What is Ethereum and how does it work?

Ethereum is a type of digital currency or cryptocurrency, a medium of exchange that exists exclusively online. Ethereum is among the most popular cryptocurrencies in the world and ranks second in total size (as of May 2024), behind Bitcoina coin that has become synonymous with crypto.

Cryptocurrency has sparked a lot of controversy, from those who see it as the world’s next payment system to those who simply see it as a speculative bubble. Here’s what Ethereum is and how it works.

What is Ethereum?

Ethereum is one of thousands of cryptocurrencies that have emerged over the past few years. Born from the brainchild of eight co-founders, Ethereum debuted in 2015. cryptocurrency or the platform is called Ethereum, while the individual unit is called an ether (2 ether, 17 ether, etc.)

Ethereum operates on a decentralized computer network, or distributed ledger called blockchain, which manages and tracks the currency. It can be helpful to think of a blockchain as a running receipt of every transaction made in cryptocurrency. Computers on the network verify transactions and ensure data integrity.

This decentralized network is part of the appeal of Ethereum and other cryptocurrencies. Users can exchange money without the need for a central intermediary such as a bank, and the lack of a central bank means the currency is almost self-sustaining. Ethereum also allows users to transact almost anonymously, even if the transaction is publicly available on the blockchain.

Although the entire field is discussed in terms of currency, it may be more useful to think of crypto as a token that can be spent for a specific purpose enabled by the Ethereum platform. For example, sending money or buying and selling goods are functions enabled by the coin. But Ethereum can do much more and can also serve as a basis for smart contracts and other applications.

What does Ethereum do?

Ethereum can power a number of applications offering a wide range of functions:

• Currency: With a cryptocurrency wallet, you can send and receive ether or pay for goods and services, if digital currency is accepted as payment. Some platforms, like Coinbase, allow you to store your coins securely. digital wallet, so you can make them less exposed to hackers, in theory.
• Decentralized applications, or dApps: Ethereum powers digital applications that allow users to play games, invest, send money, track an investment portfolio, follow social media and much more.
• Smart contracts: Smart contracts are a kind of permissionless application that runs automatically when the conditions of the contract are met. They play a central role in dApps built on Ethereum.
• Non-fungible tokens: These tokens can be powered by Ethereum and allow artists or others to sell art or other items directly to buyers using smart contracts.
• Decentralized finance: By using Ethereum, some people can avoid centralized (government) control over the movement of money or other assets.

Again, it might be more accurate to think of Ethereum as a token that powers various applications rather than just a cryptocurrency that allows users to send money to each other.

Where do ether coins come from?

New ether coins are created when owners validate transactions in the currency. Ether coins are created using what is called a “proof of stake” process. In this process, the cryptocurrency relies on the owners of the coin, the stakeholders, to validate transactions in the cryptocurrency. In return, validators earn rewards in the form of ether coins. But validators could also lose coins if they approve fraudulent transactions or try to cheat the system.

Validators must have a significant interest in crypto to participate. But even small investors can participate in the staking system and earn rewards by pledging their coins to a validator.

To issue new coins and manage its system, Ethereum once used a “proof of work” process, like that used by Bitcoin. In this process, the decentralized crypto network performs complex mathematical calculations to “mine” crypto coins. In September 2022, Ethereum moved from a proof-of-work process to a proof-of-stake process, in a team called The Merge.

A proof-of-stake process is much more energy efficient than a proof-of-work process. One of the main criticisms of Bitcoin is the amount of energy it spends running its system. A proof-of-stake process can also enable faster and larger transactions.

The total annual ether emission is limited. As of May 2024, there are approximately 120.1 million ether in existence. This stands in stark contrast to Bitcoin, where a maximum of 21 million coins can be created and new issuance becomes more difficult every year. And this contrasts even more with Dogecoin, where the emission is completely unlimited. Experts estimate that annual ether issuance has fallen by around 87% since adopting a proof-of-stake system.

Ethereum ETF approved

At the end of May 2024, the United States Securities and Exchange Commission (SEC) approved in principle the trading of Ethereum spot exchange-traded funds (ETFs). The move is a key step on the path to listing individual ETFs on the New York Stock Exchange and Nasdaq. However, the SEC has not yet approved fund companies to issue these Ethereum ETFs.

Spot ETFs directly track the price of the underlying asset, in this case, Ethereum. Investors can buy and sell shares of the ETF on exchanges, gaining exposure to Ethereum’s price movements without needing to directly buy and hold the cryptocurrency itself.

These ETFs would provide investors with a regulated and more familiar way to trade Ethereum. Supporters believe they will lead to wider adoption and increased investment in crypto. The price of ether soared following the approval of Bitcoin ETFs in January 2024, in anticipation of the subsequent approval of Ethereum ETFs by the SEC.

Is Ethereum a good investment?

Ethereum has grown significantly over the past few years, so those who bought and held years ago have done well. But rather than looking at yesterday’s price movements and being afraid of missing out, it’s important to understand what you’re investing in. And based on this, those who buy Ethereum are buying a cryptocurrency that is not backed by any physical asset or cash flow. .

This may seem trivial, but it is the main difference between stocks and cryptocurrencies. A stock is fractional ownership in a company, so its performance over time is due to the continued success of that company. If the company grows its profits, its shares will likely follow that growth over time. Shareholders own a legal stake in the assets and cash flows of that company.

On the other hand, Ethereum – and most other popular cryptocurrencies – are not supported by anything at all. The only thing holding the price up is the optimism of other investors, who all believe that they will be able to sell the cryptocoin for more money later to someone else – the so-called “theory of more big fool” of investment. Speculation is the only thing driving Ethereum and other cryptos higher.

For this reason, among others, investing legend Warren Buffett won’t touch cryptocurrency and even publicly stated that he called it “rat poison squared.”

Should you buy or stake Ethereum?

If you’re looking to speculate on Ethereum, it’s simple to buy and trade the cryptocurrency on a popular trading platform such as Robin Hood Or Binance.US. You can access the market 24 hours a day and you will benefit from good liquidity, meaning you can trade without moving the price too much. Calculating profit is also simple: you profit when you sell coins for more than you paid for them.

If you are considering betting on Ethereum, you have several options. More advanced users can participate in solo staking, which requires running your own validator. You’ll need technical expertise, a large position (usually a minimum of 32 ether), and dedicated hardware.

A more accessible option is to participate in a staking pool. You contribute your ether to a pool with other investors, and rewards are distributed proportionally based on your contribution. Some crypto exchanges also offer staking serviceswhich are convenient, but can generate lower returns.

Ultimately, buying Ethereum is easier than staking it and requires less effort.

Conclusion

Speculators can invest directly in cryptocurrencies such as Ethereum, but they can also invest in companies that could benefit from the move towards digital currencies.

Whether you trade Ethereum, Bitcoin, or any other cryptocurrency, it is essential to understand the risks, including the potential loss of your entire investment. Investors should take a measured approach to cryptocurrencies, given their volatility and numerous risks. Those looking to get a taste of the action shouldn’t invest more than they can afford to lose.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. Furthermore, investors are advised that past performance of investment products is not a guarantee of future price appreciation.

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