Ethereum is called the second cryptocurrency and the first altcoin. But in fact, Ethereum is not only and not so much a cryptocurrency.
Its functions are much broader than those of bitcoin. If you want to know why Etherium is needed, how it works, who is behind it, and whether it is worth buying as an investment, this article is for you.
What is Ethereum in simple words
Without going into too much detail, to explain in simple words, Ethereum is a universal, distributed system of smart contracts based on blockchain technology.
This is not a cryptocurrency at all, as many people think.
The cryptocurrency that is used to run applications based on Ether is called Ether.
How is Etherium different from Ether?
Ethereum is a blockchain system. It can be used to create a service or an application. And Ether (ETH) is a token that is used to transfer data within that service. Just like regular currency or securities are used in a traditional financial system with banks and exchanges.
A token is essentially a unit of information, it can be:
- Non-fungible, that is, unique – NFT (Non-fungible token)
- Interchangeable, in the case of Ether, of course all Ether tokens are equal and interchangeable, otherwise they could not be used as money.
Ether is traded on the exchange just like traditional dollars, euros or stocks, so its rate is constantly changing.
A smart contract is an automatically executable contract stored in a blockchain system. The terms of a smart contract are an algorithm (written in a special Solidity language) that cannot be changed once signed by all parties.
The main advantage of smart contracts is that there are no intermediaries to enforce it.
Simply put, Etherium is a financial system, Ether is the money that is accepted in that system, and smart contracts are the contracts by which transactions are made.
Why Ethereum is needed
Etherium is just technology. The real benefit comes from applications created using this technology. They are called DApps (decentralized applications).
According to stateofthedapps.com, 72.9% of all decentralized apps in the world use the Etherium ecosystem.
Why is Ethereum so popular?
The fact is that the technology was originally conceived so that everyone could use it for any task.
It is a decentralized system – that is, the data is distributed all over the Internet. There is no organization or person in control of Etherium. There are many community organizations just making rules and guidelines.
The source code of smart contracts is open, it can be read by any interested user, but you can’t change anything in an existing contract.
What is Etherium for
Technology is used to create:
DAO – decentralized autonomous organization. In essence, they are the same organizations with the same goals that we meet in normal life. Except that all events in them are not managed by the decision of the people assigned to manage it, but by smart contracts.
An example of such organizations:
- Uniswap is a decentralized cryptocurrency exchange. All changes are made by user voting. UNI’s own token is used for this.
- Raid Guild is a community of Web3 developers. Web3 is a blockchain-based Internet.
- Machi X is a community of artists and patrons promoting digital art.
DeFi are decentralized financial services. Most often such services are represented by trading platforms, brokers, credit institutions or investment companies.
- Opensea is the largest marketplace for trading NFTs (those pictures worth millions of dollars).
- Augur is a service for predicting events in “prediction markets”, actually estimating the value of assets, depending on future events.
- Aave is a decentralized blockchain application that can be used to receive and provide credit in cryptocurrency.
NFTs are non-interchangeable (unique) tokens. Their uniqueness is their value. After all, it is possible to “tokenize” not only digital art, but also the ownership of an invention, a piece of real estate, stocks, bonds…
Etherium creator Vitalik Buterin on the cover of Time magazine
That is, in fact, any unique asset can be written into a blockchain and then manage it as you see fit.
Thus, Ethereum is an ecosystem for creating a huge number of useful applications and services, which means that the technology brings more benefits than the famous Bitcoin, although it is the second largest by capitalization.
The service dappradar.com contains links to over 3,000 applications running on the Ethereum platform.
How Etherium differs from Bitcoin
Bitcoin is the first and most popular cryptocurrency. But it is only a cryptocurrency.
The main advantages of which are:
- a built-in mechanism for counteracting inflation.
Etherium, on the other hand, as shown above, is a tool for creating decentralized services, which is how it was conceived.
Its main merits:
- built-in smart contracting mechanism,
- a built-in inflation protection mechanism,
- speed of operation.
Ether differs from bitcoin in the mechanics of inflation protection.
Bitcoin uses the mechanism of “halving”, that is, reducing the remuneration of miners by 50% automatically every 4 years. It is becoming less and less profitable to mine bitcoin this way, and bitcoin is limited to 21 million coins.
For Ether, the mechanism of “reduction” is used – this is also a reduction of the remuneration for mining, but in “manual mode”, as required. The issue of Ether is not limited in this case.
Transactions in the Etherium system are faster.
While bitcoin is capable of processing 4 transactions per second, Etherium is already capable of 20 transactions per second.
But the main difference between Etherium and Bitcoin is smart contracts, which simply do not exist in the bitcoin blockchain.
And while bitcoin was conceived only as a digital currency where the only possible type of transaction is the transfer of funds, Etherium is a system consisting of a currency and a mechanism for using it (making transactions) – smart contracts.
This is the main value of the “second cryptocurrency.
Both systems are based on blockchain technology.
In both cases, a blockchain is a registry where information is stored. But while bitcoin’s blockchain can only store information about the ownership of the BTC cryptocurrency itself, the Etherium blockchain was originally created to store data from any application.
The advantage of Etherium is its versatility.
Why is Ethereum rising/falling?
Like any other asset, the cryptocurrency ETH is constantly changing in price. This happens because someone sells it and someone buys it.
And since Ether is the second most popular cryptocurrency, a lot of people participate in trading every day and thus form supply and demand.
Naturally, the rate of ETH can both rise and fall, depending on the mood of the market.
But, as mentioned above, Ether is not only a tool for investment or speculation, but also a useful tool for creating applications.
And the more users such applications have, the more ETH coin is in demand.
The utilitarian properties of Etherium allow it to be more stable than other cryptocurrencies.
Ethereum as an investment
It is only natural that the world’s second most popular cryptocurrency attracts the attention of investors. But is it worth investing in Etherium?
Despite the periodic ups and downs of Ether (which is typical for all cryptocurrencies), the growth trend is still positive.
- Continued market interest in the No. 2 currency, large capitalization and transaction volumes.
- A functional technology that allows the creation of individual decentralized projects, which, in turn, guarantees the demand for Ether as a digital currency.
- A huge community that supports and actively uses and develops the technology.
- Ether’s relatively high volatility – its value is constantly changing, which creates risks for investors counting on the short-term effect.
- The decentralization of cryptocurrencies also means that there is no organization that guarantees the security of their owners.
In the end, the decision whether or not to invest in Etherium is, as usual, left to the investor himself.
There are no absolutely reliable assets, neither among cryptocurrencies, nor among traditional investment instruments.
We can only recommend that before including Ether in your portfolio, you understand what Ether is, what it’s for, and how it works. This will help you understand what factors determine the price of ETH.
So, Etherium is a promising blockchain ecosystem that is used to create services based on smart contracts.
At the same time, cryptocurrency Ether is a form of asset storage, a means of payment, and an investment vehicle for those who make this decision.