What is Ethereum and how does it work? – Councilor Forbes

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Ethereum is often considered the second most popular cryptocurrency, after Bitcoin. But unlike Bitcoin – and most other virtual currencies – Ethereum is meant to be more than just a medium of exchange or a store of value. Instead, Ethereum is called a decentralized computer network built on blockchain technology. Let’s find out what this means.

How does Ethereum work?

Like everything crypto-currencies, Ethereum operates on the basis of a blockchain network. A blockchain is a decentralized and distributed public ledger where all transactions are verified and recorded.

It is distributed in the sense that all participants in the Ethereum network hold an identical copy of this ledger, allowing them to see all past transactions. It is decentralized in that the network is not operated or managed by a centralized entity, but rather managed by all distributed ledger holders.

Blockchain transactions use cryptography to secure the network and verify transactions. People use computers to “mine” or solve complex mathematical equations that confirm every transaction on the network and add new blocks to the blockchain that is at the heart of the system. Participants are rewarded with cryptocurrency tokens. For the Ethereum system, these tokens are called Ether (ETH).

Ether can be used to buy and sell goods and services, like Bitcoin. It has also seen rapid price gains in recent years, making it a de facto speculative investment. But what’s unique about Ethereum is that users can build applications that “run” on the blockchain like software “run” on a computer. These applications can store and transfer personal data or process complex financial transactions.

“Ethereum is different from Bitcoin in that the network can perform calculations as part of the mining process,” says Ken Fromm, director of education and development at the Enterprise Ethereum Alliance. “This core computational capability transforms a store of value and medium of exchange into a decentralized global compute engine and openly auditable data store.”

Ether and Ethereum: what’s the difference?

You can use Ether as a digital currency in financial transactions, as an investment, or as a store of value. Ethereum is the blockchain network on which Ether is owned and traded. As mentioned above, however, this network offers a variety of other functions besides ETH.

“It can be simple movements of funds, but it can also be complex transactions ranging from the exchange of assets to the taking out of loans to the acquisition of a digital work of art”, explains Boaz Avital, product manager at Anchorage. Transactions are processed and stored on the Ethereum network.

The Ethereum network can also be used to store data and run decentralized applications. Rather than hosting software on a server owned and operated by Google or Amazon, where the sole company controls the data, people can host applications on the Ethereum blockchain. This gives users control over their data and they have open use of the application as there is no central authority managing everything.

Perhaps one of the most intriguing use cases involving Ether and Ethereum is self-executing contracts, or so-called smart contracts. Like any other contract, two parties enter into an agreement on the delivery of goods or services in the future. Unlike conventional contracts, lawyers are not needed: the parties code the contract on the Ethereum blockchain, and once the terms of the contract are met, it automatically executes and delivers ether to the appropriate party.

Ethereum vs. Bitcoin

BitcoinIts main use is a virtual currency and a store of value. Ether also functions as a virtual currency and a store of value, but the decentralized Ethereum network makes it possible to create and run applications, smart contracts, and other transactions on the network. Bitcoin does not offer these functions. It is only used as currency and store of value.

Ethereum also processes transactions faster. “New blocks are validated on the Bitcoin network once every 10 minutes while new blocks are validated on the Ethereum network once every 12 seconds,” says Gary DeWaal, president of Katten’s Financial Markets and Regulation group. And future developments could accelerate Ethereum transactions even further, he notes.

Finally, there is no limit to the number of potential Ether tokens, while Bitcoin will not release more than 21 million coins.

Benefits of Ethereum

  • Large existing network. “The benefits of Ethereum are a proven network that has been tested over years of operation and billions of valuable trading hands,” Fromm says. “It has a large and engaged global community and the largest blockchain and cryptocurrency ecosystem.”
  • Wide range of functions. In addition to being used as a digital currency, Ethereum can also be used to process other types of financial transactions, execute smart contracts, and store data for third-party applications.
  • Constant innovation. A large community of Ethereum developers are constantly looking for new ways to improve the network and develop new applications. “Due to the popularity of Ethereum, it tends to be the preferred blockchain network for exciting (and sometimes risky) new decentralized applications,” says Avital.
  • Avoid intermediaries. Ethereum’s decentralized network promises to allow users to leave third-party intermediaries behind, such as lawyers who draft and interpret contracts, banks who are intermediaries in financial transactions, or third-party web hosting services.

Disadvantages of Ethereum

  • Increased transaction costs. The growing popularity of Ethereum has led to higher transaction costs. Ethereum transaction fees, also known as “gas,” hit a record high of $ 23 per transaction in February 2021, which is great if you make money as a miner, but less if you try to use the network. This is because unlike Bitcoin, where the network itself rewards transaction verifiers, Ethereum forces those who participate in the transaction to cover the costs.
  • Crypto potential inflation. Although Ethereum has an annual release limit of 18 million Ether per year, there is no lifetime limit on the potential number of coins. This could mean that as an investment Ethereum could work more like dollars and might not appreciate as much as Bitcoin, which has a strict lifetime limit on the number of coins.
  • A steep learning curve for developers. Ethereum can be difficult for developers to grasp when migrating from centralized processing to decentralized networks.
  • An unknown future. Ethereum continues to evolve and improve, and the continued development of Ethereum 2.0 holds the promise of new functions and greater efficiency. However, this major network update creates uncertainty for the applications and offerings currently in use. “Many new validators will be needed for Ethereum 2.0 to work,” says DeWaal. “The question is, will the migration work? There are a lot of new elements that need to fall into place! “

How to buy Ethereum

This is a common misconception among people who are new to the Ethereum network. You don’t buy Ethereum itself – it’s the network. Instead, you buy ether and then use it on the Ethereum network. Given the popularity of Ethereum, it is very easy to buy Ether:

  • Choose a cryptocurrency exchange. Crypto exchanges and trading platforms are used to buy and sell different cryptocurrencies. Coinbase, Binance, and Kraken are some of the biggest exchanges. If you just want to buy the most common coins like Ether and Bitcoin, you can also use a online brokerage like Robinhood or SoFi. Be prepared to pay a certain amount of trading or processing fees almost anywhere.
  • Depositing fiat money. You will need to deposit money, like dollars, into your trading platform or link your bank account or debit card to fund your Ether purchases.
  • Buy some ether. Once you have funded your account, you can use the money to buy Ether at the current price of Ethereum along with other assets. Once the coins are in your account, you can hold them, sell them, or exchange them for other cryptocurrencies in the future. Keep in mind that you may incur taxes every time you sell or trade cryptocurrencies.
  • Use a wallet. Although you can store Ether in the default digital wallet of your trading platform, it can pose a security risk. If someone hacks the exchange, they could easily steal your coins. Another option is to transfer the coins you don’t plan to sell or trade soon to another digital wallet or cold wallet that is not connected to the internet for security reasons.

Should you buy ether?

According to DeWaal, you might consider investing in the Ethereum network for several reasons. “First, it has value and is used as virtual currency; second, the Ethereum blockchain could become more attractive when it migrates to the new protocol; and third, as more and more people use Ethereum distributed applications, the demand for ETH may increase, ”he says.

In addition to buying Ether directly, you can also try investing in companies that build applications using the Ethereum network. If you want help managing your investment, you can also buy into a professional investment fund like the Bitwise Ethereum Fund or Grayscale Ethereum Trust, although they are currently only open to accredited investors.

Before making a large investment in Ether or other cryptocurrencies, consider speaking with a Financial Advisor first on the potential risks. Considering the high risk and volatility of this market, make sure that this is money you can afford to lose, even if you believe in the potential of Ethereum.


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About Jessica Zavala

Jessica Zavala

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