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What is Ethereum?

Discover how to buy Ethereum and learn how it works! From smart contracts to ETH2, a complete beginner’s guide to the second-biggest cryptocurrency by market capitalisation!

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Quick look: Ethereum is an open source, decentralised blockchain with smart contract functionality. Ether (ETH) is the native cryptocurrency of the blockchain. Ether (ETH) is currently the second most popular cryptocurrency by market capitalisation, after Bitcoin (BTC).

High-level breakdown

Ethereum was initially described in late 2013 in a white paper written by Vitalik Buterin, and launched in 2015 as a decentralised, open source blockchain with smart contract functionality. It is a computing platform that utilises the security and open source technology of blockchains, and extend those attributes to a great number of decentralised applications.

The name comes from Luminiferous aether or ether (“luminiferous”, meaning “light-bearing”) which was once believed to be the basis for reasoning for the propagation of light –  the hypothetical invisible medium that permeates the universe and allows light to travel.

Unlike Satoshi (Bitcoin‘s creator who remained anonymous), Vitalik Buterin has been intent on Ethereum to be the facilitator and connector of a vast number of online applications that are powered by its blockchain – creating a global computing platform that acts as a medium for applications to exist.

People in most countries can easily purchase Ethereum by signing up with a trusted crypto exchange in their respectable region.

Understanding the basics

Depending on the user’s goals, Ether (ETH) can be used as an investment asset, a store of value like gold, or a way to transfer value across regions – just like Bitcoin. But Ether’s blockchain network, Ethereum, allows developers to create, maintain, and run a vast variety of online applications that doesn’t require an intermediary – from advanced databases, games, digital artwork, to other decentralised apps.

Ethereum-based applications use ‘smart contracts’ to establish the terms of a digital arrangement between two willing parties. Unlike a paper contract, a smart contract is automatically valid and executed when the terms that were agreed upon between the two parties are met, without any involvement from a third party at all.

Some examples include stablecoins like DAI and USDC, DeFi apps (decentralised finance apps), digital artwork like NFTs, and other Dapps (decentralised apps).

Such smart contracts running on the decentralised Ethereum blockchain enable complex applications that are highly secure and efficient – running exactly as programmed with no downtime, online censorship, fraud, or interference from third parties.

Solution & Concept

Much like Bitcoin, the Ethereum blockchain is powered by a vast number of computers that securely record and verify all transactions that are ever made on the peer-to-peer network. You can read about blockchains in detail here.

But Ethereum also acts as a ‘virtual machine’ that employs all computers on the network, allowing developers to build a vast variety of decentralised online tools & apps. The network has its own cryptocurrency Ether (ETH) that’s used to cover the running costs of this global ‘virtual machine’ made up of computing devices running the Ethereum software.

When interacting with Ethereum-based smart contracts, users use Ether (ETH) to execute the contract. The network fees, known as ‘gas’, for these transactions will also be paid in ETH. In the past, gas fees have been highly volatile depending on how busy the network is – it’s caused major disruptions with some users unable to withdraw their funds due to limits set by centralised exchanges.

To reduce high and volatile gas fees, and to increase the efficiency and create a more sustainable network – Ether has since merged into Ethereum 2.0 by changing the consensus mechanism it uses to verify transactions on the blockchain

Ethereum’s key milestones

2013

• Vitalik Buterin publishes a whitepaper proposing a highly flexible blockchain that underpins virtually any kind of decentralised transaction.

2014

• Development of the Ethereum protocol is crowdfunded with the sale of 18 million in pre-launch tokens.

2015

• Ethereum is launched as an open-source project enabling smart functionality on the blockchain.

2016

• The venture fund DAO (Decentralised Autonomous Organisation) powered by smart contracts gets hacked by software bug exploits, and around $50 million in funds are lost.

• Following this incident, the Ethereum project’s community voted to revise the protocol in a way to restore the lost funds. By branching off the blockchain into two separate ones using what’s known as a ‘hard fork’, Ethereum (ETH) and Ethereum Classic (ETC) were created.

2017

• The ERC-20 standard is introduced, allowing developers to easily build Ethereum-based applications on the blockchain. It defined a way to create a virtual asset (crypto token) on top of the Ethereum blockchain!

• The project was joined by the likes of Microsoft, Samsung, JP Morgan, and MasterCard to follow non-profit initiatives in developing practical applications using smart contract technology.

• The price of Ether (ETH) breaks above $100 USD.

2018

• Decentralised Finance apps that enable faster, cheaper, and more secure digital transactions gain popularity around the world, with the launch of the lending protocol Compound and DeX (decentralised exchange) Uniswap.

• The native coin for the Coinbase exchange, the USDC stablecoin is launched on the Ethereum blockchain with $1 Billion coins issued in just the first year.

• The price of Ether (ETH) breaks above $1,000 USD for the first time.

2020

• Ethereum 2.0 upgrade starts with the introduction of proof-of-stake (PoS) consensus mechanism, whilst Ether continues to use proof-of-work (PoW) to verify transactions.

2021

• Ether (ETH) price goes above $1,700 USD for the first time.

2023

• Ethereum 2.0 upgrade and merge is complete, enabling much faster and efficient transactions on the blockchain using PoS.

What is Ethereum 2.0?

Ethereum 2.0 (known as ETH2) is a major milestone upgrade for the non-profit Ethereum project. Designed to allow the Ethereum network to grow while increasing security, speed, and efficiency, it uses the proof-of-stake consensus mechanism to verify transactions on the blockchain.

As of September 2022, Ethereum 1.0 blockchain has successfully merged with the Ethereum 2.0 blockchain.

Proof-of-stake

  • Proof-of-stake (PoS) is different from how transactions are verified on the Bitcoin network, as Bitcoin uses Proof-of-stake (PoW) consensus mechanism that requires a huge amount of processing power contributed by virtual “miners” around that compete to solve a time-consuming math puzzle for a reward.
  • Typically, transactions that are verified on blockchains using PoW take anywhere between 10-30 minutes and can cause bottlenecks due to high network traffic which eventually drives up the gas fees. Instead, PoS relies on a robust network of willing participants to verify transactions rather than a network of miners.
  • These participants (stakeholders) are known validators that contribute their own Ether (ETH) to a ‘staking pool’ with other validators for a chosen period of time to help validate blocks of transactions. Once transactions are confirmed, validated and updated on the Ethereum blockchain, the stakeholders earn rewards in ETH that are proportionate to the amount and time they’ve ‘staked’ their coins – creating a rewarding experience for the most invested participants.

Anyone who owns Ethereum can participate in staking using any popular crypto exchange or wallet. To learn more about blockchains and the two consensus mechanisms, read our article on What is a blockchain?

How to purchase Ethereum?

The easiest and more secure way to buy Ether (ETH) for a beginner is to purchase it through a centralised online exchange like Crypto.com or Coinbase. With an exchange, it’s easy to buy, sell, send, receive, and store ETH online without needing to take complete ownership of your funds (with a private key).

You can easily learn and compare the fees, new user bonuses, and other important information about popular crypto exchanges with Coinfall. For more information, please read our full guide on “How to Purchase Cryptocurrency” for beginners.

However, should you decide to buy and store ETH outside of a centralised online exchange, you’ll need to choose and create a crypto wallet to receive your ETH purchases! When you create a wallet, you’ll be given a public key (virtual vault address) for ETH that can be used to receive your funds.

To transfer funds from your wallet to a bank account after selling your ETH for fiat currency, you can do so with a platform like Coinbase, Crypto.com, or Easy Crypto AI – it’s as easy as transferring funds from one bank to another. Similar to traditional money transfers or withdrawals from an ATM, exchanges set a daily limit on withdrawals and may take a few days for the transaction to be completed.

Should you invest?

Cryptocurrency prices have so far been highly volatile and are regarded as speculative investments by some. You should always do your own research and seek advice from a professional before making any investments.

Understanding the benefits and risks can help you make more informed decisions on investments!

Here are some things to consider:

  • You can easily transfer cryptocurrency to anyone else at any given time, unlike stocks or bonds
  • Crypto transactions are much faster than fiat transactions
  • The number of people who hold Bitcoin and other digital currencies is growing – with millions already investing around the world
  • The value is determined by supply and demand, rather than by a centralised government and monetary policies
  • Centralised intermediaries like banks and monetary institutions aren’t necessary to enforce trust and solve disputed transactions between the two parties
  • The signup process is quick and only takes a few minutes
  • Purchasing is easy and secure using a debit card or bank account
  • Buy as little (or as much) as you want with reasonably low minimum purchase limits
  • You can buy fractional coins. For example, you can buy $50 worth of Bitcoin or Ethereum
  • Cryptography eliminates the possibility of a single point of failure – for example, a large monetary institution setting off a cascade of crises around the world
  • Investments can generate profits – with crypto markets skyrocketing and reaching $2 trillion at one point
  • Cryptocurrency can be used to transfer the store of value across borders/countries at much lower fees. For example, fiat currency can be converted to Bitcoin then moved across borders – then withdrawn using the fiat currency of the destination
  • Though transactions are made anonymously, they are also pseudonymous – they leave a digital trail that agencies (usually affiliated with the government) can track down. Technologies could later be developed to identify wallets to a person.
  • Cryptocurrency has a reputation for being a popular tool for criminal activities and illicit purchases.
  • They are used by hackers for ransomware activities – with an increasing number of incidents each year.
  • Although cryptocurrencies are decentralised in theory with an even distribution of wealth between the many participants on a blockchain, it is not the case just yet – ownership can be highly concentrated with some investors regarded as ‘crypto whales’ for owning a large portion of the market supply of a coin.
  • Cryptocurrencies that use proof-of-work uses up considerable amounts of energy resources. Mining can too be highly concentrated with industrialised size mining operations for some.
  • The blockchains are highly secure; however, the crypto exchanges and wallet provider platforms can be hacked. Millions of hard-earned money have previously been stolen from users – resulting in devastating losses.
  • Crypto prices are highly volatile – most have experienced rapid surges and crashes in value.

If you do decide to purchase Bitcoin, Ethereum, or any other cryptocurrency, you can compare crypto exchanges and wallets for free, anytime, with Coinfall. We work with crypto providers and businesses to even offer some signup bonuses for new users! Check them out on our website.

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  1. By publishing this guide, we are not recommending or suggesting in any way or form that Cryptocurrency is a suitable investment.
  2. We published and routinely update this guide to help people decide what’s best for them – Coinfall is conservative – Bitcoin has proven to be highly volatile in 2021 and 2022 and we strongly suggest reading this guide from the FMA before making any investment. Like the FMA, Coinfall is also cautious.
  3. We present this information in good faith and remain objective at all times. ​By including this guide, we are not advocating that cryptocurrency is an investment. We may earn a referral bonus for anyone that clicks on some of our links – see our disclaimer for more details.