Ethereum is vastly different from every other cryptocurrency available in the market. However, there are two key similarities.
One, it also uses a digital ledger that ensures the safety and reliability of the network.
Two, it also has massive growth potential in the next decade. Since its inception 5 years ago, the price per token has climbed more than 500%, catching the eye of media and investors alike.
The workings of Ethereum cryptocurrency shouldn’t be difficult to understand as it is really straightforward in most aspects. However, if you do not know where to start and how to jump on this growing trend, let us make it easy for you and start at the very basics.
Here’s what we will be learning in the next quarter hour:
Ethereum meaning: What is it?
Ethereum was proposed in 2013 by co-founders Vitalik Buterin, Anthony Di Iorio, Joseph Lubin, and others as a support system to the existing Blockchain-based Bitcoin. The software platform was launched on 30th July 2015 after a year of crowd-funding and development.
Let’s start by establishing a distinction. Ethereum is not an exchanged token like BTC.
Just how Bitcoin (BTC) works on Blockchain, Ether (ETH) works on Ethereum. It’s easy to mix these up at times, as Ethereum has become synonymous with its use as a cryptocurrency platform.
However, the truth is that Ethereum is much more than just a cryptocurrency. It is a complete programming language and a decentralised software platform. Ethereum builds on what Bitcoin already has left for the world and utilises Blockchain technology to its full extent.
On Ethereum, developers can program applications called ‘smart contracts’. This platform’s programmability makes it extremely suitable as a complete marketplace for fiscal facilities, among other services like untraceable apps and games.
Ethereum cryptocurrency as an alternative to Bitcoin
You must be wondering why Ethereum came into existence, right?
Here’s a fun fact; it takes 10 minutes to mine one block of Bitcoin transactions successfully. It takes around 12 seconds to mine one block of Ether.
Ether broadly serves two purposes on the face of financial transactions, i.e.
- Just like other cryptocurrencies, Ether is also used as a digital currency for purchase, sale, and trading between a buyer and a seller.
- Ether is also used inside Ethereum to run decentralised tamper-proof applications.
Ethereum was built to complement Bitcoin and overcome its shortcomings by providing a programmable interface. Since the government or any such authorities do not censor its workings, nobody can stop you from sending or receiving currency, even across borders.
However, to understand why Ethereum is essential, you must understand how intermediaries today regulate transactions.
A brief history of Ethereum and its use of Blockchain
Intermediaries control a huge chunk of what we do these days. Mail clients like Gmail and Thunderbird allow us to send emails; Amazon allows us to buy things from the comfort of our home, banks and stockbrokers regulate financial transactions for us.
What this essentially means is that third party regulators possess a large chunk of our personal information. Organisations like Facebook and Google are under constant scrutiny due to distributing such information for advertisement, etc.
Further, these arbitrators also open up the possibility of censorship, thereby controlling and manipulating how users interact with other users. Sometimes, users may also have to pay a charge to realise financial transactions like buying, selling, and trading.
The rise of such intermediaries is the primary reason why the concept of decentralised finance has gained such breath-taking popularity in the 21st century.
Ethereum is based on the idea of revolutionising how applications on the internet work today, extending further control to users rather than intermediaries. By adopting Blockchain-based decentralised data, software developers can build applications based on Ethereum that self-sustain themselves and cannot be tampered with by third-party intermediaries.
For example, EtherTweet, Peepeth, Akasha, and LivePeer are decentralised, token-enabled social media platforms.
Meanwhile, Etheria, CryptoKitties, FunFair, and Etheremon are popular decentralised leaderless games based on Blockchain technology.
Bitcoin vs Ethereum
Everything considered, if Ethereum cryptocurrency was not supposed to be a competitor, why is it regarded as one?
That’s because of four primary reasons:
- Ether is easier to mine as it has a smaller difficulty and block size than BTC, making it much more fluid than Bitcoin.
- Ethereum‘s lower market capitalisation has garnered the interest of investors as a long-term investment option, as there is a higher chance for growth for holders.
- Transaction charges for Ether are lower than Bitcoin.
- Far more Ether is in circulation than Bitcoins as it is a non-fixed supply asset.
While Bitcoin is famous as a store-of-value commodity, Ethereum is a tool to decentralise everything internet, from social media, work, games, and platforms to decentralised financial agreements.
Its programmability is one of the primary reasons why hard-core enthusiasts prefer Ethereum to Bitcoin. However, since both cryptocurrencies are built with quite different end-use applications, both these ideas are quite important for someone who is looking for alternative investment ideas.
That being said, you must be wondering about these decentralised applications that work without any external influence. Here, the concept of smart contracts comes into play, which is actively involved in changing the way we interact with the internet.
Open-ended Ethereum: Introduction to Ethereum smart contracts
In all honesty, the term ‘smart contracts’ is a really poor description of various protocols and technologies working behind the Ethereum network’s scenes.
The protocols are neither logically smart nor legally binding. The term ‘contract’ has no real meaning in this context.
Instead, smart contracts are absolute computer programs that run deterministically as part of the Ethereum Network Protocol. Let’s take a look at what these terms mean in the context of Ethereum.
- Absolute refers to the fact that once the code for an application has been released into the network, the only way to change anything at all is to release a completely new instance of the same.
- Deterministic refers to the fact that everyone who runs the application will get a universal outcome irrespective of the state of the Ethereum network.
- Smart contracts can be executed in a minimal context. All instances of the virtual machine on Ethereum Network Protocol are executed on the same initial state and produce the same final result.
An evident real-life example is a soda can vending machine. Every individual pressing the button for a Pepsi will get a Pepsi can only. Meanwhile, if someone wants to get a Coca Cola, they’ll have to press a different button altogether.
Additionally, note that anyone wanting to buy a soda can does not have to pay money to an intermediary. The vending machine automates the entire process, removing the need for a shopkeeper and maintenance.
That’s the notion behind Ethereum as a decentralised software platform. Automate the applications so that users can directly enjoy the benefits.
While these smart contracts are written in a high-level language, e.g., Solidity, these contracts must be compiled to a low-level byte code that runs in the virtual machine.
Now that we have covered the technical basics of Ethereum, let’s move on to its true potential as an alternative investment option in the years to come.
Ethereum as an investment in 2021
It is safe to say that Ethereum revolutionised the cryptocurrency market upon its launch in 2015. That is because Ethereum was not only a decentralised cryptocurrency token, but it was also a worldwide supercomputer that enabled developers to take advantage of this system and build decentralised applications as well.
Wait, a supercomputer? Let’s take a dive deeper to understand.
Instead of centralised servers to store information, Ethereum‘s Blockchain runs on several ‘nodes’ worldwide. On these nodes, Ether transactions are verified, thus forming a worldwide supercomputer.
The Initial Coin Offering (ICO) in 2017 saw an overwhelming response from users across nations. This boom led to the price of one Ether (ETH) skyrocket to an all-time high of INR 1,05,917.06 (ETH to INR).
Although the hype has fizzled out since then, experts presume that the ROI on Ethereum platform is over 9000%.
This is further boosted by a renewed interest in decentralised finance, which saw its price increase from INR 9,600 ($130) to INR 44,300 ($600).
Ethereum‘s programmability is its strongest suit even as an investment, pushing its growth potential further up. Investors are attracted to how creative the platform can be in its use of Blockchain, facilitating online trading, disbursing loans, and exchanging commodities.
Ethereum can serve as an excellent choice for diversifying the portfolio of an investor. Being an alternative investment option, investors can experiment with different token sizes in an attempt to make a quick profit in a relatively shorter span.
Finally, the interest in Ether as a commodity is expected to rise further in the coming years with the recent launch of Ethereum 2.0, which brings a host of new changes making it a lucrative investment option.
Ethereum 2.0 & expectations from it
With the first phase launched on 1st December 2020, Ethereum 2.0 is a massive upgrade to the network platform in terms of the changes rolled out. Let’s take a look at what the upgrade brings to the table for developers, miners, and investors and what they can expect from it.
Eth2, or Serenity as it is called, is a long-overdue interconnected upgrade to the Ethereum Blockchain and aims to enhance its efficiency as a cryptocurrency and scalability as a method of exchange. Compared to the previous version, this new edition will attempt to support up to 1000 transactions a second in an eco-friendly manner compared to the current 15-20 TpS.
The most significant change that the first upgrade phase brings is the shift to Proof of Stake consensus that attempts to make the entire process energy-efficient for miners.
Those not familiar with these terms might find it challenging to gauge the importance of this shift in consensus. If you, too, are one of them, let us simplify proof of work vs. proof of stake so that you can explain it to your friend as well!
In Proof of Work consensus, all miners are required to attempt and solve the complex sum and the reward is provided to the first miner that solves each block problem. Usually, the reward ends up with a node with the most powerful or quantity of hardware. This means that the majority of rewards end up with mining pool monopolies.
In Proof of Stake consensus, the creator of a new block is chosen randomly based on the amount they have wagered the network. Since there is no block reward, miners take the transaction fee, which makes the currency much more cost-effective.
The advocates of PoS argue that anyone staking their share on the network will give their best to do things correctly. Instead, if a forger wants to process counterfeit transactions, he/she will lose the entire stake in the process.
This shift from PoW to PoS in Eth2 has investors excited about the potential of Ethereum cryptocurrency. Expect a faster and more secure Blockchain-based currency with a severe growth potential in the next decade.
But how exactly can anyone invest in Ethereum now that its new iteration is on the horizon? In the next section, we will discuss three main ways to invest and earn capital gains from Ether during its new regime.
Ways to invest in Ethereum
To invest in Ethereum, or any cryptocurrency for that matter, you will need a digital wallet for the same. Since Ether does not trade on major stock platforms, you have to convert it into your wallet if you want to hold, trade, or mine Ether.
- Holding (spot-trading)
Massive returns from the cryptocurrency market have made it a rewarding holding option for investors. The idea here is simple; buy Ethereum (Ether) while the price is low and hope that someday in the future, someone wants to buy Ether at an inflated rate from you.
Holding as a long-term investment option in 2020 is further bolstered by the fact that Ether saw a massive 300% hike in its price compared to last year.
Ether CFDs allow investors to predict the price hike or drop of Ethereum without owning the currency. When you trade CFDs, you essentially agree to pay or receive the difference in price of Ether from the point you open the contract to when you close the contract.
CFDs enable the investment capital to go higher, as investors will essentially only deposit a fraction of the trade’s full value (margin). You can decide your margin based on your position and chosen asset and market.
In the simplest terms, mining refers to the process of verifying and adding new transactions to the Blockchain ledger. For cryptocurrencies, mining is often the only way to add more tokens into circulation via a block reward of 5 ETH.
Ethereum mining via dedicated machines (ASIC) has become even more rewarding following the launch of Eth2 as it removes the possibility of mining monopolies dominating the rewards scene.
There’s too much to say about Ethereum‘s bright future. A renewed interest in the DeFi movement has had a severe impact on Ethereum, with more than $ 1 Billion worth of ETH locked up in decentralised financial products.
This has dramatically inflated the demand for Ethereum, and we can easily imagine a future where it is used to exchange day to day commodities.
[su_note] KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing. [/su_note]
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
Table of content
Subscribe to Our Newsletter with exclusive content.