This page will provide a brief introduction of the Ethereum, an open-software blockchain platform that focuses on the next-generation use of blockchain technology; as opposed to, for example, Bitcoin, it does not simply and solely use blockchain to manage cryptocurrencies. Although Ethereum does have its own cryptocurrency, the Ether, its platform can be used in more ways than just the financial one; Ether, then, is used as fuel for the system, rather than as an end in itself.
Ethereum (ETH) Chart
Ethereum, like Bitcoin and other cryptocurrencies, works through blockchain technology, which means all the transactions are verified by users on a publicly available and constantly updated ledger.
As noted above, and contrary to Bitcoin, Ethereum is not simply a currency system. Instead, it uses similar blockchain technology to run all sorts of applications on the Ethereum Virtual Machine. This includes anything that can be expressed mathematically and requires access by multiple users but could benefit from a decentralised approach. Examples are financial transactions, but also software development, voting results, private messages, and so on.
Advantages of Ethereum
Firstly, such a decentralised system has advantages for the security of the data involved, which remains safe from hackers. This is the case because the Ethereum blockchain allows any information to be saved on thousands, even millions, of computers at once, which ensures transparency: each individual user can monitor and verify the information and any attempt to hack into the system will be easily spotted and prevented.
Secondly, the system also means users can maintain control over their content in a way traditional, centralised applications (such as Facebook or, in the case of software developers, the app store) do not allow. Such applications require the user to be able to trust the person running the application, who has the power to remove an app, steal a picture, etc. This is not the case with Ethereum: there is no middleman, and users interact with social, financial, and gaming systems in a peer-to-peer fashion, immune to hacking or censorship.
ETH versus ETC
Before investing in Ethereum, it is important that users are aware of a distinction (or so-called “hard fork”) within the system’s recent history: this is the existence of both ETH and ETC (Ethereum Classic).
This occurred in June 2016, when TheDAO, one of the largest Ethereum projects responsible for the mining of approximately 150 million dollars in Ether, was hacked. Since this happened during a large Ethereum conference, a vote was held to decide whether the code behind Ethereum should be altered in order to allow investors to recoup their lost funds. The majority of those present agreed with this, and Ethereum continued under a modified code (ETH). However, a minority of those present believed that by its very nature, a blockchain should never be subject to censorship and rule changes, since even a majority group of users cannot be relied upon to be incorruptible.
Because of this, the blockchain underwent a split, with the minority of users who believed that “code is law” and cannot be altered continuing on with the old blockchain, which became known as Ethereum Classic, or ETC.
Since Ether is the fuel used for any transactions within the Ethereum system, users who wish to conduct business using Ethereum must acquire some of its native currency. This can be done in two ways: users can either buy or mine Ether. Buying is faster, but also more expensive than mining, and is especially useful for software developers who do not necessarily wish to mine their own Ether, but who nonetheless wish to protect and run particular applications using the Ethereum blockchain system.
Before considering buying Ether, users must acquire an Ethereum wallet. A wallet is a program that generates and maintains the user’s Ethereum address, which he will use to conduct transactions, and as such it is the basic tool for any investor or developer.
Once the user has selected and installed a wallet, he must choose an exchange, which is a website through which to exchange traditional currency (or different cryptocurrencies, such as Bitcoin) for Ethereum.
Selecting an exchange
A wide range of cryptocurrency exchanges exist: these each have their own advantages and disadvantages. Users must, for example, consider if the exchange can easily be used from their country, as well as its reputation and security level. They must also verify if it allows for the purchase of Ether, and which payment methods it accepts.
Since Ethereum is a fairly well-known cryptocurrency, this is not usually a problem; however, while it possible to use credit cards to purchase Ethereum, there are still some other payment methods through which it may be necessary to first purchase Bitcoin and then use a separate exchange to trade Bitcoin for Ether.
Finally, users must also consider the fees each exchange charges per transaction, since these can vary sharply from exchange to exchange.
Different types of exchanges
Exchanges come in two different formats: trading platforms and brokers. A trading platform tends to be cheaper, but takes more time: here, the system automatically connects each buyer with a seller who is selling Ether at a price acceptable to the buyer. Orders through a trading platform may take some time to complete, since the system needs to locate a matching seller for each transaction.
Brokers tend to charge larger fees, but they sell coins directly to users at a fixed price; for this reason, Ether will always be available for users when they require it.
Once a user has selected an exchange – whether trading platform or broker – that sells Ether at an acceptable price, he will then need to register on this exchange. Once this is completed, the user can then start buying Ether or a fraction of one Ether.
Whatever funds a user purchases are initially stored within the user’s account on the exchange system. It is crucial, then, to transfer these coins from the exchange to the user’s wallet’s address, so the coins can no longer be touched if something were to happen to the exchange. From this point onward, the Ether are entirely owned and controlled by the user, protected by the wallet’s security systems.
Ethereum miners are users who put some of their processing power at the disposal of the network in order to help process and secure the transactions of the blockchain; individual users do this most often by running a specific mining application called GETH using their GPU (graphic card). Users essentially help resolve complex mathematical problems that assist in maintaining the network’s security, and in return, they gain compensation in the form of Ether coins.
A user can use the mined Ether to fuel transactions or applications within the Ethereum Virtual Machine, or, alternatively, he can also choose to sell the Ethers gained through mining. In order to control the market and limit inflation, the yearly Ether supply is capped at 18 million.
Successful miners receive a static block reward of 5 Ether per mined block. They also receive all of the gas expended within the block, that is, all the fees paid by users for the transactions stored within the block. The gas cost incurred is credited to the miner’s account, and over time, it’s expected these rewards will dwarf the static block reward.
Additionally, however, miners are compensated also for Uncle blocks included in the block they verify; they will receive an extra 1/32 per Uncle block. Uncle blocks are blocks with parent blocks that are ancestors of the mined block, a maximum of six generations ago; they are blocks that were partially verified but then abandoned in favour of another block, which became ancestor to the rest of the blockchain.
Uncles included in a block formed by the successful miner receive 7/8 of the static block reward (or 4.375 Ether), and a maximum of 2 uncles are allowed per block.
Initially, Ethereum mining could be performed using regular PCs (CPU), but since the system has become more popular and thus more competitive, miners now require more specialised equipment. Graphic processing units (GPU) are now the better option, since they are at least 200 times faster than any PC, and any GPU with at least 3GB RAM is suitable for Ethereum mining.
The purpose of mining is to earn more money than it is spent on electricity; it must be profitable. Profitability calculators are available online, so users can estimate their projected costs and earnings.
Since the rise in cryptocurrency popularity has sharply driven up the price of solo mining, many users choose to gather in mining pools, where each user puts his computing power at the disposal of the pool, which jointly mines for Ether and then allows each contributor to share in the profits. This provides users with smaller, but cheaper and more consistent rewards.
The value token of the Ethereum blockchain is called the Ether; it is used to pay for transaction fees within the Ethereum Virtual Machine and is thus necessary for any users or developers who wish to use Ethereum. It’s listed under the code ETH and traded on cryptocurrency exchanges.
One of the key issues often raised in terms of the price of particular cryptocurrencies is their volatility, consisting of very rapid inflation followed by brief “crashes”. Throughout their brief history, they have proven to be far more volatile than traditional currencies, which means users can quickly gain, but also quickly lose, money as their investments are impacted by this. As an example: between 2010 and 2014, the annual year-to-year volatility of Bitcoin was over 100%, which is eighteen times greater than that of the US dollar.
Most other cryptocurrencies know a similar volatility. The most volatile period within Ether’s history, for example, was the period after TheDAO was hacked in 2016; at this point, a large number of investors lost their coins, which led others to quickly sell off their coins for lower prices in fear of a chain reaction. Whereas 1 ETH was worth $21.50 before the incident, it fell to $8 afterward, but by June 2017, a year later, it had risen again to more than $400. This was a 5,000% rise since the beginning of the year 2017.
Rapid rise of Ether
This rapid rise of Ether compared to other cryptocurrencies is connected to the type of users that tend to adopt it; because Ethereum’s functionalities transcend that of simply a cryptocurrency, it tends to attract corporates who wish to use the technology for smart contract applications.
In 2017, a group called the Enterprise Ethereum Alliance (EEA) was founded to connect large companies to technology vendors in order to work on projects using the blockchain. Companies involved in the launch include JPMorgan, Microsoft and Intel; this greatly added to the attractiveness of Ether for investors.
Nonetheless, such heavy price fluctuations have also given rise to rumours about Ether as an economic bubble. An economic bubble is a situation in which the price of a particular product or service sharply exceeds its intrinsic value, often due to the excessive optimism of initial investors and their belief in transformative technology. This then causes the price to rise and rise until it inevitably collapses and leaves investors facing a loss of funds.
Such rumours lead investors to sell their Ether at lower prices in order to recoup some of their expected future losses, which in turn leads to a devaluation of the currency itself.
A cryptocurrency wallet serves as a place to “store” digital currencies, like a traditional wallet holds traditional currencies. At the same time, however, it functions in a slightly different way: rather than storing physical representations of a user’s coins, it simply keeps track of which coins the user owns. Thus, in the case of Ethereum, a user’s Ether are not stored in the wallet, which instead transfers a code to the system and allows the user access to his balance. Such a wallet can take different forms with different advantages and disadvantages; this article will present a few of them.
Desktop and mobile wallets
A first option is a desktop wallet. This is installed on a desktop computer, and because it is installed on the user’s own computer, the user has complete control over the wallet. At the same time, he also has complete responsibility; a desktop wallet requires some work to install or maintain. Users can create an Ether address to manage their Ethereum transactions and store a private key to access this address.
A mobile wallet is different, in that it is a smartphone application and can be used wherever the user takes his smartphone.
Both mobile and desktop wallets can be full clients or lightweight clients. The difference is that full clients verify transactions using a full copy of the Ethereum blockchain, whereas lightweight clients can access the blockchain, but do not store it in its entirety. In case of a lightweight client, users must be able to trust the server, but also require less processing speed or storage space in order to use the client. For this reason, most mobile wallets are lightweight clients.
Web wallets can be accessed everywhere and without use of any specialised device. They require less installation and setup than mobile or desktop wallets, since they are maintained and hosted by a provider. This does mean, however, that the user must trust the provider to keep his funds protected.
Hardware wallets are different: they are small devices a user can purchase to manage his Ethereum transactions. The user’s personal information will be stored offline, which adds extra security since the information becomes essentially unhackable.