What is Ethereum and Why Does it Matter?

Ethereum (ETH) is the second most popular cryptocurrency today, behind Bitcoin. It’s the backbone of virtually all the Dapps, ICOs, NFTs, and smart contracts being used today.

Ethereum is a cryptocurrency, like Bitcoin, but it’s got some very interesting features that Bitcoin does not. It was created by Vitalik Buterin in a whitepaper in 2013 and launched officially in 2015. Ethereum is the most popular platform for decentralized applications (or Dapps) today, and is the backbone of a huge number of other tokens, including NFTs. This massive growth has led to a phenomenal increase in Ethereum’s price over the last several years. 

​Ethereum (ETH) History

Vіtаlіk Вutеrіn is a Russian-Саnаdіаn рrоgrаmmеr who formerly was the editor of Bitcoin Magazine. He created Ethereum after discovering shortcomings in Bitcoin and inventing the concept of decentralized applications. The token got massive publicity when it was first envisaged and then launched, with much of the cryptocurrency community discovering value in it’s flexible nature. Thanks to Vitalik’s creation of Ethereum, his net worth is estimated at around $360 million as of early 2021, the vast majority of which is tied up in the estimated 330,000 ETH he owns.

Ethereum is a tradable coin, but it was built with some very powerful features that were very unique for the time. At its core, Ethereum is special because it allows you to program smart contracts on top of it. These smart contracts will automatically execute when certain conditions are met – without requiring any human intervention whatsoever! 

Smart contracts are the most interesting feature of Ethereum. They allow for secure, yet highly customizable transactions. You can program the Ethereum blockchain to automatically execute a pre-programmed (and non-modifiable) contract. For example these smart contracts can distribute funds on a certain date, and set various conditions before release.

These are basically small programs that people can create to pay or execute upon certain conditions being met. Virtually any condition that’s programmable could be programmed on ETH. You could create a smart contract to pay someone the next time it is 100 degrees outside, or when they publish a new blog post. Ethereum also allows for an increased number of transactions per second when compared to Bitcoin, and is set to have an even greater number in the future as the platform expands. 

Ethereum is also the backbone of other tokens, and ICOs. ICOs, or Initial Coin Offerings, are a new way to get funded for a business venture. You may have heard of one called Filecoin, which raised $257 million dollars in their ICO. While ICOs have become much more scrutinized by regulators since the Filecoin offering, there are still many great businesses raising initial capital through an ICO. Use caution when investing though, as many shady businesses have raised money and then closed up shop using ICOs.

While ETH can be mined with either GPU or CPU power, like Bitcoin it requires ASICs (application specific integrated circuits) to mine profitably. Ethereum mining has become extremely competitive in recent years, and many industrial scale operations are now focused on this cryptocurrency. One downside of using Ethereum is that gas prices (the cost associated with executing a transaction) can be somewhat expensive at times, so you may want to keep this fact in mind before getting into transactions that are too small to be worth the gas price.

Ethereum 2.0 and Proof of Stake

​Ethereum’s development team has been working on a massive improvement to the Ethereum ecosystem, including a new proof-of-stake algorithm. Formerly called Casper, now Ethereum 2.0, or Serenity, this algorithm change will be the future of cryptocurrency because it allows for greater innovation with a number of exciting features. The most important of the ETH 2.0 changes is that it will scale much more efficiently than Bitcoin, Ethereum Classic, and other blockchain based cryptocurrencies. This concern over scale is the primary shortfall over Ethereum currently, as it can take onerous gas fees to publish to the ETH blockchain. This change will be vital in helping push forward mainstream adoption. 

In short, ETH 2.0 will adopt a Proof of stake (PoS) system, whereas the old Ethereum has a Proof of Work system. In proof of work cryptocurrency algorithms, miners work on very hard math problems and publish the solutions to the blockchain. Miners that discover solutions are rewarded with the cryptocurrency. This is the fundamental way that Bitcoin and other cryptocurrencies function, and is why they are both scarce and valuable. In Proof of Stake, the concept of mining is replaced with algorithm “validation.” Basically, those who hold ETH will be able to “stake” a claim to validate the blockchain and propose a block. The rights to do this will be based on the amount of ETH they hold, and how long they’ve held it for. When other validators attest to the validity of a block, the new block is “minted” on the Ethereum blockchain. 

While it sounds similar, Proof of Stake is dramatically more energy efficient than Proof of Work algorithms. This is vitally important for the continued growth of the Ethereum ecosystem. More energy efficiency means more scale, which is the driving motivation. Its vitally important too:

  • Ethereum 1.0 supports about 30 transactions per second
  • Ethereum 2.0 supports about 100,000 transactions per second

That means that more smart contracts can be built and executed on much faster than on the old system. Proof of Stake algorithms also have the potential to be more decentralized, and therefore more secure than their Proof of Work counterparts. This is another motivation behind the development of ETH 2.0. 

This is a big change for the Ethereum ecosystem though, so it’s expected to take all of 2021 and most of 2022 before the change to the ETH 2.0 algorithm is complete. 

How to Obtain Ethereum

There are two ways to get Ethereum. The first is to mine it, but given the big mining operations that have started, we cannot recommend you mine Ethereum unless you have access to free electricity.

In order to purchase Ethereum, you’ll have to sign up with a cryptocurrency exchange. These sites allow you to buy or sell cryptocurrencies for other assets, such as fiat currencies (e.g., USD) and digital coins. As of 2021, the three most popular exchanges are Coinbase, Kraken, and Binance. Ethereum tends to be marginally directionally associated with Bitcoin. That is, when Bitcoin goes up, Ethereum tends to also go up, but not always by the same amount, and this directional influence is not always at play. 

Invest carefully, and never invest more than you can lose.

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