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What is Ethereum?
Ethereum, like Bitcoin, is a blockchain that allows the transfer of cryptocurrencies between individuals without the need for a third party – such as a bank or international remittance company – to secure the transaction.
Moreover, it is also a programmable platform where developers can create decentralized applications (dApps) from various sectors, such as finance, media, and games.
This is possible because the network operates through smart contracts, a technology that is revolutionizing the market.
In practice, these contracts are computer programs that execute pre-established rules in an automated way. An example is a loan. A person could lend values to another without the need to resort to an entity to guarantee the transaction – all terms and conditions could be programmed.
Ethereum kick-started the emergence of a new digital economy, with new crypto assets, Decentralized Finance (DeFi), Initial Coin Offerings (ICOs), Non-fungible Tokens (NFTs), and metaverse games, such as Decentraland (MANA) and The Sandbox (SAND).
How and when it emerged
Ethereum was conceived by Russian-Canadian programmer Vitalik Buterin in 2013. Buterin’s relationship with cryptocurrencies, however, began a few years earlier.
He came across Bitcoin in 2011, while he was “looking for meaning in life,” he wrote on his blog. Initially, despite understanding programming (his mother is a computer scientist), he couldn’t see much value in Satoshi Nakamoto’s idea, the pseudonym of BTC’s creator.
After a while, however, he was hooked by the technology and began to get involved in market projects. In 2012, he co-founded Bitcoin Magazine, a site specialized in BTC coverage. That same year, he enrolled in the computer science course at the University of Waterloo, Canada.
In 2013, Buterin left his degree and traveled the world to meet people who were working with cryptocurrency. It was in these meetings with industry experts that he realized it would be possible to use Bitcoin’s blockchain not only to transfer money over the internet without the intermediation of third parties but also to decentralize other segments.
In November of that year, using BTC’s code as a basis, he published the initial white paper of the project. Several people became interested and offered to collaborate, including computer scientist Gavin Wood, who co-created the project alongside him. In July 2014, to raise money and effectively kick-start Ethereum, the platform launched an ICO, managing to raise $18.5 million in just over a month. However, it wasn’t until July 2015 that the blockchain came to life.
Differences between Ether and Ethereum
Ethereum is the blockchain that allows the creation of apps and the transfer of digital assets. Ether, on the other hand, is the native cryptocurrency of this network and the “fuel” of the entire system.
If a programmer generates an application, they need to pay the network usage fees – called gas – with Ether. Similarly, if a user wants to send a cryptocurrency to another, they must also bear this fee, which is not fixed.
Just like in Bitcoin, it is the miners who keep the system standing, validating the transactions. In return, they receive rewards in Ether.
ETC and ETH
In June 2016, a hacker managed to steal $50 million in Ether from a decentralized application built on the Ethereum network. After the virtual theft, the blockchain’s developers gathered, debated, and decided to restore the network to recover the lost ETH. Not everyone, however, was in favor of the idea, and the platform was split in two.
The blockchain updated to the version prior to the theft kept the name Ethereum (ETH). The “original” blockchain, with the record of the million-dollar embezzlement, was renamed Ethereum Classic (ETC).
Forks due to disagreement among participants are common and constant in the cryptocurrency universe. The jargon used for this is “hard fork”. BTC itself has gone through some, giving rise to new digital assets, such as Bitcoin Cash (BCH) and Litecoin (LTC).
Ethereum 2.0
Ethereum 2.0 is an update to the project’s blockchain. The goal of this change is to increase the scalability, speed, and efficiency of the network, which often gets congested and has expensive fees. The change is being made in stages, and the main change will occur in the system’s mining mechanism (the process of validating and creating new cryptocurrencies).
Today, Ethereum uses the Proof of Work (PoW) protocol, the same one used by Bitcoin. This algorithm requires miners to put computers to solve mathematical problems and validate transactions. The one who finds the solution first wins cryptocurrencies as a reward. This format is criticized because it generates high energy consumption.
During the update, Ethereum will replace PoW with a mechanism called Proof of Stake (PoS), which dispenses with miners. According to the rules of this new protocol, any network user with 32 ETH deposited in a specific smart contract can help validate transactions on the blockchain. On December 22, 2020, this amount was around $128,000.
The first phase of Ethereum 2.0 was implemented on December 1, 2020. In summary, the developers created a blockchain called “Beacon Chain”, which already has the PoS mechanism in its code, and put it to “run” parallel to Ethereum’s main network.
To force current miners to adopt the new format, Ethereum had the idea of implementing a mechanism called “difficulty bomb” in the code of its main network, still in 2022. In practice, this bomb requires greater computational power to mine ETH, reducing the profitability of the business.
Finally, the last stage of the update is the creation of “Shared Chains”. In this phase, the programmers subdivide Ethereum’s main network into 64 chains. The goal, according to Ethereum.org, is to reduce the protocol’s congestion and increase the number of transactions.
How to mine Ethereum
Mining is the name given to the process of validating and including new transactions in the blockchain. Those who carry out this activity, done through computers, are the miners. As a reward, they receive new cryptocurrencies. To participate in the process, it is necessary to acquire PCs with powerful video cards. As mining involves solving mathematical calculations, the greater the computational power, the greater the chances of being able to validate transactions and get cryptocurrencies.
After buying the equipment, it is necessary to connect to a mining software. In summary, it is a program installed on the computer that controls the entire process of validation and manufacturing of new coins. Some examples are the following: EasyMiner, CGMiner, and BFGMiner.
Finally, it is also essential to have a cryptocurrency wallet. Wallets are software or physical devices that give users access to these digital assets stored in the blockchain. In addition, they also allow the sending of digital currencies without the need for intermediaries.
It is important to reinforce, however, that after the update to Ethereum 2.0, the way to mine Ether changes, and PoS becomes valid. After the network’s “upgrade”, only the user who deposits 32 ETH in a specific contract can receive rewards in cryptocurrencies.
Diferenças entre Ethereum e Bitcoin
The world’s two leading blockchain platforms differ in several ways.
Issuance
According to Bitcoin’s protocol, only 21 million units of the cryptocurrency can be mined. As of July 26, 2023, according to CoinMarketCap, 19.4 million BTC were in circulation. Ethereum, on the other hand, has no issuance limit. On the same date, 120.4 million ETH were available on the market. Therefore, unlike BTC, Ether is not scarce.
Smart Contracts
Bitcoin is a system that allows the transfer of value over the internet without intermediaries, such as banks or international remittance companies. Ethereum is also a decentralized tool for transferring value. However, it took a technological leap by also allowing the creation of smart contracts and decentralized applications on its network.
Consensus Mechanism
Both projects use PoW as a consensus mechanism, criticized for generating high energy consumption. However, Ethereum is in the midst of a transition to PoS, a more environmentally responsible protocol type.
Speed
A transaction on the BTC network usually takes 10 minutes to be verified and confirmed by miners. On Ethereum, on the other hand, this happens in less than 20 seconds.
Security
In a peer-to-peer network, as is the case with a blockchain, the larger the number of participants (called nodes), the more secure the system is. BTC, having more users, is therefore more protected than ETH. The first cryptocurrency on the market has also been in circulation since late 2008 and has never been hacked, a fact that demonstrates the robustness of the project.
Where to invest in Ethereum
You can invest in Ether through exchanges, investment funds, ETFs (Exchange Traded Funds), or P2P.
Exchanges
These are digital platforms where you can buy, sell, exchange, and store cryptocurrencies. These platforms usually charge fees for withdrawals and transactions.
Cryptocurrency Funds
These are financial products that pool resources from various investors to invest in certain crypto assets and usually charge administration and performance fees.
ETFs
Cryptocurrency ETFs are investment funds that can be traded on the stock exchange. Managers usually charge administration fees ranging from 0.7% to 1.3% per year. As these products are traded on the exchange, you also need to cover brokerage and custody fees, as well as B3 emoluments.
Peer-to-peer (P2P)
Another way to invest in Ether is by buying the cryptocurrency directly from sellers. There are fees involved, but they are generally lower than those charged by brokers. It’s worth noting, however, that this type of business is usually riskier than the previous ones, as in many cases there is no third party guaranteeing the transaction, which opens up the possibility for scams.
Risks and Advantages
Like any investment, Ethereum presents both risks and advantages.
Advantages
Heated Market – The digital economy, driven by DeFi, NFTs, metaverse, and other technologies, is in full swing, and new projects are launched every day. As many of them are based on the Ethereum network, the platform has a lot of room to grow, and its cryptocurrency can appreciate.
Liquidity – Like BTC, Ether has high liquidity. That is, it can be quickly converted into cash.
Environmentally Responsible – Ethereum is in the midst of an update that will make the project more eco-friendly by using less energy in the mining process. As the environmental flag is flying high, this change could be beneficial.
Speed – Ethereum is often congested, has scalability issues, and tends to charge high fees during periods of heavy traffic. However, Ethereum 2.0 aims to solve these problems, which could further appreciate Ether.
Risks
Volatility – The cryptocurrency market is relatively new and still immature. Therefore, it’s common for cryptocurrency prices to plummet by double digits in a single day, and this also applies to Ether.
Competition – Ethereum is not the only platform that allows the creation of smart contracts and the development of decentralized applications. Projects like Cardano (ADA), Terra (LUNA), Avalanche (AVAX), and Solana (SOL) also have these functionalities. If any competitor stands out, its cryptocurrency could depreciate.
Regulation – The cryptocurrency market has not yet been regulated in some countries. Legislation, depending on the text and taxes created, could affect Ether and the sector as a whole.
Attacks – The Ethereum network, like Bitcoin’s, is secure, but it’s not infallible. The blockchain is susceptible to 51% attacks, which occur when groups manage to gain more than half of the network’s power. Experts say that this type of virtual onslaught would not be financially worthwhile. However, it’s not impossible.
Final Thoughts
To make a sound decision for your next cryptocurrency investment, we invite you to explore our education page, where you can learn more and find a crypto coin that aligns with your investment goals.