In the cryptocurrency world, Ethereum is bigger than everyone but Bitcoin in terms of market value. It is famous not only for its native cryptocurrency, Ether (ETH) but also for its decentralized software platform powered by blockchain technology, which enables a massive and ever-growing catalog of decentralized applications (DApps).
It’s likely you’ll end up relying on Ethereum in some capacity if you plan to invest, trade, or use cryptocurrency in your future, so it’s worthwhile learning a little bit about what exactly Ethereum is, how it works, and why it is second only to Bitcoin in the cryptocurrency industry.
What is the difference between Ethereum and Bitcoin?
Ethereum made its official debut in 2015, seven years after Bitcoin brought the whole cryptocurrency industry to life, but it was first teased in a 2013 whitepaper published by Russian programmer (and Ethereum co-founder) Vitalik Buterin. At the time, Buterin described Ethereum as a solution for building decentralized applications.
At its core, Ethereum is a decentralized blockchain network that builds upon the foundations originally laid by Bitcoin in 2009. What makes Ethereum different from Bitcoin, and other blockchains that are focused primarily on payments is that it is programmable. This paves the way for anyone to build DApps that run on the Ethereum network.
What’s more, there is essentially no limit to what those DApps can do. Almost 3,000 of them exist today, and while the most popular DApps are cryptocurrency exchanges, NFT marketplaces, and decentralized finance (DeFi) platforms, there are a growing number of more novel DApps like games, social networks, and music streaming services.
Ethereum, like other blockchains, is made possible by a peer-to-peer network. It is not owned or controlled by a single entity, and it does not run on individual servers or cloud systems owned by a company. Instead, Ethereum runs on a network of nodes (computers owned by volunteers), each of which contains a copy of Ethereum’s blockchain data.
These nodes combine to form Ethereum’s network infrastructure, and because there are thousands of them, the network is much less vulnerable to hacks or outages. In fact, since its launch, Ethereum has never suffered any downtime. Residing on the Ethereum blockchain are more than 50 million smart contracts, which are essentially computer applications.
These applications are executed automatically when triggered by a user or another smart contract. And because smart contracts by their very nature are visible on the blockchain, it’s possible for anyone to see exactly how they operate. Furthermore, smart contracts are permanent. Once they are published, they cannot be removed or altered in any way.
What are Ethereum Classic and Ethereum 2.0?
Ethereum Classic is the original form of Ethereum that first launched in 2015, although it has seen some changes since then. Ethereum 2.0 is the latest version of the blockchain, announced in 2019, and it was designed with different goals in mind. Both have their own cryptocurrencies (ETC and ETH) and power smart contracts, but they work a little differently.
The biggest difference between the two is that Ethereum Classic is based on a “proof of work” (PoW) mechanism that relies on mining, much like Bitcoin. Ethereum 2.0 uses a “proof of stake” (PoS) mechanism that does not rely on mining of any kind. This allows Ethereum 2.0 to be much more scalable and deliver better performance, but with weaker security.
It’s important to note that Ethereum 2.0 does not replace Ethereum Classic. They are simply used for different purposes. One is best for low-volume applications and high-value transactions that need the best possible security, while the other is best for high-volume applications with low-value transactions that need the best possible performance.
What is Ether (ETH)?
As we’ve touched upon in the sections above, the Ethereum blockchain has a native cryptocurrency, and on Ethereum 2.0, this is called Ether (ETH). Ether is different to many other cryptocurrencies in that its primary purpose is to serve as a form of payment for those who make up the Ethereum network and power its DApps.
Ethereum wouldn’t be possible without computing resources, and those resources aren’t cheap. So, to incentivize network contributors, there are fees for developers who need to host and execute applications on the blockchain, and for users who want to enjoy them. Those fees, which are referred to as “gas” and paid in Ether, go to network contributors.
Ether can be exchanged for other cryptocurrencies that can then be used elsewhere or sold for conventional fiat currencies, like the U.S. dollar.
As of August 11, 2022, Ethereum’s market capitalization, or value, is over $230 billion, while the price of a single Ethereum token is almost $1,900. That’s more than three times the value of Tether, which is the third-largest cryptocurrency with a market cap of almost $67 billion. However, Ethereum is well behind Bitcoin, which has a market cap of over $462 billion.
Like any cryptocurrency, Ethereum is somewhat volatile, and its value tends to fluctuate quite significantly. However, Ethereum is seen as one of the more stable cryptocurrencies in existence today, alongside Bitcoin. Whether or not it is a good investment for you depends on your own investment goals
Ethereum itself is a decentralized software platform powered by blockchain technology, which is used by thousands of decentralized apps (DApps). Ether is Ethereum 2.0’s native cryptocurrency, and it is used to pay “gas” fees when using the network.
This is a fee charged to developers who want to host DApps on Ethereum, and those who use DApps for things like exchanging cryptocurrency, decentralized finance (DeFi), and many other things. The fee depends on what you’re using the network for, and it gets paid to the network contributors who make Ethereum possible.
Wrapped Ethereum, also known as WETH, is another token that represents Ether, the native currency of Ethereum 2.0. ETH can be converted into WETH, which can then be exchanged for other cryptocurrencies based on the ERC-20 standard.
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About the author
Senior content writer
Senior copywriter for AAG Marketing team with the focus of educating our community on all things web3, blockchain and Metaverse.
This article is intended to provide generalized information designed to educate a broad segment of the public; it does not give personalized investment, legal, or other business and professional advice. Before taking any action, you should always consult with your own financial, legal, tax, investment, or other professional for advice on matters that affect you and/or your business.