Caleb & Brown

August 2, 2022  ·  6 Mins

What is Ethereum? A Beginner's Guide

What is Ethereum? A Beginner's Guide

Key Points

  • Ethereum was founded by programmer Vitalik Buterin in 2015, an early proponent of Bitcoin.
  • Ethereum’s unique use of smart contracts has opened up a world of crypto applications outside of decentralised finance (DeFi).
  • Ethererum is the first crypto project to introduce the concept of decentralised applications (DApps).
  • The Ethereum network is in the process of upgrading from a Proof of Work (PoW) network to a Proof of Stake (PoS) network. Once complete, The Merge should bring about a more secure, scalable, and efficient network.

What is Ethereum?

Originally envisioned as an offshoot of Bitcoin, Ethereum is an open-source, decentralised blockchain network. Like Bitcoin, it’s a globally accessible financial system, allowing anyone to use digital money without the need for payment providers or banks. But there is one major difference between both blockchains.

Ethereum is programmable. You can use it for many different digital assets. This is one of the many reasons why some consider the network as a computer for the world.

Ethereum also empowers users to take an active role in the growth of Web3. It is a space for developers to create and publish decentralised apps (DApps). It is also a marketplace for users to access decentralised finance (DeFi), games, apps, and non-fungible tokens (NFTs).

Ether (ETH), the native token on Ethereum, has a long-standing position as the second largest cryptocurrency, next to Bitcoin.

How is Ethereum different from Bitcoin?

Being the first ever blockchain, Bitcoin was designed to achieve a very specific goal: to become a global digital cash system accessible by anyone. The creator(s) of Bitcoin intentionally made the network inflexible to change, as they themselves were not entirely open to making massive changes to the network’s structure. This immutable programming made the network practically impenetrable to hackers, creating the ideal system to facilitate secure, borderless transactions.

Ethereum, a second-generation blockchain, sought to build upon the capabilities of Bitcoin. How did the creators achieve this? By creating a programmable blockchain. Through the use of smart contracts, the Ethereum network can be programmed by developers and creators, opening up a world of use cases beyond money transactions. The use of smart contracts is what primarily differentiates Ethereum and Bitcoin.

Ethereum was originally intended to build on the foundations laid by Bitcoin, but is now depicted as a competitor due to its wider range of utility.

How Does Ethereum Work?

Smart Contracts

Similar to regular contracts in the real world, smart contracts have a set of conditions and rules. These are written digitally in Ethereum’s programming language, Solidity.

Rather than relying on an intermediary (e.g. lawyer) to ensure all contract conditions are met, smart contracts simplify trade between parties, auto-executing the terms of an agreement without the need for a third party.

The use of smart contracts, especially on the Ethereum network, has opened up a world of possible use cases for crypto while reducing the overall cost to create and implement contracts between two parties.

Smart Contracts
Smart Contracts

The Proof of Work Consensus Mechanism

You can imagine the Ethereum network as a state machine. To understand this concept, think of an empty room with a light switch. If the light is off the room is dark. Turn the light on, and the room is bright. The state of the room has changed.

Ethereum responds to inputs (e.g. a flick of the light switch) and then updates its state accordingly. In this case, the light switch is the execution of a transaction. This transaction will then trigger a smart contract. Nodes throughout the network (the internal wiring) run the code of the contract and record an output (the light goes on).

To record an output and update the state of the network, Ethereum currently uses a consensus mechanism known as Proof of Work (PoW). Similar to Bitcoin, validator nodes expend computational energy to confirm transactions in a process known as mining.

Decentralised Apps (dApps)

Smart contracts also have paved the way for the creation and use of decentralised apps (DApps). Like smartphone or computer applications, DApps have a wide range of functionalities. Rather than running on a central server, the code of a DApp is uploaded via a smart contract to the decentralised Ethereum network. Nodes on Ethereum’s peer-to-peer network can then verify transactions within the app without the need for a centralised authority.

NFTs

The network is the primary platform used for creating, collecting, and selling non-fungible tokens (NFTs). Although there are other blockchains, like Solana, that host NFTs, Ethereum is the original blockchain for NFTs. For this reason, many creators and artists have flocked to the network mint and sell their work.

ERC-20 Tokens

Ethereum also functions as a foundational layer (known as a Layer 1) for other crypto projects. Sometimes, the native tokens for these independent projects are ERC-20 tokens. You can think of ERC-20 as a standard by which all tokens created on Ethereum have to abide by. Maintaining this standard increases the utility of the entire network, as Layer 2 projects have a level of backward compatibility with Ethereum.

What is Ether (ETH)?

Ether (ETH) is the native cryptocurrency on the Ethereum network. You may hear the two names used synonymously, but it's not possible to actually buy Ethereum. But you can buy the token that powers the network, ETH.

Many independent projects and assets run on the Ethereum network. These projects need to buy and use ETH—a finite resource—to continue using the network. For this reason, some refer to Ether as digital oil, given that it’s a limited resource that’s also required to stimulate economic activity. Outside of this, ETH is distributed as a reward for validating transactions, used as payment in the buying and selling of NFTs, and the use of DApps.

Advantages & Disadvantages of Ethereum

Ethereum has paved the way for blockchain innovation, showing that crypto has use cases well beyond money transactions. As brilliant as the project is, the goalposts for perfection are always moving. Let’s explore what sets Ethereum apart from other blockchain networks, as well as some challenges that the network is trying to overcome.

Advantages

  • Decentralised: Decentralisation ensures that governance is distributed across the network. No one individual, organisation, or even government can take control of the network and use it to their advantage. Ethereum is open-source, distributing data—and essentially trust—to all its users. Because of this, there is no need for a centralised authority to manage the network and mediate transactions.
  • Strong Developer Community: Out of all the crypto projects currently live, Ethereum attracts the most developers by a large margin. High development activity is often correlated with an overall belief in the network’s utility and public sentiment that the project could achieve the goals it is pursuing.
  • Programmability: Ethereum's highly programmable networks allows newly developed DApps to interact with the many already existing protocols on the network. Like lego blocks, any smart contract, app, or protocol built on the network can interact or integrate with each other, leading to even more creative uses for Ethereum.
  • Tokenisation: Any item that can be registered in a digital format can be tokenised on Ethereum. While tokenisation is commonly used in the NFT space, it has real-world applications in real estate, art, and even gold. Think of it as a digital certificate of ownership for an asset.
  • Scalability Potential: Ethereum is currently undergoing a major change that could lead to a more scalable, efficient network. With ETH being the second largest crypto by market cap, and developer and user activity significantly higher than most projects, Ethereum is in a prime position to scale over time.
  • Staying Power: ETH has been traded publicly for the last 7 years. Although not as old as the original crypto, Bitcoin, ETH is by no means new either. 7 years is a long time to be in a sometimes unforgiving market. While other altcoins have come and gone during this time, ETH seems to have a considerable Lindy Effect, creating a staying power through every bear market it survives. Although past performance is in no way an indicator of future results, ETH’s ability to endure market swings is a feature that suggests it isn’t going away anytime soon.

Disadvantages

  • High Fees During Congested Periods: Ethereum uses a Proof of Work consensus mechanism to validate transactions. While transaction fees are negligible during periods of low activity, they become much more of an issue during busier periods. This network congestion often leads to a spike in gas fees to curb or slow down activity.
  • Immutability Concerns: In 2016, not long after the launch of Ethereum, the Maker DAO crypto project was hacked. At the time, the Ethereum community voted to undo the hack, essentially rewriting the ledger as if the hack never happened. The community was significantly smaller in 2016 so the chances that this could happen again are highly improbable. But it is a small stain in Ethereum’s history that makes some question whether it could happen again.
  • New Programming Language: The network uses its own programming language known as Solidity. While this is objectively neither an advantage nor disadvantage, some developers may find this off-putting as they’ll have to learn yet another programming language before they start coding in Ethereum.

Who Created Ethereum?

Ethereum was founded by programmer Vitalik Buterin in 2015, based on an idea he conceived two years prior. An early proponent of Bitcoin, Buterin originally envisioned Ethereum as a network that could build upon Bitcoin’s capabilities. He wanted to determine that if some deliberate design limitations were removed from Bitcoin, could blockchain technology have legitimate uses beyond digital cash?

In 2013, Buterin proposed this idea on his website, calling the blog post Ethereum: The Ultimate Smart Contract and Decentralized Application Platform.

He proposed a very lofty concept. A blockchain that could be in essence, the world’s computer. A network that could run just about any application (given enough time and resources). This very ambitious idea might be the reason why the Bitcoin community didn’t accept it at first.

So Buterin went off and created Ethereum himself. And ETH, its native token, has grown to rival Bitcoin in market dominance, market cap, and trading volume.

A Brief History of Ethereum

Ethereum Timeline
Ethereum Timeline

How to Invest in Ethereum (ETH) in 2022

Buying ETH

There are three primary ways to obtain ETH - mine, earn or to simply buy it. Since mining will soon be phased out and staking is still being rolled out, buying is the most common way to acquire ETH.

The easiest way to buy ETH is through a brokerage like Caleb & Brown. If you’re ready to dive in and make your first ETH purchase, Caleb & Brown is here to help. Trusted by over 20,000 investors across 100 countries, our dedicated team of experts works around the clock to carry out all your ETH trades.

Get set up with a personal broker today and you’ll receive a free security consultation, along with support to help you execute your first ETH order.

Selling ETH

Selling your ETH with Caleb & Brown is as simple as buying. You can trade your ETH for any of the 100s of assets available through our brokerage, or an unlimited number of pairs in your portfolio.

Should you decide to exchange your ETH for fiat currency, there are $0 withdrawal fees as well.

How to Store ETH

There are multiple ways of storing ETH, from a cold wallet, hot wallet or with a custodian. Individual risk tolerance and preferences will determine the method employed by most users.

Cold wallets are completely disconnected from the internet. As such, they cannot be easily hacked and are often seen as a safer option for infrequent traders. These storage devices often resemble USB flash drives. Cold wallets have additional built-in layers of security to prevent a data breach once you connect it to the internet for trading.

Hot wallets are connected directly to the internet, usually through a phone or desktop application. Their popularity lies in their ease of use and ability to make trades quickly.

Many of these storage methods can seem complex, especially if you are not tech-savvy. Caleb & Brown provide end-to-end custody solutions for hassle-free storage and peace of mind investing. We have a battle-tested security infrastructure, through the leading asset security platform Fireblocks. All clients receive a free security consultation to ensure they follow security best practices.

What's Next For Ethereum?

Proof of Stake

The Ethereum network is currently changing the consensus mechanism it uses to validate transactions; moving from a Proof of Work (PoW) to a Proof of Stake (PoS) model. The Merge will lead to a more secure and less energy-intensive network. The network will also be better equipped to implement new scaling solutions in the future.

In this two-year-long upgrade—estimated to be completed in late 2022—the Ethereum community is essentially rebuilding the network. Striving to create a network that can scale and accompany exponential growth, stress tests have been completed multiple times in every stage of the upgrade.

The move toward PoS is considered to be a transition toward a more energy-efficient network. Rather than using the combined computational power of all nodes on the network, in PoS a user who has staked ETH is randomly selected to validate the block. The more ETH you have staked, the higher the probability of selection. Solo stakers need a minimum of 32 ETH to participate in trustless staking.

The Merge is unique in that it’s the first time a major project has completely changed its consensus mechanism to implement an entirely different one.

Sharding

Outside this massive change in consensus mechanisms, Ethereum 2.0 will also introduce sharding. In computer science, this involves splitting a set of data horizontally to reduce the overall load on the system. In a decentralised network, like Ethereum, each shard contains a copy of the network state and transaction history.

Sharding allows Layer 2 applications to run parallel to the Ethereum base layer, reducing overall congestion.

Imagine you’re at a movie theatre, in line to purchase tickets for the release of a blockbuster film. If there was only one attendant at the box office, they would only be able to process ticket sales one-by-one. The line grows longer.

The manager notices this and opens a few more registers. Now the theatre can process several ticket purchases at once. Each attendant can access the same information about the movie, ticket prices, and seats remaining. Barring a few minor technicalities, this the gist of how sharding would work.

FAQs

Is Ethereum a good investment?

Choosing to buy ETH depends largely on your investment goals. Investors also weigh a variety of factors before choosing a project to invest in. Ultimately, it’s up to you to determine whether you decide to invest in ETH, and what strategies you use to maintain that investment.

At Caleb & Brown, we follow the facts; not opinions or trends. We encourage you to do your own independent research before making an investment. Our team of crypto experts are more than willing to answer any questions you have along the way.

Why does ETH have value?

Like any other asset, ETH’s value is determined by markets. It’s globally accessible, and people will readily buy ETH with other forms of money (e.g. dollars, euros, Bitcoin, etc.). People will use ETH as digital money to pay for goods and services, such as NFTs, DApps, or other coins. Knowing this, ETH has value because users will readily exchange it for other things considered valuable.

Yet understanding why ETH is at a certain price point is a more complex topic to unravel. It’s a delicate mix of investor belief in the value that Ethereum project creates, along with some fundamental principles that should be met for an asset to be considered valuable.

For further insight into the value of crypto, we recommend reading our Why is Bitcoin Valuable explainer.

How much is the average transaction or gas fee on Ethereum?

Although gas fees can fluctuate daily due to network activity and congestion, as of July 2022, average gas fees have hovered between 20 - 40 Gwei (~0.66 -1.32 USD).

How many transactions can Ethereum do per second?

Currently, Ethereum averages just over 13 transactions per second(TPS).

What consensus mechanism does Ethereum use?

Ethereum currently uses a Proof of Work consensus mechanism, but will soon migrate to Proof of Stake.

When is the Ethereum 2.0 launch date?

Ethereum 2.0 is releasing in several phases. The first phase was Beacon Chain, the foundation upon which all future phases will exist. This went live in December 2020.

Next is The Merge; the introduction of the PoS consensus mechanism. This is expected to be finalised in late 2022. The final phase will implement sharding, and is expected to be completed sometime in 2023.

Invest in Ethereum (ETH) with Caleb & Brown

Investing in crypto doesn't have to be complicated.

Caleb & Brown is the world's leading cryptocurrency brokerage for those looking to invest in ETH or other digital assets.

Our personalised broker service makes crypto investing simple. A dedicated member of our broker team is always on hand to guide you along the way, giving you the confidence you need to navigate the world of crypto. Not to mention key features such as:

  • No joining or signup costs
  • Industry-leading storage solutions
  • 24/7 customer support

If you are ready to take the next step and invest in ETH, contact your crypto broker today.

Not yet a client? Sign up for your free consultation.

Recommended reading: Ethereum: What is The Merge?

Disclaimer: This assessment does not consider your personal circumstances, and should not be construed as financial, legal or investment advice. These thoughts are ours only and should only be taken as educational by the reader. Under no circumstances do we make recommendation or assurance towards the views expressed in the blog-post. The Company disclaims all duties and liabilities, including liability for negligence, for any loss or damage which is suffered or incurred by any person acting on any information provided.

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