What is Ethereum? A Comprehensive Beginners Guide
- Ethereum was launched in July 2015, by a team led by Russian Ethereum founder Vitalik Buterin
- Different from Bitcoin, Ethereum is a cryptocurrency and a decentralized opensource software platform
- Ethereum makes it easy for decentralized app and blockchain developers to launch their own cryptocurrencies and monetize decentralized software applications
What is Ethereum for Beginners?
Ethereum had a spectacular year in 2017. In just twelve months, the cryptocurrency became the world’s second most popular by market cap. ETH prices rose from $14 to almost $1,500 in a short period, resulting in significant gains for early investors. The only question is, what is Ethereum? And can investors expect the same kind of price rises in the future?
Ethereum Vs. Bitcoin
Bitcoin is the grandfather of all cryptocurrency. However, the blockchain technology which underpins Bitcoin is relatively simple. The Bitcoin decentralized ledger serves one purpose. Namely, to track transactions as Bitcoin are sent from one address to another.
Ethereum is very different to Bitcoin. Specifically, thanks to the fact that Ethereum provides what is effectively a cryptocurrency and blockchain as a service platform (BaaS).
As well as sending ETH tokens between wallet addresses, Ethereum also works as a decentralized virtual computing platform. The Ethereum network can, therefore, be used by developers to create ETH-based decentralized apps, and even completely new blockchain powered cryptocurrencies.
Ethereum & the ICO Market
In 2017, initial coin offerings (ICOs) spurred an investment frenzy in cryptocurrency. Usually, startups and individuals hoping to start a business, are required to take out small business loans. However, banks consider new business loans inherently high risk. Many are, therefore, reluctant to approve funding.
Starting in 2015, Ethereum provided startups with a second funding option. Instead of applying for bank loans or pitching business ideas to investors, startups could create their very own cryptocurrency coins on the Ethereum blockchain. These ICO coins could then be sold to members of the public to raise startup capital.
Ethereum Full Capabilities
Many cryptocurrency investors are familiar with the fact Ethereum can be used to create and distribute ICO tokens. However, the Ethereum Virtual Machine (EVM) has several other unique capabilities.
- Ethereum ERC721 tokens can be created to track the real-time ownership and physical location of scarce commodities like precious metals
- Decentralized apps like games and high-end software applications can be built and hosted on the Ethereum Network
- Businesses and individuals can create Smart Contracts on Ethereum which work similar to traditional Escrow services but are entirely automated
Ethereum Key Benefits
New startups looking to raise capital, have traditionally been Ethereum’s biggest supporters. Creating and selling ICO coins via the Ethereum platform has helped more startups raise funds they need to build business concepts than ever previously. However, creating D’Apps, smart contracts, and ICO coins on Ethereum, also provides users with several other benefits.
- ETH D’Apps and smart contracts benefit from complete immutability
- No third party can ever hack, tamper with, or steal ETH funds or data
- Software running on top of the Ethereum blockchain benefits from zero downtime
What are Ethereum Smart Contracts?
After ICO tokens and decentralized software applications, the Ethereum network is predominantly used to create and execute smart contracts.
In principle, smart contacts are a completely automated version of traditional escrow services. For instance, when buying real estate, escrow agents hold home-buyer funds and property deeds until they can confirm that the terms of a sale have been fully satisfied. Once conditions are satisfied, escrow agents release funds to sellers and property titles to home-buyers. There is just one problem.
- Escrow agents and services often charge high fees
- Third parties overseeing the terms of a transaction can make mistakes
- Certain types of transactions can take days, weeks, and in some cases, even months to finalize
Ethereum smart contracts dispense with the need for traditional escrow services entirely. Any real-world asset or commodity can be digitized and locked into a smart contact. Smart contracts can then be programmed to only release assets when specific sales terms are met.
In the case of a property sale, Ethereum smart contacts can be configured to only release title deeds when home buyers deposit funds in a specific Ethereum address. When this happens, funds are released to sellers in tandem with title deeds being released to home-buyers. Transactions settle instantly, require no human oversight, and can be executed for less than a thousandth of the fee of a traditional escrow service.
How Ethereum Works
Ethereum founder Vitalik Buterin, based many of his ideas for Ethereum on concepts presented in the 1990s by computer programming prodigy, Nick Szabo. However, taking Ethereum from concept to creation has been no small feat.
Like Bitcoin, Ethereum uses a proof-of-work consensus algorithm. This means that ETH coins are mined and miners receive rewards in the form of fees which Ethereum calls GAS. Here, though, similarities with Bitcoin end.
Ethereum Vs. Bitcoin Technical Specifics
With Bitcoin, every node on the Bitcoin blockchain is required to hold and validate the Bitcoin transaction ledger. With Ethereum, this is also the case. However, Ethereum network nodes also have to verify the state of every smart contract, every decentralized application, and every third-party blockchain running on the ETH network.
The Future of Ethereum
Throughout 2018, the Ethereum price fell in tandem with the price of Bitcoin and several other factors.
- D’App development on Ethereum is widely considered limited by network scalability concerns
- New blockchain projects like EOS and Cardano, claim to be able to do everything Ethereum can, just better
- The prevalence of ICO scams has resulted in stricter regulation of ICOs in the United States
Due to scalability concerns, coins like EOS are increasingly heralded as ‘Ethereum killers.’ However, Ethereum founder Vitalik Buterin believes that such claims are overblown. To date, coins like EOS have failed to deliver on many promises presented by developers. At the same time, Ethereum developers eventually plan to transition the ETH network to a proof-of-stake consensus algorithm. When this occurs, Ethereum network performance and capabilities will increase significantly.
Is Ethereum Worth Investing in During 2019
Like Bitcoin, Ethereum has historically retested previous price highs. For this reason, many cryptocurrency commentators believe that ETH is still investment friendly, especially for new to market investors.