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What is Ethereum?

By Alison Hunt

While we’ve all heard of Bitcoin, what about its virtual cousin, Ethereum? We take a closer look at the cryptocurrency platform that’s proving to be somewhat of a rising star

What is Ethereum (ETH)?

Proposed in 2013, by Canadian-Russian programmer Vitalik Buterin, Ethereum is often mentioned in the same breath as Bitcoin and other cryptocurrencies. But the two are really not that similar. So, what is Ethereum?

Many crypto platforms, like Bitcoin’s, use blockchain technology to offer a fast, peer-to-peer cash system that facilitates online payments for a low cost. But there is far more to blockchain technology than digital currency transfers.

Developers can build their own dApps

Ethereum is also a blockchain-based platform that offers online payments. But it’s also an open software platform that lets anyone use its technology and tools to build their own decentralised applications (known as dApps as they are run by a decentralised network of computers).

So, where Bitcoin could be likened to an app on a smartphone, Ethereum is like the App Store, where developers can create their own dApps to run on the network.

Smart contract

Ethereum is also famously used for smart contract creation. These self-executing, logical agreements are coded on the blockchain and can facilitate the transfer of money, content, property, shares or anything of value. As no middle man is required, costs are greatly reduced. Indeed, many Initial Coin Offerings (ICOs) of other cryptocurrencies have been launched using Ethereum smart contracts.

While a dApp is essentially a blockchain enabled website, it will use a smart contract to connect to the blockchain. Seemingly simple, but very effective.

What is ETH?

Of course, while this technology is open-source and available to developers, it’s only fair that you should pay if you wish Ethereum (ETH) to run your dApp and this is where the Ethereum cryptocurrency comes in.

ETH currency, or Ether, as it is commonly known, is the Ethereum crypto coin. Like Bitcoin, it is digital and not controlled by any company or government. Anyone wishing their code to be run on the Ethereum network will need to pay for this in Ether, which can be bought through a cryptocurrency exchange. Once your dApp is uploaded to Ethereum it promises to run the code exactly as it has been written, without any risk of censorship, fraud, or interference.

Like Bitcoin, Ether transactions are logged on a decentralised ledger thus secure against fraud and theft and as they require no middlemen (such as banks) to manage transactions, users can avoid paying large fees.

Examples of dApps

So, what is Ethereum being used for? Developers are using this programmable blockchain technology in many different ways; some serious, some less so.

For example, the US’ Major League Baseball (MLB) has released MLB Crypto Baseball, a dApp that sells memorabilia via an online store. Users can buy or sell collectibles using Ether and even earn rewards doing so.

And a seemingly simple blockchain game called Cryptokitties, developed on Ethereum by Axiom Zen, that allows players to purchase, breed and sell virtual cats, has processed a frankly unbelievable $12m (£9.34m) worth of Ether in sales on its decentralised marketplace.

What is Ethereum classic (ETC)?

In 2016, a complex smart contract known as the Decentralised Autonomous Organization (DAO) was proposed. This investor-directed venture capital fund would fund all dApps and organise both commercial and non-profit enterprises. If you wanted to have a say you could use some Ether to buy a DAO token, which gave you the right to vote on future dApps. Approved dApps would then get the required funds.

Investors flocked to buy DAO tokens and in May 2016, raised a whopping $150m worth of ether in 28 days, the largest crowdfunding campaign in history.

However, a “split function” that allowed investors who wanted to opt out of the DAO and get their Ether back had been put in place. On 17 June 2016, a loophole in the split function was exploited and $50m worth of ether was stolen. Investors were horrified and the price of Ether plummeted.

However, the hacker hadn’t got away with the $50m yet. The missing ether had been transferred to a “child” account, that couldn’t be accessed for 28 days.

On 20 July 2016, the Ethereum community decided to “hard fork” the Ethereum blockchain, which means they stopped supporting the longest chain and instead formed a new one, which would allow them to restore almost all of the $50m back to the original contract.

Not everyone agreed with this decision, resulting in the original un-forked blockchain being maintained as Ethereum Classic (ETC). Now there were two Ethereum blockchains, each with their own cryptocurrency.

No limit on mining Ether coins

Like Bitcoin, Ether coins are mined, albeit using a different algorithm as well as Ethereum’s GHOST protocol, which enables quick confirmations and faster mining of blocks. When Ethereum was first launched in 2015, it had 72m coins, pre-mined. But interestingly, unlike Bitcoin, which was capped at 21m coins, no upper limit was set on the total Ether supply.

In 2016, Buterin predicted that the supply of Ether coins wouldn’t cross the 100m mark in the foreseeable future – but that future came too soon, as July 2019, saw 106.7m coins in existence.

The rise in supply is something that has worried Ethereum investors. In the same way that fiat currencies’ prices will rise with demand due to a scarcity in supply, so will cryptocurrencies. If the number of Ether coins mined keeps growing, this scarcity cannot be created.

In 2018, Buterin brought in an Ethereum Improvement Proposal (EIP) to cap the total supply at 120m coins.

Ethereum Market Cap

Like all cryptocurrencies, Ethereum’s share price has seen some dramatic ups and downs and, looking at the market capitalization of Ethereum, this currently stands at $20.39bn (£15.88bn). One ETH coin is currently worth $183, which is way below July’s quarterly high of $307.

It’s clear that Ethereum has revolutionised blockchain technology. Whilst in the past you would require a background in coding, maths, and cryptography, as well as plenty of time and money to write programs using blockchain, developers can now realise any idea or project using Ethereum’s open software platform and benefit from the tools already available.

Not only is this exciting for developers, but companies are starting to take notice. Indeed, the largest bank in the US, JP Morgan has even been testing its own digital currency, JPM coin on Quorum, an enterprise iteration of the Ethereum blockchain. Ether is also becoming as acceptable as Bitcoin as a virtual currency in the real world.

With a new iteration Ethereum 2.0 on the way that will hopefully iron out the problems with scalability, Ethereum could definitely be the one to watch in 2020.

FURTHER READING: Can you make money from Ethereum 2.0

FURTHER READING: Top Cryptocurrencies

Ethereum to Bitcoin
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