“Paper money is going away,” claims Elon Musk.
Is it, though?
It seemed difficult during the 2010s. After all, the only cryptocurrency was Bitcoin and not many even knew what Bitcoin is. However, the crypto-verse has expanded significantly since then. Cryptocurrencies now appear in headlines across the internet.
They have bulked up bank accounts for some investors but drained others dry. It’s only natural for the average Joe to become curious about all the crypto rage. One of the cryptos in particular has been the beneficiary of plenty of attention. Zero points for guessing—it’s Ethereum.
What is Ethereum?
Ethereum is the world’s second-largest cryptocurrency by market capitalization, second only to Bitcoin. Contrary to popular belief, Ethereum itself is not a coin but an open-source blockchain with smart contract functionality.
Ethereum uses Ether (ETH) for making payments on the blockchain. Therefore, when someone refers to purchasing Ethereum, they’re actually talking about Ether.
What separates Ethereum and other blockchain applications is the Ethereum Virtual Machine (EVM). EVM is a decentralized runtime environment that facilitates the creation and operation of smart contracts, also known as decentralized applications (DApps).
This is why even though Ethereum didn’t invent the blockchain technology (Bitcoin did), Ethereum has developed innovative, value-adding solutions using blockchain.
Why Should Anyone Buy Ethereum?
It’s not surprising that ETH has been turning heads across the crypto-verse owing to its fundamental strength. Its price has appreciated steeply during the previous five years, and the uptrend is likely to continue.
A big advantage for investors is that they can buy Ethereum on almost any major exchange. Plus, Ethereum also enjoys ample liquidity so investors will never need to worry about being stuck with Ethereum in a market that lacks buyers. It’s also fairly easy for beginners to learn how to buy Ethereum. It’s got a ton of benefits, and these are just the tip of the iceberg.
Let’s look at Ethereum’s history, its contribution to the crypto-verse, and how it’s shaping up for the future (Ethereum 2.0).
Ethereum’s History
Vitalik Buterin, the founder of Ethereum, first jotted down the idea of Ethereum on a piece of paper in 2013. Subsequently, he also published a whitepaper that included Ethereum’s proposed mechanism, rationale, and other technical details.
The following year, GmbH developed the first-ever Ethereum software. In the latter part of the same year, Ether launched a pre-sale to establish a network of shareholders and miners, which left the company with proceeds of $14 million. Back then, the Ethereum blockchain allowed creating 5 ETH for each block mined.
Ethereum’s beta version, named Frontier, was launched in 2015. Next year, a protocol upgrade named Homestead was introduced on the network. The same year, DAO raked in $150 million through a crowd sale, earning Ethereum a ton of media exposure. However, the DAO was hacked subsequently which led to the Ethereum network splitting into two—Ethereum and Ethereum Classic.
2017 was the year from Ethereum. Russia’s endorsement of Ethereum and its addition to major platforms like eToro gave Ethereum the momentum it needed. Companies also started to leverage the power of smart contracts for creating derivative tokens. Soon after, the market cap began to surge, and it hasn’t looked back since.
Smart Contracts
A smart contract is an automatically executable computer program. A smart contract is a transaction protocol that enables blockchain users to transact money and property. What’s more, a smart contract also enables users to execute actions such as voting even in absence of a central authority.
Ethereum Foundation explains that smart contracts are “applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.” Smart contracts work like third-party software that can automate the execution and enforcement of a legal agreement’s terms.
Recently, activity has been in an uptrend on the Ethereum network, thanks to the growing popularity of non-fungible tokens (NFTs), which are powered by smart contracts. NFTs are digital assets that confirm a virtual item’s ownership. For instance, the delightful CryptoKitties cats and CryptoPunks avatars.
One of the most promising use cases of Ethereum and smart contracts is decentralized finance. Decentralized finance aims to replace traditional financial products like loans and mortgages by bringing them onto the blockchain. This helps eliminate the middleman, including banks and governments, and also keeps a track of all transactions.
Ether vs. Gas
Most beginners probably won’t know that the Ethereum blockchain has two native tokens—Ether and Gas. However, they share a unique relationship and a rather interesting one at that.
Let’s break down how Ether and Gas co-exist in the Ethereum blockchain. Think of Ether as a currency that must have an intrinsic value to fulfill its purpose as a currency. On the other hand, Gas works like a commodity, such as oil for instance. Anybody who wants to use the Ethereum blockchain needs Gas, the same way as oil is needed to use a car.
There is one noteworthy difference between oil and Ethereum’s Gas, though. Oil and fiat currency are two separate assets, but Gas is just another interface on top of Ether. Think about having to exchange Ether for Gas for every transaction. Makes little sense, doesn’t it? Fortunately, that’s not how gas works.
Is Ethereum Perfect?
Not by a long shot. CryptoKitties, a popular game on the Ethereum network, once caused heavy congestion resulting in slow transactions, compelling the developers to increase their fees.
Scalability is another issue that Ethereum faces. As of today, it operates on a proof-of-work protocol, much like Bitcoin. Therefore, all transactions are validated by miners with powerful computers who compete by solving complex math puzzles. Since these computers also consume a massive amount of energy, Bitcoin and Ethereum have both been criticized in this regard.
Fortunately, Ethereum is moving to Ethereum 2.0 in phases. Ethereum 2.0 operates on a proof-of-stake protocol that relies on stakers—persons who already have enough Ether for processing transactions. Investors believe that this move will improve Ethereum’s scalability potential by enabling it to process a significantly large number of transactions quickly.
What is Ethereum mining?
Currently, Ethereum operates on a proof-of-work protocol. The participants of the Ethereum network, i.e., miners or nodes as they are commonly known, validate the network constantly. Each node tries to solve mathematical puzzles to prove that they worked to secure the network.
Of course, the larger the number of participants, the more difficult participation becomes. Each new block added to the network by a node earns them a reward that is proportional to the computational power contributed by them to the Ethereum network.
Ethereum validates new transaction blocks at a 15-second interval, which is far quicker than Bitcoin’s 10 minutes per validated block. A miner who adds the latest block is rewarded with 3 ETH, and this is the only entry point for new ETH into the crypto-verse.
When to Expect Ethereum 2.0?
Ethereum 2.0 will implement sharding. Currently, the Ethereum blocks are confirmed linearly, i.e., a new block is confirmed only after its predecessor. However, sharding allows the network to be split into smaller divisions called shards.
The shards ultimately connect to a central chain, called The Beacon Chain (Phase 0 of Ethereum 2.0). Phase 0 was successfully implemented on December 1, 2020. Since then to the time of writing, almost 180,000 validators have staked close to 6,000,000 ETH. These figures show that the Ethereum community strongly believes in Ethereum’s long-term prospects.
However, the Beacon Chain’s potential can be fully leveraged only once the subsequent phases are implemented. Sharding (Phase 1) was supposed to be implemented sometime in 2021, but it seems the implementation won’t happen until 2022.
Docking (Phase 1.5) will likely be implemented during 2022 and will finally allow the Ethereum community to leverage Ethereum 2.0’s potential. Once Docking (Phase 1.5) is implemented, Ethereum will have moved to a 100% Proof of Stake model. Subsequent phases are likely to conclude by the year 2023.
Will Ethereum Eventually Become the Next Bitcoin?
Not quite. Both Ethereum and Bitcoin have different purposes. However, Ethereum might threaten Bitcoin’s position on the crypto leaderboard. Currently, Ethereum’s market cap is less than half of Bitcoin’s. Nevertheless, Ethereum is quickly catching up.
Ethereum is much broader in scope than Bitcoin and has more use cases, too. Ethereum’s capability to allow users to create and operate smart contracts and its potential in the decentralized finance space make it fundamentally appealing. With various use cases like NFTs and DApps, Ethereum is easily one of the best cryptocurrencies around.
Ethereum also makes for an excellent investment. While enterprises are busy preparing themselves for futuristic transactions, investors and traders are aiming to pocket gains scalping through its diabolically volatile prices. Granted, the risks of investing in cryptocurrencies can be nightmarish, but those with ample risk appetite stand to earn massive returns.
When it’s all said and done, the big picture shows that Ethereum, though still in its infancy, has a bright future. It has all the characteristics that make enterprise transactions easier. It still isn’t a great store of value like fiat currencies, and only the future can tell if this will change over time.
Author Bio: Arjun Ruparelia
Email – ruparelia.arjun@gmail.com
An accountant turned writer, Arjun writes financial blog posts and research reports for clients across the globe, including Skale. Arjun has five years of financial writing experience across verticals. He is a CMA and CA (Intermediate) by qualification.
