Ethereum is a blockchain network and technology that hosts Ether (ETH), its native cryptocurrency, which remains the second most popular digital currency after Bitcoin for years. Ethereum was also built with the capacity to run decentralized apps (Dapps), which is becoming a vital part of the internet of value, for which it aims to be a protocol layer.
Ethereum founder Vitalik Buterin proposed the project in 2013, kicking off its journey and received crowdfunding in 2014. It was up and running by 2015 with 72 million ETH in supply. ETH was priced under $1 in May 2015 but has rapidly gained value since then. It reached an all-time high of $4,356 on May 12, 2021, during the bull market.
How does Ethereum work?
At its core, Ethereum is a decentralized ledger where transactions are recorded and verified through cryptography. Computers from all over the world use the network to facilitate and verify transactions on the network by solving complex math in a process called mining. This combination makes it highly secure.
Ethereum differs from the Bitcoin blockchain in that it has more features built-in, especially the ability to host smart contracts. Its additional features highlight the roadmap to becoming the underlying protocol for the internet of value. The latter is the next generation of the internet where people will easily, reliably, and affordably exchange value on the internet.
Ethereum aims to function like TCP/IP, which is the base layer for the internet we use today but with a slightly different approach. TCP/IP is a thin protocol because most of the value on the internet is currently held in the applications layer. Ethereum aims to have a fat protocol that will capture most of the value.
For example, a company like Google is considered highly valuable because it handles user data including securing and storing the data. It is a central authority from this perspective. However, Dapps on the Ethereum network will have their data stored on the network, and it will be decentralized, meaning anyone can audit it. In other words, anyone auditing the network can see the value within the entire network, and this is where things get interesting. The approach will allow value to flow from the application layer to the protocol layer, thus the value is attached to ETH.
ETH is necessary for paying gas fees on the Ethereum network when conducting computations. Because the network is decentralized, there are no intermediaries that collect most of the value. Instead, those participating in the network and can earn ETH, and will have a chance to tap into the value offered by the network. If the TCP/IP layer were fat and could provide a way to tap into the value, it would have been quite a venture to get into.
Market participants who strategically position themselves to tap into the trickle-down value will reap huge benefits, especially when the internet of value goes mainstream in the next few years. This will eventually be the case as decentralized finance becomes more popular. Ethereum is also growing at a rapid pace thanks to stablecoins. Many stablecoin issuers prefer the Ethereum network, which means more demand for the network’s transactional layer.
The involvement of traditional finance companies in the cryptocurrency market will also be a key growth driver for blockchain platforms. For example, Visa announced plans to integrate the USDC stablecoin into its payment platform, thus leveraging the Ethereum network. Visa has 46 million merchants globally and a total transaction base of more than $11 trillion annually, which means added value for the Ethereum network. The Visa transactions on the network will require gas fees settled through ETH, thus contributing to more value for the network.
How to buy Ether
Buying Ethereum is quite simple and can be done via multiple cryptocurrency platforms known as exchanges. Note that there are many exchanges out there, but Binance and Coinbase are the most popular due to their security measures, ease of use, and popularity. Both exchanges have mobile apps designed to make it easy for people to log in and purchase cryptocurrencies. You will need to verify your account, and once the verification process is complete, you can buy cryptocurrencies, including Ethereum, with fiat currencies, and a small fee will apply.
The web versions of Binance and Coinbase offer another method of buying Ethereum that is a bit more complicated and presents a bit of a learning curve. However, it is a better approach because it charges lower fees. Credit cards and debit cards are a quick method to purchase Ethereum on exchanges. However, the fees for this approach are considerably higher because it adds more intermediaries who also take their cut. You can also buy Ethereum through a bank transfer, but this method is more involved, but still a fairly quick approach. There is also the P2P approach where you buy the cryptocurrency from someone else willing to sell it to you at an agreed price, typically through a secure website which helps to avoid scammers.
How is Ether stored
You will need a crypto wallet to store your Ether, which means you need to have a basic understanding of wallets. There are hot wallets such as the ones offered by the exchanges, which allow you to hold your cryptocurrency while on the platform and easily move it and trade with it. For example, when you want to trade or exchange it for a different cryptocurrency or even fiat currency. However, hot wallets will not give you full control because the exchange will have custody of the cryptocurrency.
Another concern about hot wallets is that they are not the safest option. Past crypto exchange hacks have led to the loss of millions worth of cryptocurrencies. You can however make your wallet more secure through measures such as 2-factor authentication. Alternatively, you can download mobile wallets such as the Trust wallet by Binance or the Coinbase wallet. However, these can still be connected to the internet, which means there is a chance that they can be hacked.
Cold wallets are the ultimate wallets for those who want to securely store their Ethereum or any other cryptocurrency. Some cold wallets are available in the form of a hardware wallet that comes in the form of a USB stick device that can store the cryptocurrency offline. This is the most secure approach because it is offline, thus cannot be hacked. Users will only access or recover the cryptocurrencies in their hardware wallets through a private key, public key, and recovery phrase. It is ideal for those with a lot of coins that they do not intend to trade anytime soon.
How to trade and invest in Ethereum
There are multiple ways of making money through Ethereum. The first and arguably most popular method is hodling, where you buy Ether at a low price and wait for it to gain value over time. It makes more sense for those that can afford to buy a substantial amount of ETH while having the patience to wait for it to gain value over time. Timing is also essential when hodling, thus buying after a market crash is the better bet at maximizing the gains that will be accrued in the next bullish rally.
Alternatively, one can trade ETH similar to how fiat currencies are traded in the forex market. This requires a deeper understanding of how the market works, and the ability to use technical and fundamental analysis to determine good entry and exit points. Platforms like Binance offer a robust trading platform.
At the time of this writing, Ethereum developers are preparing for the launch of Ethereum 2.0 which will shift the network from its Proof-of-work consensus mechanism which is energy-intensive mining, to a more effective proof-of-stake mechanism. The shift will present an investment opportunity where traders can stake their ETH to get rewards.
Pros and cons of Ethereum
- The Ethereum network provides a platform where data is public rather than held in centralized organizations, thus massively reducing the cost of running applications on the network compared to running on centralized servers.
- Financial services such as banking, access to loans and others are facilitated by smart contracts, thus eliminating intermediaries who make those services expensive through high fees.
- The Ethereum network has huge growth potential.
- The number of real-world uses on the Ethereum network keeps increasing, thus growing the network at a phenomenal pace.
- Hefty fees and scalability have are a concern for the Ethereum network, potentially making it less attractive to potential partners. However, Ethereum 2.0 is intended to overcome this challenge.
- Other blockchain projects such as Neo and Tron are already taking advantage with their own competitive networks with lower fees.
Future outlook for Ethereum
The Ethereum network is poised for a great future considering its approach to becoming a fat protocol layer. It has attracted major partnerships and is becoming the protocol layer for the internet of value. The Ethereum 2.0 rollout should solve some of the challenges that the network has experienced, making it even more attractive to potential partners and other projects. These developments will likely accelerate its expansion and progress, thus providing more investment opportunities in the future.