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What is Ethereum?
By James F. Trumm MONEY RESEARCH COLLECTIVE
Ethereum is the world’s second-largest cryptocurrency by market capitalization. It’s frequently used in smart contract transactions, the purchase and sale of non-fungible tokens (NFTs) and other decentralized applications (dApps).
What is Ethereum and how does it work?
To be precise, Ethereum is an open-source blockchain whose native currency is called Ether (ETH). But for most people, and for the purposes of this article, Ethereum has come to mean either the Ethereum blockchain or Ether cryptocurrency, depending on context.
Ethereum’s white paper was published in 2014, and the Ethereum blockchain was launched a year later by Canadian programmer Vitalik Buterin and four co-founders. As of this writing, it has a market cap of $216.8 billion, making it second only to Bitcoin (BTC) in total value.
Like all cryptocurrencies, Ethereum is a virtual currency that exists as entries on a blockchain ledger. It can be sent instantly and cheaply to anyone with an internet connection and a computer or smartphone. Unlike fiat currency (such as dollars, euros, pesos, or yen) issued by a government, Ethereum was privately created and is regulated by its own algorithm rather than by the decisions of the U.S. Federal Reserve, its international cognates, or any other central authority. It can be bought, sold, traded or given as a gift. Its value is determined by what people will pay for it; that is, it has value only to the extent people believe it does.
Ethereum vs. Bitcoin
Because they are the #1 and #2 cryptocurrencies in the world by market cap, Bitcoin and Ethereum are frequently compared. The chief contrast between them is that Bitcoin and the Bitcoin network were designed primarily as a form of digital currency. Ether and the Ethereum blockchain, however, are the foundation of blockchain technologies such as dApps and smart contracts. There are other differences as well.
| Ethereum | Bitcoin | |
| Coin Supply | Unlimited but subject to annual cap | Capped and rate of production is halved every four years |
| Purposes | Medium of transactions; store of value; dApps such as smart contracts; NFTs | Medium of transactions; store of value |
| Transaction Processing Capacity | 30 transactions/second* | 4.6 transactions/second |
| Mining Method | Proof-of work* | Proof-of-work |
| Market Cap (6/9/22) | $216.8 billion | $555.8 billion |
* In August 2022, Ethereum is scheduled to switch to a proof-of-stake mining model which is expected to expand transaction processing capacity to 100,000 transactions/second. This will make Ethereum significantly faster than the Bitcoin blockchain.
What is Ethereum used for?
Many people buy Ethereum for the same reasons they buy other cryptocurrencies: as a store of value and an investment they hope will appreciate. And even though as of this writing the whole crypto market has just suffered a wrenching downturn, Ethereum is still selling for three and a half times what it was selling for five years ago. That’s a pretty good return on your money.
What separates Ethereum from cryptocurrencies like Bitcoin and Dogecoin is that Ethereum uses its blockchain to create, in effect, a giant decentralized computer known as the Ethereum Virtual Machine, or EVM. The EVM supports dApps, NFTs, smart contracts, Decentralized Autonomous Organization (DAO) records and other peer-to-peer Decentralized Finance (DeFi) applications. Many of these applications utilize Ether as their native token. They can be written in almost any programming language, a feature that makes it attractive to numerous DeFi startups.
The Ethereum blockchain can also process many more transactions per second than, say, Bitcoin’s blockchain. Downtime is minimal. This makes it easier to scale up the Ethereum platform’s operation, perhaps even to the point where it will rival conventional payment and currency transfer technologies.
All of this means that Ethereum has actual utility beyond its use as an investment. Ethereum proponents argue that its intrinsic usefulness makes it a path to a future in which peer-to-peer transactions cut out costly and inefficient middlemen – a future where blockchain technology secures everything from legal agreements to medical records to musical and artistic creations.
Is Ethereum a good investment?
Like all cryptocurrencies, Ethereum is a highly volatile and speculative investment. It isn’t “backed” by anything of generally accepted value, such as gold, silver, real estate, or other property. Many financial advisors tell people that no more than 5% of their portfolios should be in crypto, while others bluntly advise people that they may lose every cent they put into crypto. These warnings should not be ignored. As of this writing (June 21, 2022), the price of Ethereum was down almost 40% from a year ago.
However, for those who can stomach the volatility of digital assets, Ethereum is likely a better choice than most (if not all) of the altcoins on the market. This is partly due to Ethereum’s enormous market cap but also has to do with the fact that Ethereum, unlike some other digital currencies, has significant functional value as the blockchain of choice for dApps, smart contracts, NFTs, and other applications.
What’s more, if Ethereum’s transition from proof-of-work to proof-of-stake goes as planned, it will be able to handle far more transactions per second than it does now. At that point, the Ethereum platform might become not merely a rival to Bitcoin and other cryptocurrencies but also turn into a competitor of payment processing networks and financial services organizations such as Visa and Mastercard.
Perhaps. But perhaps not. So the answer to whether Ethereum is a good investment is, “Who knows?” And of course, the above should not be construed as investment advice one way or the other.
Should I buy Ethereum?
If you intend to trade in NFTs or set up smart contracts, then not only should you buy Ethereum (or another Ethereum-based coin), but it’s almost a necessity. If you are just looking to invest in crypto, then your decision to buy Ethereum should be based on a clear-eyed risk assessment.
Ethereum is subject to some risks–and some opportunities–not found in other cryptocurrencies. As noted below, the Ethereum community is bracing for a major change in how Ether is mined–a shift from proof-of-work to proof-of-stake. No one knows how smoothly this change will go. The doomsayers predict massive disruptions in the Ethereum market, while the cheerleaders expect the change will make Ethereum significantly more useful and valuable.
Is it worth mining Ethereum?
Anyone hoping to make money by mining Ethereum had better have deep pockets, solid technical knowledge of mining algorithms, access to cheap electricity, and a strong stomach.
Ethereum miners currently earn two Ether per block and collect the associated transaction fees. With Ethereum now trading at about $1,150, that’s not a lot of money considering the investment needed to be a miner. One mining calculator notes that at present, it would take 34.4 days to mine just one Ethereum coin with a high-performance rig capable of processing 2500 MH/s. A miner’s profit would depend on the cost of electricity and the cost of the equipment.
How to buy Ethereum
Because it’s the world’s second-largest cryptocurrency, Ethereum is easy to purchase. It can be bought on most cryptocurrency exchanges, including Coinbase, Binance, Crypto.com, and Kraken. Ethereum can also be purchased with other cryptocurrencies from a crypto wallet or with a stablecoin such as USD Coin.
Ethereum FAQ
Ethereum price prediction
Yogi Berra once said, "I never make predictions, especially about the future." But as the recent sharp downturn in crypto prices has shown, it's safe to say those who see the crypto market as a perpetually rising tide that will lift all boats may be in for a big surprise.
Google "Ethereum price prediction" and you'll get results ranging from five figures to effectively zero. Historically speaking, crypto is a new technology and a new type of investment. There simply isn't enough data to support a consensus about Ethereum's future value. Beware of those who say otherwise.
Is Ethereum proof-of-stake?
As of this writing (June 21, 2022), Ether creation operates on a proof-of-work model. Under this system, computers compete against each other to see which one can solve a complex mathematical puzzle. The operator of the winning computer is then allowed to create a new block on the Ethereum blockchain.
This system has various drawbacks, including massive electricity consumption, relatively slow transaction processing speeds and limited scalability. These factors limit Ethereum's utility and growth.
To address these shortcomings, the Ethereum network is transitioning to a proof-of-stake model called Ethereum 2.0. Proof-of-stake allows people who own Ether, and are willing to pledge it as collateral, to earn more Ether by validating transactions on the Ethereum blockchain. Here are the key differences between the two models of Ethereum mining:
| Proof-of-Work | Proof-of-Stake | |
| Electricity Consumption | Far greater | Far less |
| Scalability | No | Yes |
| Transaction Speeds | Slow | Fast |
| Name of Coin Creators | Miners | Validators |
| Name of Creation Process | Mining | Validation |
| Investment Required | High-speed computers; electricity; air conditioning | Purchase of Ether |
