Understanding Ethereum And ETH

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Ethereum
Understanding Ethereum And ETH

What is ETH, and how is it different from Ethereum? Click through to learn about the second-largest cryptocurrency and why it’s a popular choice among crypto investors! ETH, hosted on the Ethereum blockchain, is the second-largest cryptocurrency by market cap. What is ETH, and what makes it special? Read on for a complete guide to ETH and the Ethereum blockchain!

What Is Ethereum?

Ethereum is a blockchain-based computing platform that allows developers to create decentralized apps. Decentralized means these developers are free to create anything they want without answering to a certain authority. Ethereum was first introduced in a 2014 whitepaper by Russian-Canadian programmer Vitalik Buterin.

dApps

Buterin wanted to expand the utility of crypto by supporting the creation of special apps called decentralized applications (dApps). dApps are self-executing through smart contracts, blockchain-based programs that carry out their functions if certain conditions are met. Developers can program smart contracts to send transactions, loan funds, and other tasks.

Supported Tokens

Ethereum’s native token is Ether (ETH), first launched in 2014 through an initial coin offering. The blockchain also supports people creating other cryptocurrency tokens like Aave, 1INCH, and Decentraland’s MANA.

EIPs

Ethereum is community-developed through EIPs (Ethereum Improvement Proposals). Anybody in the Ethereum community can submit an EIP. If it gets enough support, it can be made into an ERC (Ethereum Request for Comment) standard and applied across the blockchain. This community-centric development method provides transparency often not found in larger tech organizations like Apple and Microsoft.

Use Cases

Ethereum’s versatility and openness to app developers have made it one of the best blockchains for decentralized software. Notable uses include game applications, decentralized finance, decentralized autonomous organizations (DAOs), and non-fungible tokens (NFTs).

How Does Ethereum Work?

Like Bitcoin and other mainstream cryptocurrencies, the Ethereum blockchain runs on the proof-of-work (PoW) consensus mechanism. Miners work to verify transactions and account balances, preventing people from “double spending” ETH and securing the blockchain from attacks.

Anybody can mine ETH by running an Ethereum node to validate blockchain transactions. Just like Bitcoin, miners compete to finish new blocks, add them to the blockchain, and gain rewards. That said, there’s more information stored in the average Ethereum block, so ETH miners may need more powerful hardware.

In contrast to bitcoin, which has a limited supply, ETH has an unlimited supply. However, ETH undergoes a reward reduction process similar to bitcoin’s halving to reduce inflation. These block reward reductions aren’t coded into Ethereum but are instead proposed by the community through EIPs. To date, the Ethereum community has voted to reduce block rewards twice:

  • Genesis block to block 4,369,999: 5 ETH
  • Block 4,370,000 to block 7,280,000: 3 ETH
  • Block 7,280,000 to now: 2 ETH

The block reward awarding rate is also influenced by the “difficulty bomb”. These bombs increase mining difficulty and the time spent to solve blocks, reducing the overall ETH issuance rate.

Differences Between Ethereum And Bitcoin

Ethereum is often called the digital silver to Bitcoin’s digital gold. While both share many similarities, they also have lots of differences. Here are six ways that Ethereum differs from Bitcoin: 

Objectives

Satoshi Nakamoto created bitcoin as a medium of exchange, replacing fiat currencies. Meanwhile, Vitalik Buterin intended for Ethereum to become a platform for smart contracts and dApps.

Price

Cryptocurrency prices wildly fluctuate, but bitcoin is generally much more expensive than ETH. Bitcoin reached an all-time high of $68,990 in November 2021, while ETH reached its all-time high of $4,878 in the same month.

Consensus Mechanism

As of mid-2022, Bitcoin and Ethereum blockchains use a proof-of-work consensus mechanism. However, Ethereum has been experimenting with a proof-of-stake (PoS) consensus mechanism since 2020, with full implementation planned in November 2022.

Market Share

As of November 2021, Bitcoin was valued at $1.08 trillion and accounted for 48% of the entire crypto market. Meanwhile, Ethereum was valued at $2.25 trillion, making up 23.4% of the market.

Maximum Supply

Satoshi Nakamoto planned to end bitcoin distribution at 21 million BTC, while Ethereum has an unlimited supply.

Amount In Circulation

As of November 2021, over 18 million BTC and over 118 million ETH exist.

Block Times

Bitcoin blocks take ten minutes to solve, while Ethereum blocks only take around 15 seconds.

How Do You Store ETH?

You store ETH in digital wallets, similar to bitcoin. These wallets consist of two main elements:

  • Ethereum address: An Ethereum address is like your wallet’s username. Everybody can look it up and see your coin balance.
  • Private key: Private keys are your wallet’s password. They are used to approve transactions in and out of the wallet.

Ethereum wallets come in five types:

  • Hardware wallets are flash drive-like devices that secure your private keys offline, preventing cyberattacks. 
  • Paper wallets are pieces of paper containing your public address and private key. 
  • Mobile wallets are flexible crypto wallets that allow you to execute transactions on your phone.
  • Web wallets are online wallets that manage your ETH funds, typically offered by cryptocurrency exchanges.
  • Desktop wallets are downloadable wallets that allow you to make Ethereum trades from your computer.

Hardware and paper wallets are cold wallets, which are very secure and tougher to steal from. That said, if you want to make crypto transactions, keep in mind that funds stored in cold wallets are harder to access. 

Meanwhile, mobile, web, and desktop wallets are hot wallets that let you make transactions quickly. The trade-off is that they are relatively easier to breach since they’re always online.

Understanding Ethereum Gas Fees

Everything done on the Ethereum blockchain network needs a gas fee. These fees are paid to Ethereum miners and stakers who help verify transactions. Gas fees are typically calculated in gwei, where one gwei equals 0.000000001 ETH. 

Some Ethereum blockchain activities that require you to pay transaction fees are:

  • Minting NFTs
  • Buying NFTs
  • Trading cryptocurrencies
  • Using smart contracts and dApps

Simpler transactions like buying or selling ETH have lower gas fees, while more complex tasks like using smart contracts tend to be more expensive. 

Another major determinator of gas fees is blockchain traffic. Ethereum gas fees may spike during times of high traffic, like when somebody drops new NFTs or launches a new coin. While gas fee spikes can be frustrating, they protect the Ethereum blockchain from constant congestion.

You can also pay higher gas fees to speed Ethereum transactions up. Conversely, you can pay less gas if you don’t mind longer transaction times.

Ethereum Token Standards

Almost everything on the Ethereum blockchain is built on ERCs. These are application-level standards for Ethereum, containing token standards, name registries, package formats, and more. Anybody in the Ethereum community can propose ERCs, but not all of them catch on and become widely used in blockchain projects.

These token standards are “blueprints” for token development, helping developers predict how their tokens will function in the Ethereum ecosystem. Thanks to these blueprints, developers don’t have to build tokens from scratch whenever they want to start a new project.

Some of the most common ERC token standards include:

  • ERC-20: The most common fungible token standard used by coins like USDT, DAI, and BNB
  • ERC-223: A token standard that fixes a flaw in ERC-20 to prevent tokens from being lost in transfers
  • ERC-721: A token standard used for non-fungible tokens. Unlike regular cryptocurrencies, there can only be one of each non-fungible token in existence.
  • ERC-1238: A token standard governing non-fungible and non-tradable badges, typically used to mark experience points or other assigned properties
  • ERC-1155: A token standard governing smart contracts that contain multiple fungible and non-fungible tokens

Uses Of Ethereum

With smart contracts, dApps, and its native programming language, Ethereum boasts many use cases. Here are some of them:

Medium Of Exchange

Along with bitcoin, ETH is slowly being accepted as a currency. These days, a wide variety of companies accept payment through ETH. Notable brands that accept ETH payments include:

  • Shopify
  • Newegg
  • Nordstrom
  • Barnes & Noble
  • Off-White

Decentralized Finance

Decentralized finance (DeFi) is a financial technology concept where transactions are done between the buyer and the seller without third parties like banks or other financial institutions. DeFi allows people to exchange funds quickly, openly, and anonymously, as with crypto.

Most DeFi apps operate on public blockchains, including Ethereum. These apps allow you to do things like:

  • Lend money
  • Get loans
  • Trade crypto and other digital assets
  • Open savings accounts

Decentralized Autonomous Organizations

Decentralized autonomous organizations (DAOs) are best described as organizations and companies without a central authority. Unlike traditional organizations that typically have a CEO or chairperson at the helm, everything in a DAO is proposed and voted on by its members. Once the proposals are approved, developers will write the changes into the DAO’s code so the smart contract can execute them.

Non-Fungible Tokens

NFTs are perhaps the most common use for Ethereum, alongside cryptocurrencies. Non-fungible tokens are often used as digital collectibles and investment vehicles. The uniqueness of NFTs makes them great for many purposes, such as:

  • Digital collectibles: NFTs mostly come in the form of digital collectibles. You can trade artwork or profit through price speculation.
  • Tokenized real-world assets: NFTs can replace paper-based deeds for land, real estate, and other physical objects. Since they’re one of a kind, these deeds cannot be forged or falsified.
  • NFT-based games: NFT-centric games like Axie Infinity allow players to collect in-game assets and potentially trade them for real money.
  • Event tickets: NFT-based sports or concert tickets can reduce ticket scalping by only allowing the NFT holder into the event.
  • Anti-bootlegging measures: Many luxury brands now bundle NFTs alongside their products, acting as a certificate of authenticity.

Future Ethereum Developments

As of June 2022, the Ethereum Foundation is working on a major upgrade to its blockchain called Ethereum 2.0. It plans to replace its power-hungry proof-of-work consensus mechanism with a more environmentally friendly proof-of-stake system.

In addition to its primary Mainnet blockchain that uses PoW, Ethereum also runs a Beacon Chain that has adopted PoS. Ethereum currently plans to merge these two blockchains for Ethereum 2.0.

After the merge, Ethereum will phase mining out in favor of staking. Instead of using hardware, proof-of-stake validators lock their ETH up to help verify transactions on the Ethereum blockchain. The more ETH a validator stakes, the more block rewards they’ll get.

You need to commit 32 ETH to become a validator. However, many crypto exchanges provide staking pools, allowing people with less than 32 ETH to also become validators.

Conclusion

ETH is the native cryptocurrency of the Ethereum blockchain, developed by Vitalik Buterin. The Ethereum platform allows people to develop decentralized applications for finance, organizations, gaming, and many other purposes.

As with bitcoin, you can trade and mine ETH to gain profits. However, the Ethereum 2.0 upgrade planned for November 2022 will phase out mining in favor of staking to help Ethereum grow and considerably reduce its carbon footprint.

FAQs

Can you mine ETH?

You can mine ETH by running an Ethereum node. As with bitcoin, you mine ETH by validating transactions and winning block rewards. In addition to solo mining, you can merge processing power with other miners in staking pools for a better chance of getting ETH and other rewards.
However, ETH mining will be phased out at the end of 2022 as part of the Ethereum 2.0 upgrade.

Can you stake ETH?

You can stake ETH on major cryptocurrency exchanges like Coinbase and Binance. When the Ethereum 2.0 upgrade finishes, staking will be the only way to create new ETH.

Where can I buy or sell ETH?

You can buy and sell ETH on cryptocurrency trading platforms like Coinbase, Binance, Crypto.com, and more.

How many ETH can there be?

There are no issuance limits to ETH, so new Ether tokens will be created as long as people keep mining and staking.

Is ETH a good investment?

ETH is generally regarded as a good investment because it has strong fundamentals and skilled developers. However, we recommend doing your own research and considering your risk appetite before investing in ETH.

What is the difference between ETH and Ethereum?

Ethereum is the blockchain platform, while ETH is the blockchain’s native currency.