As you navigate the new-age world of cryptocurrencies, you’re sure to come across Ethereum. But what is Ethereum (ETH) and how does it compare to Bitcoin? We’re going to run you through the complete guide, ensuring that you’re not only informed but also understand the vast potential of this top 3 cryptocurrency.
What Is Ethereum (ETH)?
Let’s start with the basics, Ethereum is a decentralized, open-source blockchain system. Similar to Bitcoin, the network is run by the community as opposed to a central entity and offers a value of exchange through its cryptocurrency, ETH. How Ethereum differs from Bitcoin is that the platform allows for the creation and execution of smart contracts, which are automated contracts that facilitate a predetermined action once a certain criterion has been met (more on this later).
Ethereum also offers a foundation for dApps, which are decentralized applications, as well as being a strong understructure for the DeFi movement (decentralized finance). DeFi is the modernization of traditional financial instruments into trustless, automated, and transparent protocols built on blockchain technology.
While Bitcoin offers a value of exchange, Ethereum offers a platform on which many different use cases can be created, from dApps to different Ethereum-compliant tokens, to decentralized services. Ethereum’s cryptocurrency, ETH, fuels the activity on the platform and is also known as the “gas” required to use the Ethereum platform. Like you’d pay BTC for a product or service, you’d pay ETH to build a dApp on the Ethereum platform.
You can think of Ethereum as a global computer connecting developers around the world.
History of Ethereum
Ethereum was originally launched in 2015 as a complement to Bitcoin, but over the years the platform has offered plenty more uses and has grown into something entirely different.
Written as a white paper by 19 years old (at the time) Vitalik Buterin, Ethereum was developed with a team of co-founders and conducted a crowd sale in 2014 to further fund and develop the project. The crowd sale was a massive success, with 7,400,000 ETH sold in the first 12 hours, equating to roughly 3,700 BTC at the time. These funds helped to further develop the platform into what it is today.
According to one of the co-founders, Anthony Di Iorio, Ethereum was founded by “Vitalik Buterin, Myself, Charles Hoskinson, Mihai Alisie, & Amir Chetrit (the initial 5) in December 2013. Joseph Lubin, Gavin Wood, & Jeffrey Wilke were added in early 2014 as founders."
Launched to offer a platform on which to develop applications through the use of smart contracts, the network has developed into something much bigger than that, reaching many different industries far beyond just cryptocurrency and blockchain.
What Are Smart Contracts?
In understanding the fundamentals of Ethereum, one must understand what smart contracts are. Smart contracts in their most basic form are agreements that are executed automatically. In technical terms, smart contracts are digital agreements that through the use of software code can conduct terms that were agreed upon, and are facilitated by a decentralized network.
For instance, say A was selling his baseball bat for $10 and created a smart contract to facilitate the sale. When B sends the money to the determined location, the baseball bat is immediately released and sent to B. Without needing to engage with each other or the smart contract, the funds are received and the product is automatically released.
Not only do smart contracts determine the rules of the agreement, but they also automatically execute the transaction once the criteria have been met. Much like the benefits of using a decentralized currency, smart contracts remove the need for a middleman and operate seamlessly without interference. They’re also immutable and are distributed among the network to ensure final validation.
What Are ERC-20 Tokens?
Additionally to smart contracts, Ethereum is also able to host different tokens on the same network. The platform is able to host a variety of different tokens depending on their use case, however, ERC-20 tokens are the most popular. ERC-20 tokens allow a project to develop its own cryptocurrency without the need to create an entirely new blockchain from scratch. These tokens are compatible with Ethereum’s platform but can have their own use case, community, and purpose separate from what the Ethereum community might be working toward.
To date, just under 300,000 ERC-20 tokens are in existence, including over 40 of the top 100 cryptocurrencies according to CoinMarketCap. These tokens range in uses, but all facilitate a purpose in their own projects. Some examples of ERC-20 tokens include the stable cryptocurrency Tether (USDT), Binance-powered Binance Coin (BNB), and blockchain-based middleware ChainLink Token (LINK).
ERC-20 tokens need to follow a certain list of standards, with some compulsory and some optional requisites.
What is DeFi?
You might have come across the term DeFi recently, it’s gaining traction not just in the cryptocurrency world but also in the traditional financial sectors. Once you’ve understood what is Ethereum, you’ll probably find yourself wondering what is DeFi exactly? This decentralized finance movement revolves around taking trusted financial services and incorporating them into decentralized, programmed financial services that don’t require a bank (unlike in the traditional sector). Primarily built on top of Ethereum, the programmable codes involve lending, borrowing, and earning interest without having to rely on anyone entity to ensure the safety of your funds or facilitate the actions.
While this is still an experimental ecosystem, the movement incorporates all the strong points of cryptocurrency, namely trustless, transparent and decentralized elements, but this time incorporated into more complicated financial services.
Your Complete Guide To What Is Ethereum
There’s no denying that Ethereum has the most vibrant community of developers in the crypto sphere. In your complete guide to Ethereum, we’ve covered what the Ethereum blockchain does, what are smart contracts, what are ERC-20 tokens, and what is DeFi.