What is Ethereum: A Beginner’s Guide
Cryptocurrencies have taken the world by storm and over the past few years, they have proven more profitable than conventional investment opportunities. Despite this, however, most people do not have a clear understanding of what cryptocurrencies are and how they work. In this post, the focus is on the second biggest—and by far the most functional—cryptocurrency platform in the world, Ethereum. Below, you will find a non-technical description of the Ethereum network, what it does, how it works, and how to take advantage of the unique opportunities it presents.
What is Ethereum? How does it Work?
In the most basic sense, Ethereum is a platform that provides developers with the infrastructure and the tools to build blockchain-based apps. To fully understand how Ethereum works, a basic understanding of blockchain technology is needed.
The blockchain is a public database that can be programmed to store data (and value), update said data regularly, and share them with everyone on the network. Everyone can see the data on the blockchain network, but no one can change it. There is no central point of failure, i.e. it doesn’t exist on any single server, rather, it is secured on millions of computers all over the world.
Now, what Ethereum does is allow developers to build all kinds of apps (known as decentralized apps/DApps) on the blockchain network. Before Ethereum, building DApps required a complex knowledge of coding, mathematics, cryptography, computer science, etc.; developers had to build entire blockchains from the ground up. Not anymore.
How is Ethereum Similar to/Different from Bitcoin?
Bitcoin was the first digital currency in the world and the first beneficiary of the revolutionary blockchain tech. Bitcoin’s token, BTC, is also the most valuable cryptocurrency in the world. As a result, it is the most popular and many people equate all cryptocurrencies with Bitcoin. However, Bitcoin and Ethereum are very different.
Bitcoin is a peer-to-peer electronic payment system, and it allows people from all over the world to send BTC within minutes and without bureaucratic hassles. Ethereum, on the other hand, is an ecosystem on which other blockchain-based apps can be built. Bitcoin has one major use case—payments—while Ethereum can be used to build any type of decentralized application and/or cryptocurrency token. For some context, there are many DApps on the Ethereum Network that facilitate payments just like Bitcoin.
What Investment Opportunities Does ETH Offer?
Ethereum’s cryptocurrency token, ETH, serves as the governing currency on the network. To leverage the services that Ethereum offers, e.g. building DApps, creating smart contracts, and so on, developers have to pay in ETH. As a result, the value of ETH is tied to how well the Ethereum network performs. Furthermore, ETH can also be used to process payments à la BTC and ironically, it has a more efficient payment system than Bitcoin. Per Wikipedia, as of January 2018, nearly 150 stores accept ETH as a payment method.
According to Coinmarketcap, ETH was released for trading on the 7th of August, 2015 and as of the 8th of May 2018, the value of the cryptocurrency has risen by ~41,710%. That means original investors have seen a 417-times return on investment. Over the past year, the cryptocurrency has seen ~800% increase in value, meaning those that invested in ETH around this time last year have made 8-times their original investment.
What are the Dangers of Investing in ETH?
- As a rule, cryptocurrencies are very volatile. Prices change drastically, both positively and negatively.
- There have been compliance issues: because of its decentralized nature, governments are not in full support of cryptocurrencies, ETH included, and it is banned in some countries.
- The Ethereum network has not reached mass adoption.
Where Can I Buy/Sell ETH?
It is the second most valuable cryptocurrency in the world, so, all major exchanges buy/sell ETH. You may invest in the Ethereum network by buying ETH and keeping it, in the hope that its value increases. However, you may decide to trade ETH similarly to how fiat currency pairs (EUR/USD, USD/JPY etc.) and commodities (Gold, Coffee, Sugar etc.) are traded—sites like Binance, BitMex, and many others allow this.
What is the Probability of Critical Mass?
Critical mass, also known as self-sustainable growth, occurs when a network has gained so many daily users that it can grow sustainably on its own. A network that has attained critical mass has a very low probability of failure, e.g. the Internet, Google, or Facebook.
Ethereum was launched in 2015 and while it has not reached critical mass, it is the cryptocurrency network with the best chance of doing so. By allowing developers build DApps on it, Ethereum is ensuring that it will remain relevant in the coming years. As of August 2017, CoinTelegraph reported that there were over 5300 tokens built on the Ethereum network, as of now, the number has undoubtedly increased considerably.