What is Ethereum?
The easiest way to think of Ethereum is as “Smart Bitcoin”. But that undersells it. It originated with a vision from a Crypto enthusiast (and co-founder of “Bitcoin Magazine”), Vitalik Buterin.
Whereas Bitcoin’s Blockchain was essentially a globally-shared ledger and an alternative currency, Ethereum’s goal was to be a global computer (based on Blockchain principles) that could run apps and function as a DAO – a Decentralised Autonomous Organisation (one that runs itself, and there’s no one organisation that has control over it).
How does it run itself? Ethereum is a giant computer (a “Virtual Machine”) powered by computers worldwide running the Ethereum software. The programs running on it are “Smart Contracts” – bits of code hosted on the Blockchain that perform specific functions such as “take this and pay all these people”, or “check the status of this, then send it to x”. It’s all automated, and anyone can see the code of the Smart Contracts. It doesn’t care who executes them, as long as all the conditions are fulfilled. You need to pay ETH to execute any Smart Contract, and that ETH payment is called “Gas”. Some other Blockchains have a literal “GAS” token for the same purpose.
The development of Ethereum was financed by a pre-sale of $18 million worth of tokens (called Ether, abbreviated to ETH). It was launched in 2015. Despite not being launched as a store of value, it became the second most popular store of value after Bitcoin.
A Rocky Start – Ethereum and Security
Ethereum as a Blockchain is as secure as Bitcoin’s: any tampering with transactions is impossible because that tampering will always be outvoted by the many other “miners” processing transactions.
However, the Smart Contracts – the code written by people who want to use the Blockchain for something – are always a potential weak point. They’re visible to all, but that “all” includes hackers, as well as people who might be motivated to fix a bug.
In 2016, a hacker removed $50 million of ETH from a venture fund by hacking a Smart Contract, and Ethereum developers had a dramatic battle between themselves over what to do about it. One set wanted to leave things as they were, and one set wanted to modify the Blockchain so that the $50 million was restored.
In the end, they had a vote and the fixers won the day. However, the non-fixers decided that they would split the Blockchain to maintain their own version of Ethereum: Ethereum Classic (ETC). The fixed Ethereum was the “official” version and took off. The classic version… not so much. Though it didn’t fail either.
There have been many “Smart Contract” hacks since, but none of them resulted in a similar earthquake.
How is ETHER (ETH) Created?
Ethereum was originally designed to operate on the same Proof-of-Work principle as Bitcoin: computers around the world compete to solve a time-limited mathematical puzzle and earn the right to add a new block to the Blockchain in exchange for a reward in ETH. Other computers are then chosen to validate that transaction in exchange for a bit more ETH.
The puzzles come and go much quicker than with Bitcoin, for a supposedly faster network. However, this computationally intensive way of working has become a huge bottleneck, resulting in an overloaded network and sky-high gas fees: the Ethereum Blockchain now supports a vast array of tokens and activity, with much of DeFi (Decentralised Finance) resting on its back.
Also, while most of the electricity consumed solving the puzzles is from renewable sources, it’s still an environmental factor the world could do without.
To fix the problems with capacity and environmental footprint, Ethereum developers have been working since 2020 on ETH 2.0. There have been lots of improvements, but the main one is moving from Proof-of-Work (computation) to Proof-of-Stake.
Staking a Claim
ETH 2.0 replaces miners with “validators”: users who want to earn a share of the new ETH by validating transactions with their computer. To be a validator, they lock up some of their ETH so that it can’t be sold, moved or traded, and keep their computer running to validate transactions.
The Blockchain then continually chooses users to be that lucky validator and receive the reward. The more you stake, the better the chance you have. It’s like the old “Premium Bonds”, where you lock your money into bonds, and the computer chooses some bonds to win prizes. While you have the bonds, you’re entered into each draw, but you can still sell them to get your money back if you want (though ETH will have changed in value while locked away).
Staking ETH (once ETH 2.0 is fully functional) will be one way of earning money from Ethereum that has similar results to an interest-bearing account. But, there’s no fixed rate and your return can vary depending on luck. However, to be a full validator, you will need a lot of ETH and to leave your computer running to validate transactions.
This will mean more staking pools, where you pool your ETH with others and everyone shares the validator money. This does put you at the mercy of a private company because they would be a middleman in the staking process.
ETH 2.0 was due for full launch in June 2022 but has been delayed.
Much of Decentralised Finance is also waiting for that development: there are other Blockchains competing with Ethereum, but the “unhackability” of the core Blockchain and the number of other users means that Ethereum is perceived as a safe option for mission-critical transactions. Ethereum is home, for instance, to many Stablecoins that track real-world assets: such as USDC (which track the US Dollar and are used instead of it in Crypto transactions).
How do you Buy or Trade Ethereum?
You can buy Ethereum in more and more places: even Paypal offers it now! The most common places to buy are:
1. At AQRU
AQRU offers a simple and convenient way to buy and sell Ethereum through trusted payment provider MoonPay and is especially handy for investing your new Crypto stash into AQRU’s Crypto funding services.
Centralised exchanges can be the cheapest way, but you can also easily incur withdrawal fees sending the Crypto somewhere useful, and it’s often safer and more convenient to buy from.
Low-fee exchanges might also be the cheapest place to exchange your ETH into other Crypto or sell back your ETH to USD or other “real” (fiat) currencies, though this does mean sending your ETH back into the exchange to sell, which is more transmission fees.
In centralised exchanges, the selling/buying process is also more complicated than the other options, since you have to understand the various types of orders and how to execute them.
Even if you have no intention of trading, it’s a good idea to register with an exchange ahead of time just in case, and to get a better idea of the whole Crypto process: for instance, what an order book looks like, what the price histories of the Cryptos are, etc. It’s even more fun when you’re just looking!
2. At a Financial Service Provider such as Paypal or Wirex
More pricey than an exchange with little transparency about the rate you’re getting, but it’s easier than an exchange with little transparency about the rate you’re getting.
You can buy, sell and swap between Cryptos easily on these platforms, but to use them in Ethereum services, they still need to be sent to a wallet.
3. Using an in-app or in-wallet Provider
The popular Ethereum wallet “MetaMask” interrogates a range of payment providers to get the “best” quote for swaps between ETH and a wide range of other Crypto, and links to third-party payment services for purchasing ETH.
Some Web 3.0 websites such as OpenSea (NFT marketplace) and INX Securities (digital security tokens – like stocks and shares on the Blockchain), link to MetaMask and access your local wallet rather than demanding that you send your tokens elsewhere.
4. A Decentralised Exchange (DEX)
It’s possible to buy, swap and trade ETH on a Decentralised Exchange that also has access to your local wallet rather than transferring your tokens to an exchange-owned wallet somewhere else. Some exchanges are “order book”, and run like a regular centralised exchange, and some are “swap” exchanges, where the software directly finds people who are offering compatible swaps (like ETH for USDC).
A good list of decentralised exchanges can be found here.
Does Ethereum have Value?
The traditional answer to this is that something is worth what someone is willing to pay for it. But the value of ETH is also built on its usefulness and vast network. The more it’s used, the more ETH has to be purchased to activate the Smart Contracts: and the supply isn’t infinite. Therefore, supply and demand kick in and the price tends to rise.
Also, Ethereum is the technology underlying many other financial instruments, all of which have value – for instance, the tokens that are hosted on it.
Tokens, tokens, tokens
We haven’t touched yet on how quite early on in the life of Ethereum, a standard called ERC-20 was established to standardise the specifications of tokens launched on the Blockchain. The launch of ERC-20 was the signal for a boom in tokens on the Blockchain.
Now you even get ETH-ised versions of coins from other Blockchains, such as wBTC (“Wrapped BTC”) so that Bitcoin/Ethereum trading can happen within the Ethereum environment.
Ethereum even has competing token standards for Security Tokens – that is, tokens intended to represent a share of something – like digital stocks and shares. ERC-1404 for example ensures that transfers can only happen between whitelisted addresses, solving many regulatory problems. It also allows tokens to be revoked, which means it’s also impossible to lose them or steal them.
The Future of Ethereum
Will demand for Ethereum continue to rise?
The eager wait for ETH 2.0 implies that it will, even in the face of competing Blockchains that also offer dApps (Smart Contracts with a user interface). If the digital security token market takes off and uses ETH 2.0, then you will see exponential growth.
So, promising lower fees, a lower environmental footprint, faster transmission rates and more facilities, it’s a big upgrade that needs to succeed.