What Is Ethereum? | U.S. News


Ethereum is a blockchain platform created to support smart contracts and secure financial transactions. Ethereum’s native cryptocurrency is Ether (ETH).

Smart contracts are software that allows decentralized apps, or dApps, to run automatically on a blockchain when a set of predetermined conditions are met.

The Ethereum network includes dApps for gaming, gambling, socializing and even decentralized finance, or DeFi. Most nonfungible tokens, or NFTs, are also based on the Ethereum network. The Ethereum blockchain has its own cryptocurrency called Ether (ETH) and its own programming language called Solidity. Ethereum’s cryptocurrency is the second-most-valuable crypto in the world, with a $310 billion market cap as of late January 2022, trailing only Bitcoin.

The initial goal of the Ethereum network was to create a blockchain platform on which developers could create and publish dApps that can be used securely without risks of downtime or interference from a third party.

Ethereum is unique because it allows online computer systems to run without relying on any third parties, such as big tech companies. Instead of running on a centralized platform, such as large company computers or massive cloud servers from Google, Ethereum allows software applications to run securely on a large, decentralized network of small, private computers. Because Ethereum is open-source, any developers around the world can create and run dApps without getting third-party permission or paying large fees.

Each time money is transferred by an Ethereum smart contract, Ether is the method of payment. Whenever they run on the network, dApps must pay a small Ether fee, called “gas.” These fees discourage malicious applications that are designed to bog down the network.

Ethereum transactions are verified and secured using blockchain technology and cryptography. Ethereum uses proof-of-work, or PoW, verification in which cryptocurrency miners compete to verify transactions by solving complex mathematical puzzles using powerful computers.

Ethereum mining is the process used to verify transactions and record them on the blockchain. Ethereum miners use powerful computers to complete advanced mathematical functions called hashes. This method of transaction verification is called proof-of-work because miners must prove they have done the work of solving these complex math problems to earn the right to verify a new block of Ethereum transactions.

Ethereum is transitioning to a proof-of-stake, or PoS, model, a more energy-efficient protocol. PoS cryptocurrencies choose transaction validators based on the number of coins they have staked, or locked up, to the network.

Ether (ETH)

Investors can buy Ether on popular cryptocurrency exchanges, such as Coinbase, Gemini and eToro. Ether trades under the ticker ETH. Many online brokers allow users to purchase Ether directly, including Robinhood, Interactive Brokers and TradeStation. Investors can also buy Ether through digital payment apps PayPal and Venmo. Finally, investors can buy Ether through physical Ethereum ATMs. There are tens of thousands of cryptocurrency ATMs worldwide, many of which support Ether buying. No matter how investors choose to buy their Ether, they must store it in a digital wallet.

Cryptocurrency wallets are like digital versions of physical wallets. Instead of storing dollar bills, cryptocurrency wallets store the private keys needed to send and receive cryptocurrency. Anyone with access to an Ethereum wallet’s private keys controls all the Ethereum stored in that wallet. Ethereum wallets can be physical hardware or digital software. Physical crypto wallets often come as small USB drives, while digital wallets are apps on a smartphone. “Hot” cryptocurrency wallets are connected to the internet, and “cold” wallets are not.

Thanks to exchange-traded funds, there are several ways for Ethereum investors to invest in the cryptocurrency without buying it directly. One is the Grayscale Ethereum Trust (ETHE). Each ETHE share represents about 0.01 Ether, the native token on the Ethereum platform. The Evolve Cryptocurrencies ETF (ETC.TO) trades on the Toronto Stock Exchange and invests in Bitcoin and Ethereum, with weightings based on the two cryptocurrencies’ respective market capitalizations. Finally, crypto investors looking for even more diversification can buy the Bitwise 10 Crypto Index Fund (BITW), which provides investors with exposure to the 10 most valuable cryptocurrencies and is market-cap-weighted.

Bitcoin is the clear cryptocurrency market leader. However, Ethereum is second. There are thousands of cryptos out there, but there’s a good reason why Etherum and Bitcoin represent a combined 62% of the total market, as of January 2022.

Bitcoin was the first cryptocurrency, and its first-mover advantage, simplicity and utility as a digital currency make it the most popular cryptocurrency investment. But Ethereum’s support of smart contracts, NFTs and other dApps makes the Ethereum blockchain much more functional for developers than Bitcoin. Planned Ethereum upgrades in 2022 could make the network faster, more energy efficient and cheaper to use, as well.

Ethereum

The Ethereum development team is large, growing and well-respected in the crypto community. The Ethereum network is also large, with nearly 109,000 addresses holding at least 32 Ether as of November 2021. This large number of nodes adds to Ethereum’s decentralization and security, two more pros of the cryptocurrency. Ethereum is more than just a cryptocurrency since it supports smart contracts and other dApps that offer users a high degree of potential utility. This utility has also attracted powerful business supporters, such as Intel Corp. (INTC), JPMorgan Chase & Co. (JPM) and Microsoft Corp. (MSFT).

Ethereum must address scaling and network congestion, but many of the current issues are expected to be fixed during the network’s transition to Ethereum 2.0. That upcoming series of updates will transition Ether from a PoW model to a PoS model. Ethereum’s Solidity is a unique programming language and creates a potential barrier to entry for some developers. Finally, congestion on the network has triggered spikes in transaction fees in the past, another problem the Ethereum team is attempting to address with Ethereum 2.0.

Ethereum was created in 2015 by a small group of developers. That original development group included Joe Lubin, founder of ConsenSys, and Vitalik Buterin, the man credited with coming up with the original Ethereum concept. Buterin is a Russian-Canadian writer and programmer and was an early member of the Bitcoin community. In 2013, Buterin put together a white paper describing his idea for Ethereum. The project officially launched in January 2014, and the initial team of developers included Lubin, Buterin, Mihai Alisie, Anthony Di Iorio, Charles Hoskinson and Gavin Wood. A few months later, the team raised $18 million via an initial coin offering to fund the project.

FAQs

No. Ethereum is a unique blockchain network with several key technical differences from the Bitcoin blockchain.

Gas refers to the cost required to perform a transaction on the Ethereum network. Gas fees are paid in Ether and denoted in gwei. One gwei is equal to 0.000000001 ETH.

Ethereum 2.0, also called Eth2 or “Serenity,” is a series of upgrades to the Ethereum blockchain that involves transitioning it from a PoW verification model to a PoS model. The Ethereum 2.0 upgrades began in 2021 and are expected to be completed in 2023.



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