What is Ethereum?
A 10-Minute Guide to the #2 Crypto
Are you new to Bitcoin or Crypto? Have you been around and don’t really know much about Ethereum other than the fact that it’s right up there at #2, right under Bitcoin? Or just want to know more about Ethereum? Then read on. Let’s clear some things up!
The Basics: Bitcoin, Ethereum and Ether
Bitcoin was the first known successful application of blockchain technology, created by Satoshi Nakamoto in 2009. With the innovation that was and is Ethereum, the power of blockchain technology was taken to the next level. It was first proposed by programmer Vitalik Buterin in 2013 and went live in 2015. (More in the History of Ethereum section below)
Ethereum is the community-run technology powering the cryptocurrency, Ether (ETH) and thousands of decentralized applications. It is overseen by the non-profit Ethereum Foundation. For a deeper dive, visit ethereum.org.
Both the Bitcoin and Ethereum networks are blockchains (in other words, super cool, decentralized databases on steroids).
One difference between Bitcoin & Ethereum: Bitcoin is the name of the currency (token) and it is also the name of the decentralized computer network it is run on. Ether, or ETH, is the name of the currency (token), but Ethereum is the name of the decentralized computer network it is run on. However, on social media and in common use, Ethereum has also been used to refer to Ether the currency (token).
Blockchain: The Next Generation
No, not THOSE guys… but you get the idea.
Ethereum was an innovation that unlocked the untapped power of blockchain. Literally a layer had been added; a layer that easily allows other tokens and technologies to be built on the Ethereum blockchain. There are now other blockchains that give this ability, but Ethereum was the first broadly implemented, the most active, and the one with the most tokens.
Ether (ETH) is the basic token built on the Ethereum network. ETH is the second-largest cryptocurrency by market capitalization (the total value of all tokens in existence), after Bitcoin. As of late in the evening on March 14, 2021, the price for a single ETH was $1,884.99 and the market capitalization was $216.4 billion USD.
As we will go in more detail below, there are other tokens, separate from ETH, built on this blockchain. As of late in the evening on March 14, 2021, there were 526 other tokens on the Ethereum blockchain with over $1 million USD in market capitalization, and including the above, a total 724 over $100,000 USD in market capitalization.
In fact, in all, there have been 375,106 ERC-20 tokens (see definition below) ever created on the Ethereum blockchain including most not involving trading or the sale of a cryptocurrency token. Yes, that is a lot. More data on the Ethereum blockchain is available at etherscan.io but I think you get the point.
I strongly believe Ethereum’s technology innovations will completely change the world we live in. The use cases could go on much, much further, but in this article, I will focus on the following innovations:
1. Smart Contracts
2. Decentralized Applications
3. Fungible Tokens (ERC-20)
4. Non-Fungible Tokens (ERC-721)
5. Decentralized Finance
There have been other projects since that have sought to replicate or utilize these, but as far as I can know, Ethereum was the first successful, broad application of these innovations.
1. Smart Contracts
A smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained in them exist across a distributed, decentralized blockchain network. The code controls the execution, and transactions are trackable and irreversible.
Smart contracts permit trusted transactions and agreements to be carried out among distant, disparate (very different from one another), anonymous parties without the need for a central authority, legal system, or external enforcement mechanism.
2. Decentralized Applications
The Ethereum network supports building and running digital, decentralized applications — called Dapps, dApps, DApps or dapps — for business and personal use. The computational resources required to execute these operations are tracked and paid for with Ether tokens.
A developer who builds Ethereum applications may need to pay charges to host and execute the applications on the Ethereum network, and a user who uses such applications may need to pay for using the application. Ether acts as a medium to allow for such payments.
A developer who builds an application that uses minimal network resources will pay fewer Ether tokens compared to a developer who builds high-resource applications. Just as an inefficient engine requires more fuel — and an efficient engine consumes less fuel — data-hungry applications require more Ether to process transactions. The more computation power and time is needed by an application, the higher the Ether fee that is charged for the action to be completed.
3. Fungible Tokens
Fungible: adjective. able to replace or be replaced by another identical item easily; mutually interchangeable.
Examples of fungible things:
A US $20 Dollar bill
A gallon of milk
A gallon of gasoline
ERC-20 Token Standard
The ERC-20 Token Standard allows for fungible tokens on the Ethereum blockchain. Numerous cryptocurrencies have launched as ERC-20 tokens and include the 724 tokens mentioned above. Fees to send ERC-20 tokens must be paid with Ether.
This is a specific kind of ERC-20 (fungible) token.
These are tokens that are not intended to fluctuate in price, but are instead tied to the value of a traditional currency, such as US Dollars, Euros, etc. These are heavily used by exchanges and traders buying and selling cryptocurrencies on those exchanges. Again, almost all stablecoins in existence are on the Ethereum blockchain.
These are also used by crypto financial services such as Nexo, BlockFi, Celsius and exchanges like Gemini and Coinbase that allow one to store your stablecoins in an account and receive interest. These are between 0.5% and in some cases up to 13%, a much higher interest rate than one can get in any bank account. Some also allow borrowing from your crypto at interest.
Well known examples:
US Dollar Tether (USDT) — there are 38.5 Billion currently in existence.
US Dollar Coin (USDC) — there are 9.5 Billion.
Binance USD (BUSD) — there are 3.1 Billion.
DAI — there are 2.8 billion.
TOKEN, a.k.a. Stasis Eurs — there are 58 million of these stablecoins, which are tied to the price of the Euro.
Note: figures as of March 14, 2021.
4. Non-Fungible Tokens (NFTs)
Non-fungible tokens (NFTs) are all over the headlines, and for a deeper dive on this subject, stay tuned for my article next week. Here’s a quick overview, starting with what exactly non-fungible itself means:
Non-fungible: adjective. not fungible. Not able to replace or be replaced by another identical item easily; not mutually interchangeable.
Examples of non-fungible things:
The Mona Lisa
A rare antique 1670 violin (on eBay for $275,000)
An original 19th century picture from Austria (on eBay for $100,000)
1952 Mickey Mantle rookie card which sold for $5.2 million in January
A family heirloom handed down for countless generations
Ethereum allows for the creation of unique and indivisible tokens that cannot be directly exchanged for one another, called non-fungible tokens (NFTs for short). The ERC-721 Token Standard allows for NFTs on the Ethereum blockchain. Use cases for non-fungible tokens include: digital art, collectibles, gaming, certifications and personal licenses, domain names, music, and in the near future — even fashion, finance and insurance. This is another reason why I am convinced that the potential of Ethereum (especially) as well as other blockchains are nearly limitless and are the way of the future.
5. Decentralized Finance
Decentralized finance (DeFi) is a use case of Ethereum. It offers traditional financial instruments in a decentralized architecture, outside of companies’ and governments’ control, such as money market funds which let users earn interest. Examples of DeFi platforms include MakerDAO and Compound. Uniswap, a decentralized exchange for tokens on Ethereum, grew from $20 million in liquidity to $2.9 billion in 2020. As of October 2020, over $11 billion was invested in various DeFi protocols. Additionally, through a process called “wrapping”, certain DeFi protocols allow synthetic versions of various assets (such as Bitcoin, gold and oil) to become available and tradeable on Ethereum and also compatible with all of Ethereum’s major wallets and applications.
Ethereum: A Brief History
Ethereum was proposed in 2013 by a Bitcoin programmer named Vitalik Buterin, who had also co-founded Bitcoin Magazine in 2011. Buterin argued that Bitcoin and blockchain technology could benefit from other applications besides money and needed a programming language for application development that could lead to attaching real-world assets, such as stocks and property, to the blockchain.
In 2013, Buterin briefly worked on an attempt on a project to do this with Bitcoin, however, after failing to gain agreement on how the project should proceed, he proposed the development of a new platform with a more general programming language that would eventually become Ethereum.
Development was crowdfunded (verb. To raise small amounts of money from a large number of people) in 2014. This included an event, well known to long-term crypto insiders. Ethereum was announced at the North American Bitcoin Conference in Miami, in January 2014. During the conference, a group of people rented a house in Miami: Gavin Wood, Charles Hoskinson, and Anthony Di Iorio from Toronto who financed the project. Di Iorio invited friend Joseph Lubin, who invited reporter Morgen Peck, to bear witness. Six months later the founders met again in a house in Zug, Switzerland, where Buterin told the founders that the project would proceed as a non-profit. Hoskinson left the project at that time. Charles Hoskinson is also the founder of Cardano, whose native token is ADA.
The Ethereum network went live on 30 July 2015, with 72 million coins pre-mined.
Buterin chose the name Ethereum after browsing a list of elements from science fiction on Wikipedia. He stated, “I immediately realized that I liked it better than all of the other alternatives that I had seen; I suppose it was the fact that [it] sounded nice and it had the word ‘ether’, referring to the hypothetical invisible medium that permeates the universe and allows light to travel.” Buterin wanted his platform to be the underlying and imperceptible medium for the applications running on top of it.
Ether was originally mined using the Proof-of-Work (PoW) system, like Bitcoin, which has been criticized for its heavy use of electricity. Since December 2020, it has been phasing over into a Proof-of-Stake (PoS) system, with the intention to completely phase over. This and a lot more upgrades are part of what is known as Ethereum 2.0.
Coming up next week:
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Note: This article is not intended as financial advice and does not take your personal financial situation into account. The intention of this content is educational in nature and basics on my observations and opinions. Cryptocurrencies are volatile assets and one should understand the risk before investing or trading. You shouldn’t borrow to invest or trade.
Disclosure: I am invested in Bitcoin, Ether and other cryptocurrencies.