What Is Ethereum And How Does It Work? – Forbes Advisor Canada


Ethereum (ETH), the second most popular cryptocurrency after Bitcoin, was launched by co-founder Vitalik Buterin in 2015 and other co-founders, including Gavin Wood. It is also the second most dominant cryptocurrency, accounting for more than 17% of the $ 1.2 trillion cryptocurrency market.

But there are some distinct differences between Ethereum and the original crypto.

Unlike Bitcoin (BTC), Ethereum aims to be much more than just a medium of exchange or a store of value. By contrast, Ethereum is a decentralized computing network built on blockchain technology.

Here’s what you need to know about Ethereum.

What is Ethereum?

In the crypto’s own words, Ethereum is “a global, decentralized platform for money and new types of applications,” with thousands of games and financial applications running on Ethereum’s blockchain. Cryptography is so popular that even other cryptocurrencies work on its network.

The core of Ethereum is its blockchain network. A blockchain is a decentralized, distributed public registry where transactions are verified and logged.

It is distributed in the sense that all participants in the Ethereum network have an identical copy of this book, which allows them to see all past transactions. It is decentralized, as the network is not operated or managed by any centralized entity; instead, it is managed by all the holders of the general ledger distributed.

Blockchain transactions use encryption to keep the network secure and verify transactions.

Ether, Ethereum’s native token, can be used to buy and sell goods and services like Bitcoin. But the only thing about Ethereum is that users can create applications that “run” on the blockchain like software “runs” on a computer. These applications can store and transfer personal data or manage complex financial transactions.

Ether and Ethereum: What’s the Difference?

You can use Ether as a digital currency in financial transactions, as an investment, or as a security reserve. Ethereum is the blockchain network where Ether is maintained and exchanged. As mentioned above, this network offers a variety of other features outside of ETH.

“They can be simple fundraising, but they can also be complex transactions that do anything from exchanging assets to borrowing to acquiring a digital work of art,” says Boaz Avital, Anchorage’s chief product officer. Transactions are processed and stored on the Ethereum network.

The Ethereum network can also be used to store data and run decentralized applications. Instead of hosting software on a server owned and operated by Google (GOOGL) or Amazon (AMZN), where the only company controls the data, people can host applications on the Ethereum blockchain. This gives users control over their data and they have an open use of the app as there is no central authority that handles everything.

One of the most intriguing use cases involving Ethereum is self-executing contracts, or so-called smart contracts. Like any other contract, both parties agree to deliver goods or services in the future. Unlike conventional contracts, lawyers are not required: the parties encode the agreement in the Ethereum blockchain. Once the terms of the contract are met, Ether executes itself and delivers Ether to the appropriate party.

Ethereum vs Bitcoin

The main use of Bitcoin is as a virtual currency and store of value. Ether also functions as a virtual currency and store of value. But Ethereum’s decentralized network also allows you to create and run applications, smart contracts, and other network transactions. Bitcoin does not offer these features.

Ethereum also processes transactions faster.

“The new blocks are validated on the Bitcoin network once every 10 minutes while the new blocks are validated on the Ethereum network once every 12 seconds,” says Gary DeWaal, chairman of Katten’s financial regulation and markets group. And future developments could speed up Ethereum’s transactions even further, he says.

Finally, there is no limit to the number of possible Ether tokens, while Bitcoin will not release more than 21 million coins. Bitcoin currently has 19 million coins in circulation.

Benefits of Ethereum

  • Large and existing network. The benefits of Ethereum are a proven and true network that has been proven through years of operation and billions of value trading hands. It has a large, committed global community and the largest ecosystem in blockchain and cryptocurrency.
  • Wide range of functions. In addition to being used as digital currency, Ethereum can also process other financial transactions, execute smart contracts, and store data for third-party applications.
  • Constant innovation. A large community of Ethereum developers is constantly looking for new ways to improve the web and develop new applications. “Due to the popularity of Ethereum, it is often the preferred blockchain network for new and exciting (and sometimes risky) decentralized applications,” says Avital.
  • Avoid middlemen. Ethereum’s decentralized network promises to allow users to leave behind third-party intermediaries, such as attorneys who draft and interpret contracts, banks that are intermediaries in financial transactions, or third-party web hosting services.

Disadvantages of Ethereum

  • Increased transaction costs. Ethereum’s growing popularity has led to higher transaction costs. Ethereum transaction fees, also known as “gas”, can fluctuate and be quite costly. That’s great if you’re making money as a miner, but less so if you’re trying to use the net. Unlike Bitcoin, where the network rewards transaction verifiers, Ethereum requires that participants in the transaction charge the fee.
  • Cryptographic inflation potential. Although Ethereum has an annual limit of launching 18 million Ether per year, there is no lifetime limit for the potential number of coins. This could mean that, as an investment, Ethereum may function more like dollars and may not appreciate as much as Bitcoin, which has a strict lifetime limit on the number of currencies.
  • Steep learning curve for developers. Ethereum can be difficult for developers to pick up as they migrate from centralized processing to decentralized networks.

Ethereum 2.0 is coming

Coming soon is Ethereum 2.0, which promises to upgrade Ethereum’s Mainnet to increase scalability. The long-awaited update to the Ethereum blockchain could finally happen this summer, probably in August.

The most significant change with Ethereum 2.0 is that cryptography will move from a working test mechanism to a participation testing mechanism. This will gradually eliminate the need for miners, who run validations on expensive cryptographic mining equipment and consume a lot of energy.

The bet, which involves blocking a certain amount of cryptocurrency to participate in the transaction verification process, will replace mining to verify Ethereum transactions once the merger is complete.

Ethereum 2.0 is expected to reduce the carbon footprint of cryptography by up to 99.95%.

How to buy Ethereum

It is a common misconception among young people on the Ethereum network. Don’t buy Ethereum itself, that’s the network. Instead, you buy Ether and then use it on the Ethereum network. Given the popularity of Ethereum, it is very easy to buy Ether:

  • Choose a cryptocurrency exchange. Cryptographic exchanges and trading platforms are used to buy and sell different cryptocurrencies. Coinbase, Binance.com, Netcoins, Shakepay and Kraken are some of the biggest exchanges. If you’re just interested in buying the most common currencies like Ether and Bitcoin, you can also use an online brokerage like Wealthsimple Crypto. Be prepared to pay some amount of trading or processing fees almost universally.
  • Deposit fiduciary money. You can deposit cash, such as dollars, on your trading platform or use your debit or credit card to fund Ether purchases. Just make sure your bank or issuer supports the possibility of doing so.
  • Buy Ether. Once you finance your account, you can use the money to buy Ether at the current price of Ethereum along with other assets. Once the coins are in your account, you will be able to keep, sell or exchange them for other cryptocurrencies in the future. Please note that you may incur taxes whenever you sell or trade cryptocurrencies.
  • Use a wallet. Although you can store Ether in the default digital wallet of your trading platform, this can be a security risk. If someone hacked the exchange, they could easily steal your coins. Another option is to transfer currencies that you do not plan to sell or trade soon to another digital wallet or a cold wallet that is not securely connected to the Internet.

Should you buy ether?

According to DeWaal, you may want to consider investing in the Ethereum network for a number of reasons. “Firstly, it has value and is used as a virtual currency. Secondly, the Ethereum blockchain could become more attractive when it migrates to the new protocol. And thirdly, as more people use applications distributed by Ethereum, the ETH demand may increase, ”he says.

In addition to buying Ether directly, you can also try investing in companies that create applications using the Ethereum network. If you want help managing your investment, you can also buy a professional investment fund like Bitwise Ethereum Fund or Grayscale Ethereum Trust.

Before making any significant investments in Ether or other cryptocurrencies, consider first talking to a financial advisor about the potential risks. Given the high risk and volatility in this market, make sure it is money you can afford to lose, even if you believe in the potential of Ethereum.



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