WHAT IS ETHEREUM?

Ethereum is a programmable blockchain with its own cryptocurrency or coin called Ether. It is decentralised digital money denominated by ETH. Just like Bitcoin, Ether is not controlled by any organisation or government. However, similarly to BTC, the Ethereum network is controlled by miners and validators that may reside in the same country or even region. Ether can be used to store value, make payments and provide collateral. When people typically talk about Ethereum, they are talking about Ether (ETH). The Ethereum blockchain has become synonymous with its coin or digital asset and is still the go-to smart-contracts platform in the crypto sphere. 

Launched in mid-2015 by a Russian-Canadian programmer named Vitalik Buterin, Ether (ETH) became the second most valuable cryptocurrency in market capitalisation in just two years and still holds the top spot of altcoins at the time of writing. Ethereum’s blockchain is powerful due to its built-in programmability, which means developers can use the platform to develop decentralised applications (dApps).

Why was Ethereum invented?

Currently, most of our digital data, including financial information and personal credentials such as passwords, is stored on third-party servers owned by large corporations and companies like Google, Microsoft, Amazon and Facebook. This unprecedented centralisation of data storage provides organisations and governments with extraordinary leverage over citizens.

Ethereum’s primary goals include replacing online banking and data-sharing with a decentralised currency like Ether and third-party service providers with servers owned by people using blockchain technology. This is the basis of a new kind of internet, where everything from data storage and payments to financial systems and service applications are integrated. Currently, there are thousands of developers building applications using Ethereum. These include:

  • Financial applications that allow you to invest, lend or borrow your digital assets and currencies.
  • Decentralised markets where you can trade digital assets
  • Games, where the user owns all the gaming assets and where one can even earn real money
  • Cryptocurrency wallets that allow the user to make instant and affordable payments with Ether or other currencies

How does Ethereum work, and what is the technology behind it?

Ethereum drew inspiration from Bitcoin’s blockchain but has additional capacity for developers to create smart contracts and dApps with different ownership criteria, extra steps, new transaction formats or numerous methods for transferring state. It uses the Turing-complete programming language, allowing developers to create apps where blockchain transactions can dictate and automate specific outcomes. For this reason, they are often referred to as “smart contracts”.

As the Bitcoin blockchain, Ethereum is a shared database representing a complete transaction history, with each node connected to the network having a copy of it. Apart from these transactions, the nodes also store the current state of each smart contract. The network keeps track of the state of each smart contract or Ethereum application, including the balance each user has. When a transaction is made on the Ethereum blockchain, the platform follows the model of bank accounts. They show up in one wallet and can easily be transferred to another.

Ethereum’s cryptocurrency, Ether (ETH), is based on a token called ERC-20, one of the most widely used in the entire crypto sphere. It is currently mined using the same proof-of-work protocol used by Bitcoin. However, due to the drawbacks of the protocol, such as excessive power consumption, the Ethereum blockchain will soon receive the ETH 2.0 update, which will move Ethereum to a Proof of Stake-based consensus. 

Is Ethereum real money?

There is no absolute answer to this question, mainly because Ethereum is more than just an alternative digital currency in its capacity. It aims to replace traditional online banking and third-party payment gateways and strives to democratise the internet through collective ownership of digital services and data storage. Nevertheless, there are over 100 merchants that accept Ether as a payment method, including CryptoPet, Peddler.com, eGifter, FlokiNET, Overstock, PizzaForCoins and others.

A fundamental difference between Bitcoin and Ethereum is that the former is a dedicated digital currency alternative. Ether, however, is a token used to power the network’s integrated utilities, including dApps, smart contracts, transactions and decentralised autonomous organisations (DAOs). So within the ERC-20 blockchain ecosystem, Ether acts as the most popular currency. It is also the most commonly used currency in Initial Coin Offerings (ICOs). But in the traditional sense, Ethereum as a currency currently has lower acceptance.

Ethereum fees and costs

At the time of writing, Ethereum’s average transaction fee is $0.4492 per transaction, almost 150% higher than last year when the fee hovered around the $0.17 per transaction mark. The average fee is calculated in USD when a miner processes and confirms a transaction. It can be directly affected by network congestion or the high demand for proof of work. In mid-2018, as cryptocurrencies rose to their all-time highs, Ethereum’s average transaction rate peaked at $3.00.

Apart from this, the expenses and fees charged by different crypto services, including trading platforms, vary in percentage and structure. Most of the time, standard buying and selling via a bank transfer will cost you 0.5% to 2%, while instant buying with debit cards can set you back between 3% to 7%. Similarly, bank transfers can incur a fixed fee depending on whether you deposit or withdraw your money. Pricing structures are quite complex and vary significantly based on numerous factors such as payment method and geographical location, of course.

What are the advantages of Ethereum?

Ethereum offers all the benefits of a traditional blockchain along with some unique advantages:

  • Immutability – Every transaction that takes place on the Ethereum blockchain is immutable, which means that once the data has been processed, confirmed and written, it can never be changed. This makes Ethereum almost impossible to hack.
  • Decentralised – Ethereum currently uses a consensus mechanism to verify transactions, eliminating a central authority or intermediary. Smart contracts based on the Ethereum blockchain can execute themselves.
  • Fast transactions – Instead of going through manual checks and verification processes, blockchain uses automated processes to ensure the validity of a transaction. This not only makes Ether much faster – though not as fast as many other blockchains – but also more affordable.
  • High reliability – Ethereum has been around for several years now, and new applications are created and run on the blockchain without having to overcome hurdles such as fraud, third-party interference, censorship and downtime.
  • Programmable – One of the most significant advantages of Ethereum is that it is programmable, and developers can use it to create decentralised applications. This can include financial services, games, smart contracts and much more.

How secure is Ethereum?

The Ethereum network is very secure. Every transaction on the Ethereum blockchain is secured by cryptographic encryption, and Ethereum has three times more nodes to verify each of its transactions compared to Bitcoin. Most hacking attempts and cyberattacks related to Ethereum target poorly written developer smart contracts, not the blockchain itself. The blockchain will become even more secure now that the platform is moving to the Proof of Stake consensus protocol.

Which teams are working on the development of Ethereum?

Currently, the largest project for Ethereum Blockchain is ETH 2.0, led by Raul Jordan. It will make fundamental changes to the blockchain, including moving from the Proof of Work (PoW) to Proof of Stake (PoS) protocol. Including Raul’s team, eight teams are working on various Ethereum projects around the world:

PegaSys

Led by Faisal Khan, this team’s primary goal is to bring businesses to the Ethereum Blockchain by developing compelling software that is more affordable, easy and convenient to customise for different types of businesses.

ChainSafe

ChainSafe is a Toronto-based research and development company that provides blockchain consulting for projects based on Ethereum, such as Polymath, Aion, Shyft and Bunz. Mikerah Quintyne-Collins is the current lead.

Parity Technologies

Parity is a blockchain infrastructure company to keep the second most popular client, Parity Ethereum, on the blockchain. It is considered by many to be one of the most advanced and fastest Ethereum clients.

Harmony

This team was subsidised by the Ethereum Foundation to create the full specification for the Ethereum 2.0 upgrade. The project operates under the GPL or General Public License to ensure that all code implementations remain free.

Prysmatic Labs

Using the Go programming language, this team created the first variant of Ethereum 2.0 and is currently providing the necessary help for the blockchain to achieve sustainable scalability. Raul Jordan leads the team.

Trinity

It is the current Python-based Ethereum client with six developers under contract with the Ethereum Foundation. The team is also working on support for Ethereum 2.0 specifications.

Status

Another team funded by Ethereum Foundation to develop a mobile browser and messaging platform to increase user engagement. The main goal is to ensure mass adoption by optimising performance on less resourceful devices.

Sigma Prime

Sigma Prime is an Ethereum Foundation grant-funded blockchain technology and information security consultancy tasked with developing an Ethereum 2.0 client called Lighthouse.

Which financial institutions are involved in Ethereum?

Many financial institutions have gotten behind Ethereum in recent years. A few years ago, the Enterprise Ethereum Alliance was formed, which includes many tech giants and financial companies such as ING, MasterCard, Credit Suisse, JP Morgan and others. Recently, Natixis Investment Managers, Clearstream, Credit Suisse and the Luxembourg Stock Exchange announced that they would fund a Series A round for an Ethereum-based startup FundsDLT.

Ethereum Mining

Mining Ethereum is quite similar to mining Bitcoin. There are blocks of transactions that require computing power to find the right solution. Technically, the unique metadata of a block is run by miners using a hash function that returns an encrypted string of a fixed length that appears to be random. When a miner finds a hash that matches the target, it is assigned the Ether token, and each node validates the transaction and updates the database. Once a miner finds the correct hash, all other miners start mining more blocks, and so on.

Ether Wallets

An Ethereum wallet is software used to store Ether tokens. Depending on your requirements, you can choose from a variety of programs:

  • MetaMask – browser-based and mobile wallet.
  • TrustWallet – mobile wallet
  • MyCrypto – web-based wallet
  • Argent – mobile wallet
  • MyEtherWallet – client-side wallet
  • Gnosis Safe – security-oriented wallet with multiple signatures
  • Coinbase Wallet – mobile wallet

If you are looking for hardware wallets, Ledger Nano S, D’CENT, KeepKey and Trezor are good options.

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