Ethereum is arguably the second-best known cryptocurrency after Bitcoin, and for good reason. A pioneering project dreamt up by a man with a taste for unicorn t-shirts, Ethereum is the bedrock on which thousands of decentralized cryptocurrency projects have been built and is the home to entire movements, including NFTs and DeFi.
But how did Ethereum get started, how does it work, and what might the future hold for it? Our guide will help walk you through all these questions and more. Should you buy Ethereum? Let’s find out!
What is Ethereum?
Ethereum is a decentralized, open-source blockchain with an in-built smart contract functionality. A smart contract is software that automatically executes, controls, or documents legally relevant events/actions according to an agreement between two or more parties.
The native cryptocurrency of Ethereum is known as Ether. Ether is created when miners complete a proof-of-work system for adding blocks to the blockchain. You can find Ether listed on exchanges under the abbreviation ETH. The ETH token fuels all the processes within the Ethereum network. There are also several decentralized exchanges that run off the Ethereum platform, the most famous being Uniswap.
Ethereum: A Brief History
Those with a technical mind will tell you that the seeds of Ethereum were sown by Nick Szabo in 1997. Szabo is a pioneering cryptographer who coined the term ‘smart contract’. This simple yet revolutionary idea turned into a reality when an unknown teenager named Vitalik Buterin released a white paper in late 2013 entitled ‘A Next-Generation Smart Contract and Decentralized Application Platform’.
Russian-born Buterin was first introduced to Bitcoin in 2011 by his computer scientist father and began to write for Bitcoin websites and online magazines. When his suggestions to Bitcoin were rebuffed, he created a new project. His platform, called Ethereum, would combine the principles of smart contracts with blockchain technology to create a platform on which anyone could create decentralized applications with smart contracts built in.
The DAO Hack
After completing Ethereum’s ICO in 2014, Buterin and the Ethereum developers created a digital decentralized autonomous organization (DAO) in 2016. The DAO was a form of investor-directed venture capital fund based on the Ethereum platform. Investors put money into the DAO in the form of ETH with hopes that the projects would result in profit.
Unfortunately, a hacker found a way in and stole a third of the ETH in the DAO before the attack could be halted. The attack led to the Ethereum network experiencing a ‘hard fork’, resulting in a second coin, Ethereum Classic, being born.
What is Ethereum 2.0?
With questions being raised over its long-term suitability and the Ethereum network getting clogged to a choking point, a series of upgrades were planned in 2018. The most drastic of these upgrades was a move away from the existing proof-of-work (PoW) consensus mechanism to proof-of-stake (PoS). Other upgrades included scrapping transaction fees in favor of a burnable ‘base fee’ plus a miner tip.
These changes, and others such as improved scaling, were announced as being part of the overall upgrade to Ethereum 2.0, which entered its first phase in November 2020. Ethereum developers and supporters hope that these changes will be enough to ensure that the decentralized ecosystem, most crucially the burgeoning DeFi world, remains on the Ethereum platform and doesn’t become split over disparate blockchains.
Proof of Stake vs Proof of Work
Sharding
The chief criticism of Ethereum was its failure to scale adequately. The network would easily become clogged, leading to expensive transactions. This is because the PoW consensus mechanism only allowed one block at a time to be processed, leading to a backlog of transactions at busy times.
Ethereum 2.0 has solved this problem by implementing sharding, a process that partitions the network into 64 separate chains called ‘shard chains’, which run parallel to one another and interoperate seamlessly. This allows Ethereum 2.0 transactions to process multiple transactions simultaneously, up to 64 blocks worth.
How to Buy Ethereum
Purchasing Ethereum is the same as all other cryptocurrencies. Just follow the five steps below.
Best Ethereum Wallets
Once you have successfully obtained your ETH, you will want to make sure that you secure it in a crypto wallet. The type of wallet you need (hot or cold) will largely depend on how much Ether you purchased.
Hot Wallets
Hot wallets, or digital wallets, are generally viewed as the most convenient and perfect for storing small amounts of Ethereum. These wallets can be accessed on your desktop, laptop, or mobile device at any time. Because hot wallets are always connected to the internet, it is important to know that they are the most vulnerable to cyber and malware attacks.
Top hot wallets include:
Cold Wallets
Cold wallets are sometimes referred to as “hardware wallets.” This is because they are physical wallets. Paper wallets are never connected to the internet but are also the most easily lost. Other cold wallets connect to your computer like a USB drive. This is why cold wallets are seen as the most secure choice but can also be very expensive. Some cold wallets can cost up to $200 USD.
Popular cold wallets are:
Mining Ethereum: Is It Worth It?
Mining ETH differs from mining other cryptos. Ethereum now uses a proof of stake mechanism rather than proof of work. In proof of stake, miners don’t compete against one another. Instead, they work to essentially create a new block chosen by the algorithm and collect transaction fees from this process.
Back in the day, miners could use their PC’s to easily mine for ETH, but those days are now behind us. To successfully mine Ether today, you’ll need an Application-Specific Integrated Circuit (ASIC). These powerful CPUs are what is now needed to solve the complex mathematical puzzles in mining. And they don’t come with a cheap price tag, as some ASICs can cost as much as $5,000 USD.
In addition, you will need access to electricity – and lots of it. To run those ASICs requires massive amounts of energy, and those costs will consistently eat away at your mining profits.
High costs of mining are the number one reason most individuals do not go into crypto mining and seek out alternatives such as cloud mining and faucets. In the end, you will need to weigh your potential return on investment before making a commitment to mining Ether.
Ethereum vs. Bitcoin
| As of 08/2022 | Ether (ETH) | Bitcoin (BTC) |
| Price | ≈ $1,800 USD | ≈ $23,600 USD |
| Market Cap | $225,591,000,000 USD | $459,213,771,997 USD |
| Total Supply | Unlimited | ₿21,000,000 |
| Algorithm | (PoW) Proof of Work | (PoW) Proof of Work |
| Max Block Size | 1.875 MB | 1 MB |
| Block Time | 12 – 14 seconds | 10 minutes |
A Bright Future Ahead: Ethereum Price Predictions
Ethereum has retained its second spot in the crypto charts by market capitalization since late 2015, and some even predict that Ethereum 2.0 could eventually overtake Bitcoin in market cap due to its new deflationary tokenmonics. Whether this eventuality comes to pass or not, Ethereum has played a massive part in cryptocurrency’s past and will very likely play an equally important role in its future.
FAQ
Should I buy Ethereum?
Market analysts are currently predicting ETH to increase in value by as much as 400% by the end of 2022. However, with any cryptocurrency, there are risks and rewards. It is important to do your research and understand the volatility of the market before purchasing Ethereum.
How much is 1 ETH worth?
As of October 2022, the value of 1 ETH was approximately $1,400 USD.
Is Ethereum better than Bitcoin?
While both cryptos are highly sought after, which one you invest in will depend on your needs. Ethereum has more practical uses, and so it is viewed as better for those looking to invest in a cryptocurrency to make transactions and trade. Bitcoin is more valuable and, therefore, would be best for those looking for an investment.