In the world of cryptocurrency, Ethereum is often regarded as the one that spearheaded the innovations in blockchain technology that would lead to smart contracts, decentralised applications, NFTs, and more.
Ethereum (ETH) is the second-most popular cryptocurrency network in the world after Bitcoin (BTC). The reason for its popularity is that it allows developers to create applications that can do far more than simple peer-to-peer payments that Bitcoin does.
In this article, we’ll briefly cover what Ethereum is, how smart contracts work, what proof of work and proof of stake is, and why it’s such a big deal in the crypto space. We’ll also take a look at its price performance, and how well it can maintain value across time.
Introducing Ethereum — What is it?
Ethereum is similar to Bitcoin, in that it allows anyone to do peer-to-peer payments with blockchain technology. This means that on Ethereum, money can be sent to someone instantly and electronically, no matter the distance. The difference between peer-to-peer payments and international banking, is that with the former, you don’t have to rely on a bank or an intermediary.
Paying someone with Ethereum and Bitcoin is almost like sending paper cash with air mail. The difference is that, because payments are done electronically, the money can reach its destination safely and fast.
Ethereum can do more than simple payments
What sets Ethereum and Bitcoin apart is what you can do with Ethereum. With Bitcoin, you can only do simple transactions. Money (in Bitcoins) gets sent from A to B, and that’s about it.
Ethereum’s currency Ether (ETH), can be sent to an escrow account that is controlled by a computer program. The escrow account won’t do anything with the money, and will only send the money to its destination if certain conditions are met.
This escrow account is called a smart contract. Nobody can control a smart contract. It acts according to how it’s programmed. Just like a vending machine, it won’t do anything unless certain conditions are met.
How does Ethereum work — introducing smart contracts
There are many kinds of smart contracts on Ethereum. Here’s one that can be used in a hotel business. Let’s say a hotel room is connected to the Ethereum network. The door can only be unlocked from the outside if a guest has paid for the room, and if the guest can use their crypto wallet ID (private keys) to prove that the Ether was paid from their wallet.
Guest A can book the room in advance using wallet A at a specific Time A. Guest B can book the same room, also in advance, using wallet B at a specific Time B. A smart contract will hold on to the Ether from both Guest A and B, and will only send the Ether to the hotel owner after each of their check-out dates.
Guest A arrives at the hotel room, using her Ethereum wallet A to prove that she was the one who booked the room. The door unlocks for this guest for the duration of the stay. If Guest A had not gone out by the check-out date, there’s a risk of her getting locked out by accident. Perhaps, she must pay one more night’s worth of Ether in order to get back in, as if she’d just check-in again for the next night.
The smart contract can also be programmed so that guests cannot unlock the door before their check-in date, even if other guests have sent Ether to the same smart contract. The smart contract can be programmed to match the guests’ check-in date with their Ethereum wallet ID (or private key).
In this scenario, it’s entirely possible for the hotel to be run entirely on smart contracts. There is no need to employ a hotel staff that safeguards the keycards.
For sure, no credit card companies are needed to process electronic transactions as the hotel can be booked by anyone from anywhere, simply by using an Ethereum wallet.
History of Ethereum
Ethereum was first proposed in 2013 by a Russian-Canadian programmer Vitalik Buterin, who was 19 at that time.
The potential of Bitcoin attracted Canadian-Russian programmer Buterin, but he thought that blockchain technology might be used for more than simply money transfers. On top of a blockchain architecture, he imagined a platform that would enable developers to create decentralised apps.
After some work on Ethereum’s development, on July 30, 2015, the network officially launched, and since then Ethereum has accomplished a number of key milestones. This includes making it possible to create a completely decentralised market for cryptocurrencies, and to crowdsale and launch new crypto tokens off the same network with the same blockchain technology.
One such crowdsale created a defining moment for Ethereum in 2016. After a successful crowdsale which raised millions in Ether, the smart contract that was used to run the crowdsale was breached due to a bug. Apparently, the programmers of that specific smart contract (not Ethereum’s fault) made it possible for a hacker to drain $50 million worth of ETH.
This incident caused the Ethereum community to be split between restoring the lost Ether and to continue moving on with a painful lesson on smart contract security.
This gave rise to a hard fork, which happens when a consensus is reached to agree to the creation of a separate network that follows a different set of rules from the main network, hence the term fork.
Those who wanted their money back stayed on the (current) Ethereum blockchain. The other party formed Ethereum Classic (ETC), which did not restore the lost Ether.
In 2022, Ethereum became one of the most eco-friendly cryptocurrency networks. This is because it switched its engine from the Bitcoin-inspired Proof of Work into Proof of Stake, which uses 99.95% less energy.
What is Proof of Stake?
Proof of Stake is a mechanism that makes Ethereum secure and decentralised. Because no bank or company maintains the Ethereum network, the network relies heavily on volunteers called “validators”.
Ethereum validators exist around the world, and they listen to transactions. Every 12 seconds, all the validators submit a list of all the transactions that they’ve listened to in the past 12 seconds. Of course, the list will be different for each validator. The question is — which list is the “official” one?
To decide on the official and finalised record of the 12-second part of Ethereum’s history, one validator gets chosen at random. When a validator gets chosen to present their list as an official source of information, they get paid in ETH.
So, can every person who owns ETH become a validator? Unfortunately, to become a validator, one must stake (or deposit) 32 ETH to run a validator. As you know, 32 ETH is not cheap. But it gives proof that the validator has risked so much money in order to serve the Ethereum network.
That’s why this system is known as Proof of Stake.
Ethereum’s current market value
In February 2023, Ethereum had a market capitalization of over $400 billion and a value of almost $3,500 per Ether. By market capitalization, Ethereum is the second-largest cryptocurrency behind Bitcoin.
Like other cryptocurrencies, the market value of Ethereum is prone to changes because of a variety of variables, such as market sentiment, governmental regulations, and technical progress of the network. The popularity of crowdfunding, which is often held on the Ethereum platform, is one significant aspect that has affected the value of Ethereum in the past.
Crowdfunding on Ethereum is not as frequent as it was back in 2017 due to governmental regulations that restrict it.
However, Ethereum is still far more valuable than many people believe. For example, decentralised finance apps created on the Ethereum platform have drawn more attention in recent years, which has helped to increase the price of Ether. Users may trade, borrow, and lend bitcoins using DeFi apps without the use of middlemen like banks or exchanges.
Ethereum’s prices have been negatively affected by recent events, including war, global economic stagnation, and investors’ negative sentiment of the whole financial market from 2022 through 2023.
However, looking at its 3-year price performance, it has exceeded the S&P 500 Index by 40 times over. Looking further back to see its 5-year price performance.
Use cases for Ethereum
Store of value
Just like normal fiat currency, cryptocurrencies like ETH share a fundamental function as a store of value. In fact, many investors hold ETH as a way to diversify their investments. And as the Ethereum network continues to grow and evolve, the value of ETH is predicted to increase over the long term.
Create NFTs
Ether can also be used to facilitate the creation of non-fungible tokens (NFTs). The process of creating NFTs, also known as the minting process, requires fees in the form of cryptocurrency, such as ETH, MATIC, USDT, and many more.
Crypto casino
Another use case for ETH is to wager it in crypto casinos such as Gambulls, and use it in place of regular fiat currency.
There are some advantages of using cryptocurrencies such as ETH for online gambling, namely the privacy, instant and seamless payments, and the convenience of gambling from wherever you are.
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The takeaways
Ethereum has offered some very useful technologies, which has made the crypto space so advanced and valuable today. Given its continuous development and growing popularity among interested investors, it’s unlikely for Ethereum to go away any time soon.
The information presented in this article is still very much introductory, and there’s so much more to explore about Ethereum. It’s recommended that you do your own research and dig a little deeper than this, if you want to dabble into Ethereum and cryptocurrency in general.
On a closing note, everything discussed in this article serves as educational material and should not be perceived as financial advice in any way, shape, or form. Doing your own research is imperative to provide context and insight into making more informed decisions when it comes to crypto, or any investment endeavour.
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