If you’re someone looking into cryptocurrency, you might have already heard of the most popular cryptocurrency out there, which is Bitcoin. You might have also already heard of its runner-up, Ethereum.
Ethereum is the second-largest cryptocurrency by volume, but it has a much larger learning curve for new investors than Bitcoin. It can act as money and a store of value, but it can also act as a highway for decentralised finance.
Unlike Bitcoin, Ethereum does not create value but instead acts as a software platform that runs on a blockchain. The cryptocurrency associated with it is called ‘ether’, and it is utilised by users to either interact with the platform or buy and sell it as a store of value. Developers commonly use Ethereum, but others choose to invest in crypto for its potential to grow in value over time.
Ethereum – What Is It And How Does It Work?
Ethereum was created back in 2015 by a programmer named Vitalik Buterin, following the success of Bitcoin. He wanted something that would be different and could do more than Bitcoin and made a blockchain network with an associated cryptocurrency, subsequently called ‘ether’.
Ethereum can be bought and sold as an investment like Bitcoin, but it can also be used by developers as a software platform to create new applications, usually related to crypto. Those applications can be designed to make buying, selling, and using cryptocurrency a smoother process. Similar to the apps on your smartphone, there can be a variety of lending apps or payment platforms that can be made using Ethereum. You can think of it as a software development platform targeted at crypto users.
This is all powered by something called ‘smart contracts’, a program that runs on the Ethereum blockchain autonomously. Smart contracts handle functions that a third-party would normally have to take care of.
For example, peer-to-peer lending is gaining traction on Ethereum because people can now complete direct transactions on the network. This is possible because of a lending app made on the platform that allows users to lend money to each other without letting banks get involved. Ethereum has also been used to create Matcha, a data service that can search multiple crypto exchanges for the best prices out there.
But what exactly is a ‘smart contract’? It is an algorithm designed to perform specific functions when certain criteria is met. Smart contracts are hugely beneficial to the system since they are faster, lack human errors or bias, and cost less than traditional lenders.
And because Ethereum is based on the concept of decentralisation, like other digital currencies, products and services on Ethereum are available to anyone with internet access.
Being open-source allows Ethereum to allow other developers to create wholly new cryptocurrencies like Chainlink and XRP. It can also be used to create non-fungible tokens or NFTs, which are tokens powered by Ethereum that can be used to represent ownership or unique items.
To create all of these decentralised applications and new tokens, developers have to pay a fee called ‘gas’ to the Ethereum network. Gas acts as the price that you pay to be able to use the system, similar to the act of purchasing a ticket to ride the tube.
Ether would then be the cash that you use to buy those tickets. Different uses of the platform require different amounts of ether, and the fees increase when more people join the network.
All of this can help explain the rise in Ether’s value over the years. As more and more people use Ethereum to create, they would need to buy more ether to pay for gas fees, and more people paying gas would increase ether’s value. Investors are now eyeing the potential it has for the future.
If you want to invest in Ethereum, you need to buy ether. Similar to investing in Bitcoin, investing in Ethereum entails buying and selling the token in hopes that it will increase in value over the course of time. Of course, always keep in mind that with every high risk investment there will always be fluctuations so prepare yourself before delving in.