Commonly referred to as either Bitcoin 2.0 or crypto 2.0, Ethereum is the biggest challenger to the dominant currencies on the market right now. But what is it about this virtual currency that has everyone so excited? Isn’t it just another altcoin?
Here, you are going to find out exactly why there is so much hype about Ethereum. The digital currency is pushing the boundaries of blockchain technology and we are going to show you how.
In general, cryptocurrencies use the blockchain as a public ledger where funds can be transferred to other users without middle men. They have the potential to help people move capital with much less friction than existing financial systems.
On top of this, Ethereum is also exploring other applications for the underlying technology. Here’s a no nonsense explanation of how this altcoin works.
Ethereum is well known because of the explosive rise in the value of the ether digital tokens, but to call this a cryptocurrency is an oversimplification.
The developer, Vitalik Buterin, has much bigger plans. Launched in 2014, the virtual currency is not the biggest challenger to Bitcoin in value, but is definitely redefining what can be done with the blockchain.
Individuals and companies can use blockchain technology for raising money through ICO’s or signing smart contracts and that is only the beginning. If you are finding this a bit hard to take in, let’s break it down and look at the practical applications.
First of all, stop thinking of this virtual cash as just a currency and look at it as an ecosystem built on the base blockchain technology.
Ether is the first and most profitable coin built on this technology, but it is open for anyone else to use as well. People can use it to create their own coins or smart contracts.
The smart contracts are revolutionary and act as a digital way to represent shares, membership or could even be used for secure voting.
This is why they call Ethereum Bitcoin 2.0 - it takes the original idea and runs with it. Some of the early adopters have startup companies that have started using ICO’s. But what is an ICO?
An Initial Coin Offering (ICO) is one of the most popular uses of Ethereum right now. Using their blockchain technology, anyone can create their own coins or currency.
Small companies realized it’s a great way to raise capital. These companies create their own coins, each of which represent a share in that company.
Investors can then buy the coins from the company without the traditional middle man of a stock exchange. Those who have purchased the coin can then hold onto it or trade it on the secondary market.
It’s the newest and most secure method of crowdfunding to date and is more accessible and flexible than traditional funding models. Now let’s take a look under the hood at some of the technology behind this digital currency.
As you can see from the features discussed above, Ethereum is a very versatile public ledger technology. But what goes on behind the scenes? How does it all work?
There is a lot you don't need to know unless you are an enthusiast. But if you are going to invest, you do need to understand the basics.
One big criticism of Bitcoin is the slow speed of transactions. In fact, you could say it was never designed to process as many transactions as it is now.
The developers learned from this and have built this virtual currency to be fast. Bitcoin can only process an average of 3-7 transactions per second, whereas this crypto can already do double that number.
The speed all comes down to the block frequency. Bitcoin only hashes a block every 10 minutes, with Ethereum processing a block every 17 seconds.
When we say block, this actually represents many transactions which are then validated by the computers on the network. This high block speed is the key to the high number of transactions per second possible on the network.
Smart contracts are not a new technology, they are a way of harnessing the full power of the blockchain. Right now, transferring a cryptocurrency between users is a smart contract that transfers value from one person to another.
Any contract is conditional. Once a computational task finishes via mining, the coins change hands in accordance with the contract. What Ethereum is doing is giving the ability to create contracts for many things, not only the transfer of value.
You could have smart contracts that transfer activation codes once software has been purchased, the settling of online betting, library lending or even insurance agreements.
The GHOST protocol serves many purposes, but mainly it helps to keep Ethereum fast, while also disincentivizing pooled mining.
Other cryptos (see the rest here) have been slowed down by ‘orphan blocks’ in the chain. These are blocks which were confirmed by more than one node and the signal is sent out by both to the network claiming the credit.
In the case of orphan blocks in other networks, larger concentrations of computing power tend to win the race for confirmation, leaving the other confirmation data ‘orphaned’ and clogging the network.
This process also gives the larger miner an advantage, as they have a head start on the next block. It drives small miners out and concentrates computing power in fewer hands, which is bad for the network.
The GHOST protocol eliminates these orphan blocks and in the case of simultaneous confirmation, distributes awards based on the computational power used to process the block.
Next, let’s take a look at how you can store this digital currency.
Although Ethereum is revolutionary in other areas, their storage solution is the same as every other major crypto.
They have their own wallet but also support a plethora of third party wallets.
You will need to decide whether you will go for a software wallet, which is convenient but at higher risk for hacks, or a more secure hardware or offline solution.
At the end of the day, it comes down to how you will be using the tokens. If you will be moving coins or trading, then electronic wallets are definitely the best choice.
If you are looking to buy and hold, then the other options may be more suitable. So can you still mine Ethereum? Let’s find out!
The great news is mining this cryptocurrency is still possible for the average person, using consumer level CPUs and GPUs.
As we discussed above, the GHOST protocol is in place to limit the advantages of large miners and mining pools.
What this means for you is the deck is no longer stacked in favor of the big guys. You can mine at home and still make money.
But you will need to consider the cost of hardware and electricity against the gains to see if it’s worth it for you. Maybe mining isn’t your thing, so let’s see how to invest or buy Ethereum.
Because of its popularity, it’s easy to buy this cryptocurrency. Right now, it’s available on all the major exchanges and there are plenty of coins available on the market if you wish to buy.
To get some for yourself, you will need an account on any of the exchanges, funded with money from your bank account. Then you will put in a purchase order and wait for it to be filled.
At this point, your exchange account will receive your new Ethereum and you should then transfer it out to your own wallet for safe keeping. So that’s how this cryptocurrency works, but what else do you need to know before investing?
Before you invest in anything, it pays to be up to date in the latest news and developments. We are going to look at some of the most important things right now, but we also encourage you to do some research for yourself.
One of the most exciting things for Ethereum in particular and cryptocurrencies in general is the way big companies have embraced the idea of smart contracts. If digital currency is going to be viable long-term, it will definitely need to be adopted by businesses.
Some Fortune 500 companies like Microsoft and JP Morgan have started working with Ethereum and plan to build and release business tools based on the platform. This is massive for the cryptocurrency and gives us a glimpse of what the future might hold.
On the more negative side, there was recently controversy about a hard fork in the blockchain. To simplify the matter, a company that had raised around 50 million via an ICO had their tokens stolen.
Debate began in the community about whether the blockchain should be rolled back, reversing the theft. Purists argued against it, believing it set a bad precedent. However, it was rolled back and the tokens returned.
This led to a ‘fork’ where those who disagreed continued along the same track, while the majority started a new chain. In practical terms this does not affect you one bit. What it does do is show the strength of the community and the kinds of things possible with blockchain technology.
Only you can make this big decision, all we can do is present you with information and our opinion. As you see by now, Ethereum is a very interesting new cryptocurrency.
If you feel like you missed the boat with Bitcoin, then this crypto may be your second chance. The countless applications, as well as the support this technology has seen from big business, speaks to a big future for Ethereum.
The technology behind this crypto is impressive enough to give it the title of crypto 2.0. Adding more speed to their network future-proofs this currency in a way that other existing cryptos can’t.
Also, smart contracts are quite possibly the way of the future and Ethereum is at the forefront. If you believe in the future of crypto, then this digital currency should be on the top of your list for investment.
The content of this post is for educational purposes only. Please do your own research and consult a financial professional before making any investment decisions.