What Is Ethereum And How Does It Work? Everything you Need To Know
Cryptocurrencies have revolutionized the digital currency and payments world, starting first with Bitcoin and moving forward with altcoins, with the majority of them using the Ethereum blockchain network as their foundation for launching and growing.
After the initial launch and success of Bitcoin, Ehtereum was introduced along with some other cryptocurrencies, but with an expansive mission than just what Bitcoin was created to do. Ethereum wasn’t just going to be a cryptocurrency for transactions to be carried out with, but also a network that would be a foundation for the next generation of decentralised applications to be built and hosted on.
Following its launch, Ethereum’s goal has been largely successful. It is not just the second-largest cryptocurrency in the world, but it is the largest blockchain network where thousands of decentralised applications have been built on, hosted on and are thriving today.
Owning and trading Ethreum comes with a lot of risks and an upside long-term value. Also hosting an application on the Ethereum blockchain network could be confusing. But if you don’t understand what the Ethreum token or coin truly is, how do you make a decision to purchase one?
To help newbies and early cryptocurrency traders from Nigeria, Africa, or anywhere else around the world understand the origins, usage and value of Ethereum, this article covers everything you need to know about Ethereum and how it works.
What Is Ethereum?
Ethereum is a cryptocurrency token known officially as Ether (ETH) but widely called Ethereum and is also a blockchain network. As a token, it is a type of decentralized digital currency that is limited in value and controlled by no government or individual. And as a blockchain network, it is a community-run technology powering the cryptocurrency called Ether (ETH) and thousands of decentralized applications.
Ethereum’s token is called a cryptocurrency because it uses cryptography to ensure its security, and its value as a decentralised digital currency is because it has no physical form, its balances are stored on a secure & transparent public ledger, and its transaction records are verified by an immense amount of computing power called mining.
History of Ethereum
The idea to create Ethereum was conceived by the Russian/Canadian programmer, Vitalik Buterin, in the year 2013 after he felt that the bitcoin community was not approaching the problem of decentralised applications in the right way. In a bid to create a Swiss Army Knife blockchain network that didn’t just support indidivudal applications, but supported every use case in its own unique way, he and some other individuals, namely Gavin Wood, Charles Hoskinson, Anthony Di Lorio and Joseph Lubin, In 2014, started working on building the Ethereum network after a crowdfunding campaign where they raised more than $18 million dollars from selling Ether tokens. And by the 30th of July 2015, the Ethereum network went live.
The original and consistent goal of Ethereum is to ensure that the platform was more than Bitcoin’s basic ability to just transfer money in a few seconds to anywhere in the world indepent of any government oversight if need be, but also to be a platform that powers and supports thousands and eventually millions of decentralised applications that cannot be manipulated by any entity or government.
Ethereum’s Ether token is not issued by any government or financial institution. They are also not physical commodities. But as a currency trading in relation to the US dollar, its original trading price as at launch was $0.31 per Ether and over $3,000 per Ether as at the time of publishing this article.
The success of Ethereum has led to the creation and growth of many other cryptocurrencies and decentralised applications.
How Is Ethereum Different From Bitcoin
- Bitcoin only functions as a cryptocurrency for a store of value and money transfers, but Ethereum offers several methods of use as a cryptocurrency, smart contracts and the Ethereum Virtual Machine (EVM).
- Ethereum uses a “proof of stake” security protocol system to validate transactions while Bitcoin uses a “proof of work” system to validate transactions
- Ethereum allows both permissioned and permissionless transactions while Bitcoin only allows permissionless or censor-proof (public) transactions to happen on its network;
- Ethereum’s miners to complete more blocks and receive more Ether because the average block time is lesser than Bitcoin’s which is 12 seconds for Ethereum against Bitcoin’s 10 minutes
- For Bitcoin, the computers (called miners) running the platform and verifying the transactions receive rewards. Basically, the first computer that solves each new block gets Bitcoins (or a fraction of one) as a reward. Ethereum does not offer block rewards and instead allows miners to take a transaction fee.
Benefits of Ethereum
Some benefits of Ethereum are:
1). Ethereum is Independent:
Unlike other fiat currencies like the US Dollar that are subject to government restrictions, control, and economic risks, Ethereum is 100% independent and its price is not controlled by the government.
2). Ethereum Transactions Are Mostly Anonymous:
Unlike other transactions online or in the bank that requires documentation and KYC from the client, Ethereum transactions are mostly anonymous, as the only trace is either through the wallet address or if the person did the transaction through a centralised exchange.
3). Ethereum Transactions Are Executed Via A Peer-To-Peer Model:
Unlike banks and other financial institutions, Ethereum transactions are done on a peer to peer basis. this means that an Ethereum owner can transfer Ethereum to another wallet address owned by another person without the need for any financial intermediary to control the transaction.
So unless you’re transferring Ethereum via a centralised exchange or a financial institution, Ethereum transactions are 100% peer-to-peer.
4). Ethereum Transactions Have Very Low Fees:
Transactions that are done through the bank can carry anywhere from 0.2% to sometimes up to 5% transactions fees. But if the transactions are done via the blockchain network, it could cost as low as $0.5 to transfer over $1 billion worth of Ethereum which would have cost over $1m to $60m to execute with a bank or financial institution.
5). Ethereum Payments Are Location Independent:
Without having to go to a bank or staying at a particular location to make a transfer, Ethereum transfers are mobile. This means that the Ethereum owner can transfer funds to any part of the world within a few seconds or minutes without having to worry about being at a particular place or at a particular time.
6). Ethereum Transactions Are Very Secure:
Without the private keys of your Ethereum wallet, it is virtually impossible to have your Ethereums stolen, unlike physical cash that can be taken and escaped with. Also, anytime an Ethereum transaction happens on the blockchain network, it has to be confirmed by several independent decentralised computers through a complex process called mining to verify it is a valid transaction, and this process is very secure, and so far, unhackable.
7). Global Access:
No matter where you’re from in the world, you can own and trade Ethereum. The global accessibility of Ethereum does not limit its ownership, and as such, no party can truly fully prevent anyone around the world from owning and trading cryptocurrencies no matter how much they tried.
8). Ethereum Transactions Cannot Be Changed:
Transactions that happen on the Ethereum network are mostly always permanent. So it’s usually difficult for any government or private organisation to reverse them. If the transaction happens on some other blockchain network owned by a private company, it could be reversed, but not on the Ethereum network.
Some other benefits of Ethereum are:
- Ethereum is open source
- Ethereum cannot be seized on a decentralised network
- Ethereum requires no permissions
- Ethereum transactions are transparent for everyone to see
- Ethereum represents freedom
Challenges of Ethereum
Some of the challenges of Ethereum are:
1). Ethereum Is Volatile:
The price of Ethereum, like other cryptocurrencies, can potentially rise by more than 100% in a day and crash by 99.99% the same day. While this type of rise has not been the case for Ethereum in recent years unlike many other cryptocurrencies, it does rise by over 30% on some days and falls by 50% on some other days, making it highly volatile.
2). Ethereum Have Little to No Government Regulations:
Lack of proper government regulations makes the use of cryptocurrencies like Ethereum susceptible to criminal activities. With proper regulation, it would be easier to track and keep people in check.
3). Ethereum Transactions Are Mostly Irreversible:
Depending on what network the Ethereum was sent through, the transactions are mostly irreversible and if you send your Ethereum to the wrong wallet address they are largely lost forever.
4). Ethereum Has Limited Use For Now:
Unlike fiat money that can be used to pay for goods and services almost anywhere, Ethereum cannot currently be used everywhere to pay for goods and services, but rather in some places. As such, Ethereum has limited use only for now.
How To Buy Ethereum
There are several ways to buy Ethereum. Some of them are:
- Buy from a decentralised exchange like Pancakeswap, Uniswap, and much more and store it in a crypto wallet like Trust Wallet, Metamask, or a hardware wallet like Trevor.
- Buy from a centralised exchange like Binance, Kucoin, and the likes and store in your wallet account on the exchange
- Buy from an individual or company and have it transferred to your online or offline wallet
To Sum It Up
The creation of Ethereum helped promote the new world of money introduced by Bitcoin and also created a decentralised platform for decentralised applications to be hosted on and thrive. By understanding how Ethereum works, its uses and impact on society, you can make good cryptocurrency investment decisions and you’d be able to not just own other cryptocurrencies, but also profit tremendously from them in Nigeria, Africa, or anywhere else around the world.