• crypto
  • October 18, 2022

Ethereum: What you should know before you invest

Ethereum (ETH) is the second most widely circulated cryptocurrency following Bitcoin (BTC).  Unlike many other digital currencies - Ethereum is intended to be much more than just a medium of exchange or a store of value. 

Ethereum is a decentralized blockchain network driven by its Ether token, which allows customers to make transactions, gain interest on their assets by means of stacking, it also enables them to utilize and store non-fungible tokens (NFTs), to benefit from social media, exchange cryptocurrencies, play games and much more.

It creates a network that securely operates and validates a code of applications, known as smart contracts. It allows users to transact without a credible central authority by signing and spending Ether as the transaction fee on the network. In this article, there is some interesting information about the Ethereum network for you to get a better insight into what Ethereum is and how it works.

A Brief History of Ethereum

Vitalik Buterin co-created the Ethereum project as a response to Bitcoin's drawbacks. Buterin put out the Ethereum white paper in 2013, outlining the specifics of smart contracts - automated undeviating “if-then” statements, which support the implementation of decentralized applications. Hence, Ethereum 1.0 emerged. Eventually, creators joined Ethereum bringing their own decentralized insights to the network. The DAO (Decentralized Autonomous Organization) was founded, a group that voted for modifications and proposals.

Everything fell apart when an anonymous hacker grabbed $40 million from the DAO's funds because of a security hole. The DAO voted to "hard fork" Ethereum to help reverse the heist, by switching to a new protocol, basically experiencing a major software update. This new fork kept the name Ethereum, while the initial network is known as Ethereum Classic.

Overall public awareness of blockchain is booming, celebrities are enjoying the benefits of NFT. All these activities have resulted in elevated transaction fees and delayed validations. This can lead to a problem, as commissions can sometimes be more than half of the transaction value. Part of the solution is in the proof-of-stake consensus, which is a key feature of Ethereum 2.0. The PoS replaces miners with validators who store the Ethereum blockchain, confirm transactions, and so on. In other words, they are another form of nodes.

How Does Ethereum Work? 

Ethereum, like other cryptocurrencies, relies on blockchain technology, with all the data about each block available to anyone within the blockchain network. As cryptocurrencies became widespread on a daily basis, blockchain layers came to be needed to enhance Ethereum network security, documentation, and other services.  

The first layer (Layer 1) in a decentralized ecosystem is blockchain. Layer 2 is a third-party integration together with Layer 1 to add more nodes and therefore more system capacity. In Layer 1 scaling, the core blockchain protocol is modified to enable scalability. Here, protocol rules are adjusted to increase throughput and transaction speed, so that more data and users can be deployed.

Decentralized finance has perhaps been the greatest accomplishment of the Ethereum network. DApps, which offer numerous functions in the ecosystem, emerged in 2019-2020 and are growing in popularity. It requires a cryptocurrency held in a wallet to interact with Ethereum. 

From there, you can buy things, play games, and do everything, like on the traditional Internet. Artists earn millions of dollars by converting their work to NFTs, which have ownership confirmation and offer a secure form of storage. It's all operated autonomously via blockchain and smart contracts, with DeFi allowing users more control over their funds than ever before.


Ethereum vs. Bitcoin 

One of the major similarities between Ethereum and Bitcoin is that both use immense amounts of energy. These blockchains operate on a proof-of-work protocol, but Ethereum is gradually switching to proof-of-stake, which consumes much less power.

While Ethereum and Bitcoin have much in common, investors should be aware of some important differences, some of which are as follows. Bitcoin is mainly used as a digital currency and reserve of value. Unlike Bitcoin, Ethereum's decentralized system enables the creation and launching of apps, smart contracts, and other online transactions. 

The amount of Bitcoins that can be released into circulation is limited to 21 million, while ETH can be created in unlimited amounts. Transaction fees, known as 'gas', are covered by users for transactions on the Ethereum network. Commissions for Bitcoin transactions, however, are taken up by the Bitcoin Network.

Advantages and Disadvantages of Ethereum

Ethereum has several benefits, here are some of them: 

  • Absence of censorship - All insulting comments on the Ethereum-powered social media platform only become visible if the public votes for it. 
  • Wide variety of functions - In addition to its use as virtual currency, Ethereum can as well be applied to process other financial transfers, execute smart contracts and save data for third-party applications.

Although Ethereum seems to be an ideal platform, it has a few flaws that need to be fixed.

  • Increasing transaction fees - The reason is that, unlike Bitcoin, where the network compensates transfer verifiers itself, Ethereum requests that individuals pay the commission.
  • Potential for crypto inflation - Ethereum has a yearly limit of releasing 18 million Ether, yet there’s no lifetime limit for the potential quantity of coins. This means that as an investment, Ethereum may be more similar to dollars and may not rise in value as much as Bitcoin.


What Is Ethereum Mining?

The creation process of the transaction block to be added to the Ethereum blockchain is known as mining. Ethereum miners are computers that have software installed and utilize time and power to manage transactions and make blocks. To produce the cryptocurrency, one would have to invest huge sums of money in mining facilities and then consume costly electricity to mine it. Purchasing Ethereum is simpler than mining it and takes less effort.

To Sum Up

Prior to investing significant sums in Ethereum or any other cryptocurrencies, you should consider the possible risks involved. Taking into account the high risk and vulnerability of the crypto market, do make certain that you invest the money you can afford to lose, even if you trust in Ethereum's prospects.

Ethereum: What you should know before you invest