a new proof-of-stake protocol. Once its transition is complete, the demand for the Ether coin will increase, increasing the price as well.
Lastly, as more and more people are utilizing smart contracts and decentralized apps, the demand for Ether coins is rising. The increase in demand will increase the price of the Ethereum coins. Considering the above factors, you can see that investing in Ether coins might be the best decision you’ll ever make.
The Bottom Line
Ethereum, the second most popular cryptocurrency, has recently gained popularity. As more people start utilizing smart contracts and NFTs, the price of Ethereum is only going to increase in the future. If you want to invest in a high-risk asset, investment in Ethereum might be the best option. However, investors should only invest as much as they can afford to lose. Given its volatility and high risks associated with the digital asset class, investors should take a measured approach when investing in Ethereum.