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What is Ethereum (ETH): A Beginner's Guide

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Hannah Scherwatzky / ONE37pm

By now, you have probably heard of Ethereum. As one of the most utilized blockchains in the world you can book hotel rooms, buy airline tickets, purchase Amazon products, and of course trade NFTs using Ethereum. But, what is Ethereum exactly?

Ethereum is a decentralized, open-source blockchain with smart contract functionality. Ether is the native cryptocurrency of Ethereum, and the blockchain is the most utilized platform for buying, selling, and creating NFTs.

Blockchain technology is still new, so there is a lot to discuss when talking about the most popular blockchain in the world. Here's everything you need to know about how Ethereum works and everything you can do with its technology.

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What is Ethereum?

Technically speaking, Ethereum is a decentralized, open-source blockchain with smart contract functionality. Okay, great. So what does that mean?

Let's break it down. 

Decentralized describes the process by which the activities of an organization or platform—particularly those regarding planning and decision making—are performed away from a centralized entity. In Ethereum’s case, that means multiple computers make the decisions, not just a single server. These computers are better known as nodes in the blockchain world.

The problem with a centralized server is that if it crashes, so do all the platforms using that server. Whereas with a decentralized platform like Ethereum, if one server crashes, there are still numerous nodes around the world that will still allow Ethereum and its platforms to operate.

Open source refers to something (in this case Ethereum) people can modify and share because the platform is publicly accessible.

A Blockchain is a digitally distributed public ledger that exists on a platform.

Smart contracts are self-executing contracts with terms that are written into lines of code. Smart contracts are often used to cut out the middle man by automating the execution of an agreement using the code. It’s important to note that smart contracts are not viewed as legal contracts just yet.

Great. So how does Ethereum use all of these different terms to improve a user’s experience? Let's use Uber as an example.

When you need a ride, you open up the Uber app, request a ride, and then a driver picks you up. Upon completion of the ride you pay the driver, then the driver pays a percentage of their earnings to Uber for facilitating the transaction. 

In this example, Uber acts as the third party and is paid as such. However, if Uber utilized a smart contract, it could facilitate the transaction automatically using code. Hence cutting out the middle man and saving both the user and Uber money, and enables the driver to pocket more cash, creating a more efficient experience for everyone.

That being said, Ethereum is really just a platform used to run decentralized apps (DApps) worldwide, it’s not a currency like many might believe it to be. One of Ethereum's goals is to decentralize the internet which in turn gives the power back to the people rather than to a large single entity. Ultimately, Ethereum allows people to connect directly through a string of decentralized computers.

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How does Ethereum work?

Ethereum utilizes a coding language called Solidity to write smart contracts that are the logic that runs decentralized apps (DApps).

In real life, a contract is simply an agreement of “ifs” and “thens”. For example, if I pay my landlord $1,500 per month to rent my house, then he lets me live in it. That is how smart contracts work on Ethereum. Developers write the conditions for their program, then the Ethereum blockchain executes it. But with smart contracts, they do everything for you.

Therefore, smart contracts automatically enforce, manage, perform, and pay according to the terms written by developers. On Ethereum, code is law. That means a contract on Ethereum is the final authority, and no one has the ability to overrule a contract unless something like a decentralized autonomous organization (DAO) has been implemented.

To verify and execute every single transaction, Ethereum uses a proof of work (PoW) consensus mechanism. PoW is a complex mathematical equation that is solved by nodes and used to validate new blocks in the blockchain. Although this mechanism is what makes Ethereum so secure, it also requires a lot of energy from the computers to solve such equations.

The inefficiency of the Ethereum blockchain has many people concerned about the environmental impact that the Ethereum blockchain has on our planet, however, the good thing is that Ethereum is in the process of upgrading to a proof of stake (PoS) mechanism which will still be secure, but much more energy efficient.

To incentivize transactions on the Ethereum blockchain, the network utilizes a cryptocurrency known as Ether (ETH). Ether is used as the medium of exchange and is the native currency of Ethereum.

Ether can be infinitely created, meaning that more and more ETH can be pushed into the Ethereum network. Currently, there is a total supply of 120,920,725 ETH. So how is the value of ETH determined? Essentially, the value of ETH lies in the network’s future potential. As more companies build on top of the Ethereum blockchain, the demand for ETH increases. As a result, the value also increases.

You can easily buy your own ETH using our guide. But before you buy ETH, you should consider where you will store it.

To store your ETH, you can either use a centralized cryptocurrency exchange like Coinbase or set up your own decentralized wallet such as Metamask. The advantage of setting up your own decentralized wallet is that it is more secure. However, due to its high level of security, it’s nearly impossible to recover your wallet and its funds if you lose your secret phrase, which is required to access your wallet. 

Moreover, if you really want to keep your digital assets safe, then using the best hardware wallet on the market is a sure way to give you peace of mind when storing any digital assets, including your ETH.

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Getty Images

What is Ethereum Used for?

There are numerous use-cases on the Ethereum blockchain. Below are some of the most recognized use-cases as of today.

NFTS

The Ethereum blockchain is best known for being the go-to blockchain for buying, selling, and creating NFTs. The most popular NFTs to date including CryptoPunks, Bored Ape Yacht Club, and VeeFriends have all been created on the Ethereum blockchain.

Wait a minute. Isn’t the Ethereum blockchain inefficient? Why not use a more efficient blockchain that costs less to transact and is better for the environment? It’s simple.

Ethereum is the leading NFT blockchain for a reason. When NFTs first became popular in early 2021, it was the result of CryptoPunks and the popular Nyan Cat Meme selling for large sums of money and making headline news. Since these NFTs both live on the Ethereum blockchain, the trend continued.

As more people began to create NFTs, they made sure to utilize the blockchain where all the attention had already been—the Ethereum blockchain. As a result, Ethereum became known as the go-to blockchain for those who wanted to sell their NFTs for a substantially higher price compared to other blockchains, which at that point, were far behind Ethereum in popularity.

In addition to Ethereum’s popularity, the security and its smart contract functionality are a big pro when it comes to NFTs. Many of us in the Web3 space are innovators, and Ethereum just so happens to be the platform where innovators can thrive and create whatever they want, while still ensuring security.

Decentralized Finance (DeFi)

Another application also founded using the Ethereum blockchain is decentralized finance (DeFi) platforms such as PancakeSwap. DeFi platforms enable people to lend and borrow funds from others, invest in assets, trade crypto, insure against risks, and earn interest in savings accounts.

The best part about DeFi platforms is that, unlike traditional centralized exchanges, DeFi exchanges use Ethereum’s smart contract functionalities to provide services that don’t need intermediaries. Saving the users' fees, and the exchanges time and money.

Decentralized Autonomous Organization (DAO)

Another function discovered by Ethereum developers is a decentralized autonomous organization (DAO). A DAO is a blockchain-based organization that operates without any central authorities.

Instead, they are governed by smart contracts and the administrative decisions are voted upon by community members who are also stakeholders in the organization. At the end of the day, DAOs are open-source and community-governed, just like the Ethereum blockchain.

Overall, the Ethereum blockchain is still considered a new technology. All of its use-cases are still being optimized, and other use-cases are yet to be discovered. With that, it’s safe to say the potential of Ethereum seems very promising. With more than $27 billion of NFT sales volume alone, Ethereum is set to remain the premium blockchain for years to come.

Ethereum is a decentralized, open-source platform best known for NFTs and its cryptocurrency, ETH. The blockchain technology that powers Ethereum enables secure digital ledgers to be publicly created, viewed, and maintained—creating the ultimate transparent platform for creators and consumers alike.

How to buy Ethereum

To buy Ethereum, you'll need to set up a digital wallet, purchase Ethereum on an exchange, and transfer the ETH to the wallet. You can read about different wallets, exchanges, and more in our detailed guide on how to buy Ethereum here.

How much does it cost to buy 1 Ethereum?

The current price of 1 Ethereum is $1910.555 per (ETH / USD) as of June 9, 2022. Ethereum is 60.94% below the all time high of $4891.70. Keep in mind that the price of Ethereum is constantly fluctuating depending on market conditions. You can choose to buy however much you want and if you hold, your total amount will change. For example, if you bought $1,000 USD in Ethereum on March 13, 2020, it would be worth about $14,700 today.

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