One of the most popular cryptocurrencies, Ethereum, has more tricks than just cash value up its sleeve: it's also fuel for building computer applications.
Cryptocurrency: It's a word that anyone who spends any time online is sure to have heard of by now. Decentralized digital cash like Bitcoin has made cryptocurrency, and by extension the blockchain, a hot topic for discussion, and the cryptocurrency known as Ethereum is one of the hottest.
But Ethereum isn't technically just another cryptocurrency—it's a whole decentralized computer network powered by a cryptocurrency called Ether. Instead of just being an alternative to the dollar, euro or pound, Ether has a specific application.
Ether can be traded for its cash value, and it is one of the most highly valued cryptocurrencies. But to simply call it a cash alternative misses out on a lot of what it's actually for.
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What is Ethereum, and how does it differ from Ether cryptocurrency?
Despite their often interchangeable usage, Ethereum and Ether are technically two different things. Ethereum is a decentralized computer network that runs applications, and Ether is the cryptocurrency that fuels it. For the sake of consistency, we'll use those specific terms throughout this guide.
There are basically three layers to Ethereum: The Ethereum Virtual Machine (EVM), the cryptocurrency Ether and gas, which is the actual EVM "fuel" that Ether translates to.
The EVM is a decentralized runtime environment for building and operating smart contracts, also called decentralized applications (DApps). The definition of what DApps are is up for debate, but at its most basic level a decentralized application is one that has no central point of failure. Ethereum's developer pages do add a bit of insight into how Ethereum defines a DApp, which it classifies as "an application built on a decentralized network that combines a smart contract and a frontend user interface."
EVM DApps eliminate failure points because the apps are built on the back of the Ethereum blockchain, which spreads out the code, assets and management of applications over the entire EVM network.
Creating a shared network the size of the EVM isn't cheap, and that's where the Ether cryptocurrency comes in. Ether is the part of the Ethereum network that has actual, relatable, real-world value, and it in turn can become gas to fuel the EVM. Here's where things get a bit confusing.
Gas is a way of describing the amount of work being done by the EVM, similar to kilowatt hours being a measure of expenditure and not an actual unit of energy. Much in the same way that a kWh will cost a certain amount on your electricity bill, gas has an Ether cost that anyone using the EVM has to pay in order to commit a change to the Ethereum blockchain.
Also like a kWh, the cost of gas isn't fixed to a certain amount of Ethereum—it can be adjusted so that EVM operational costs don't become prohibitively high or so cheap that the network is flooded with junk transactions.
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Ether is paid to miners who work to process changes to the blockchain as a way to incentivize their work, much in the way Bitcoin fees are paid (there are some differences, however). Here's the catch: The person requesting the transaction has the ability to set the amount of Ether they're willing to commit to the sale. The more they commit, the greater the incentive and the faster the transaction will likely be processed.
Getting the ratio of Ether to gas just right is important when a user wants to submit a change to a DApp, either as the programmer or a user. Try to go cheap by cutting back on the amount of Ether (and thus gas) that you're willing to pay, and the transaction may never get processed; Plus, you're still out the money you fronted as the transaction fails.
In short, Ethereum is a decentralized virtual machine that runs on blockchain technology. It uses the cryptocurrency Ether to pay for the costs of operating decentralized applications since committing changes to the DApps by users or programmers requires mining done by other users.
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What can you do with Ethereum?
Ethereum is built to run smart contracts, which the Ethereum Foundation says are "applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference."
Don't let the name contract fool you into thinking the EVM can only be used to operate transaction-based apps like e-commerce, currency exchanges or identity verification. There are countless other things being done with the EVM, with smart contracts only being the foundation on which they're built.
Some of the things being built with the EVM are:
- Games like CryptoKitties, Acebusters and Ether Dungeon
- Cloud-based operating systems
- Document notarization
- Decentralized news verification
- Job markets
- Messaging platforms
- Social networks
If you're wondering what you can do with Ether, the cryptocurrency used by the EVM, it can be traded like any other cryptocurrency, turned into fiat currency (government issued) or used to operate DApps as a user (everything you do in a DApp costs some amount of gas).
In early 2021 a new use for cryptocurrencies and blockchains found a home in the Ethereum network: Non-fungible tokens, or NFTs. Like blockchains and cryptocurrency, NFTs are another confusing concept involving "ownership" of non-physical items, with people paying arguably absurd prices to be able to claim they own the bits making up the very first Twitter tweet, memes, digital art, gifs and other digital items.
Ethereum has become the de facto home for NFTs because of its ERC-721 NFT token standard, which sets rules for establishing unique smart contract tokens on the Ethereum blockchain. ERC-721 tokens allow a person minting an NFT to attach specific data to it that makes a token permanently linked to the digital asset it is connected to. If someone were to look at the Ethereum blockchain for that token they would be able to find a record of purchase, sale and ownership that would directly link a token to the buyer.
Think of NFT ownership as owning an original Picasso: It's worth money, it's unique, but there could be hundreds of thousands of prints, posters and replicas out there which you have no right to limit or make money from.
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How is Ether different from other cryptocurrencies?
Aside from its biggest difference—that it's an entire virtual machine network and not just a currency—there are a lot of ways in which Ether, the cryptocurrency that powers Ethereum, is different from other currencies.
Ethereum was heavily influenced by Bitcoin. Ethereum's designer, Vitalik Buterin, was involved in the Bitcoin community and wanted to use the Bitcoin blockchain to build decentralized applications, later creating Ethereum to develop his theory.
First off, the speed at which a block of transactions can be solved and added to the blockchain, called block time, is much faster for Ethereum. While a Bitcoin block can be mined in an average of 10 minutes, the Ethereum block time averages around 10 to 20 seconds. That means more transactions are added to the Ethereum blockchain in less time.
Another major difference between the two is the reward for solving blocks: The Bitcoin reward halves approximately every four years, while Ether mining rewards remain largely consistent. This is largely due to the fact that Ether won't reach a hard cap like Bitcoin, of which there will never be more than 21 million.
Ether, on the other hand, has a cap of 18 million per year; the cap is designed to create a consistent regeneration of Ether to offset coins lost to misuse, key loss and other errors. An upcoming Ether shift from the current proof-of-work model to a proof-of-stake one called Casper is likely to greatly lower reward amounts due to less need for mining subsidy, making the 18 million cap unlikely to be reached.
Casper's proof-of-stake model shifts the value generation for Ether from miners to stakeholders, who vote on blocks instead of mining for hashes. Each stakeholder gets a proportion of votes based on the stake (in Ether) that they've invested. As of early 2021, proof-of-stake has launched with the creation of the Ethereum 2.0 Beacon Chain, but most Ethereum traffic still happens on the energy-intensive, proof-of-work Ethereum blockchain.
Another major difference between Bitcoin and Ethereum is how each treats stale blocks. Stale blocks occur when two separate miners arrive at a solution for the same hash but because of inherent lag times sending block changes from one node to another, one of the miners submits the transaction first.
In the Bitcoin world, the second miner is simply out of luck: Their stale block goes unrewarded, and the time and computing resources invested is lost. Ethereum, on the other hand, provides a partial reward to stale blocks, which it calls Uncle Blocks, so no one spending time and resources is out of luck. This is done largely to offset the power inherent in large mining pools, which have a high likelihood to push small-scale miners into stale territory since they are unable to keep up with pool processing capabilities.
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Is Ethereum more stable than other cryptocurrencies?
From the end of December 2017 into early January 2018, cryptocurrency values plummeted—Bitcoin in particular was hard hit, dropping from a high of nearly $20,000 to less than $10,000 by late February 2018.
Ether fared slightly better, and while its value followed the late-December spike other cryptocurrencies had, it's not in as nearly bad a state as Bitcoin and others. As Matthew Godshall pointed out in a VentureBeat piece, Ether's value relative to Bitcoin rose by 50% in 2018.
Now, in 2021, Bitcoin has reached new all-time highs, with an April 14 high of nearly $65,000. In the few weeks since then, Bitcoin's price has settled back down into the mid-$50k range, while Ethereum continues to hover just shy of $3,000 per ETH, a mark it has yet to hit.
Looking at historic charts from the past year of trading, Ethereum and Bitcoin's losses and gains mostly match up: When Bitcoin is down, Ethereum is down, and when Bitcoin is up so goes Ethereum. The most telling of these mirrored rises and falls can be seen when comparing the value of the two from late 2020 into early 2021: Both were valued significantly less than half of their current price, and right around October 2020 both began a rapid ascent from $10k for Bitcoin, and $352 for Ethereum, to their current levels in the $50k and $3k range, respectively.
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The stability of Ethereum, and its value against crypto-leader Bitcoin varies depending on who you ask. Ethereum's growth has been lagging slightly compared with other altcoins (anything other than Bitcoin), but some are predicting rapid growth as Ethereum has generally been up versus Bitcoin, with 40% growth in April 2021 to Bitcoin's 5% loss. Other leading financial personalities, like Kevin O'Leary, predict that Ethereum will never catch up to Bitcoin, always playing second fiddle to the cryptocurrency leader.
Why would anyone want to invest in Ethereum when other altcoins are growing faster and Bitcoin seems to be unstoppable? Ether has a purpose beyond just being money.
As Godshall points out, Ethereum founder Buterin saw a much greater use for blockchain technology than just creating decentralized cash, and Ethereum has done just that. There are already more than 1,000 applications for the Ethereum blockchain listed in its main app repository, and more are being developed all the time.
While Ether's value isn't directly tied to the price of gas needed to operate the EVM (as mentioned above), that doesn't mean one doesn't affect the other, and as long as the EVM is healthy and in use there's no reason to expect Ethereum to bottom out in the way that Bitcoin could.
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Ethereum's co-creator Steven Nerayoff predicted explosive Ethereum growth in 2018, and he was right: It did jump massively that year before declining rapidly in the second half, holding steady in the mid-hundreds range until its massive leap in the beginning of 2021. As more businesses realize the usefulness of decentralized applications for their industries, like less downtime, enhanced trust and increased security, it's likely the EVM will continue to grow and Ether with it.
In late April 2021, investment advisory group Fundstrat predicted that Ethereum's non-monetary value as the fuel for decentralized applications in the EVM would push it into higher territory as more investors figure out what it can really do.
"When new investors come to crypto the first asset they generally hear about and buy is Bitcoin before learning about other assets and allocating across the space. We think the same learning curve is playing out with institutional investors right now where the crypto narrative is shifting from Bitcoin to Ethereum and other segments like DeFi and Web 3 apps," Fundstrat said in an April 29 cryptocurrency investment newsletter.
Ether could still lose value in the long term, especially considering that there isn't a hard cap on the amount of Ether that will ever be generated. If natural loss of Ether doesn't keep up with its creation, the value could dip, but it's far more likely that's a ways off into the future.
In short, Ether is more stable than other forms of cryptocurrency because it isn't centered on only being valuable—it is, first and foremost, a way to fuel an application ecosystem. As more businesses realize the power of decentralization, it will probably just keep growing.
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Should I invest in Ethereum?
As with all things, Ether's value as a financial investment isn't as black and white as predicting that it will rise or fall.
If proof-of-stake takes over as the dominant model in 2021 Ether prices could drop, as a shift from mining payouts to yearly dividends for stakeholders under proof-of-stake could alienate some users, causing them to dump coins due to uncertainty. Buterin also mentioned that it will take around 1,000 ETH to become an initial stakeholder—that's over $800,000 USD.
When it costs nearly $1 million to buy a voting stake in the future Ethereum blockchain, a lot of small-time investors are going to feel left out.
All of that only matters if you're investing in Ether purely for its financial value. If you're interested in Ether for its applicational uses, that's an entirely different story. Whether you want to use DApps or build your own, you'll need to invest in Ether, and it can be expensive to get involved—even simple transactions can cost $10, which isn't much but can be enough to discourage experimentation as an interested investor or app developer.
What investment boils down to, as a programmer, an EVM user or a financier, is doing research. Know what you're getting into with cryptocurrencies of any kind, and you won't end up surprised when prices fluctuate, fees sap the value of your digital wallet or big changes upset how you interact with the blockchain.
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How do I get started with Ethereum?
How you get started with Ethereum and Ether all depends on what you want to use it for. DApp developers, DApp users and Ether investors are all going to take different approaches.
If you want to develop decentralized applications for the EVM, you'll need to do a few things:
- Get the command line tools needed for DApp development
- Download any additional Ethereum development tools you need
- Become familiar with Solidity, the Ethereum programming language
- Learn all about the structure of an Ethereum smart contract
- Learn how EVM transactions work
- Brush up on other Ethereum development tutorials at GitHub and DApps for Beginners
Those who want to use DApps need to start by opening a wallet and buying some Ether. From there, you'll need to install a bridge app like Metamask that will move Ether between your wallet and the DApp you're trying to use. Before installing a bridge app, check with the DApp you want to use to ensure the app is supported.
Investors who simply want a piece of the Ether pie can follow the same first step listed for DApp users above to open a wallet and buy some Ether. It doesn't have to leave your initial wallet, which exchanges like Coinbase generate for you, if you don't intend to do much with it beyond watch it (hopefully) accumulate value.
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