What is Ethereum in simple words
The history of Ethereum dates back to 2011, when a young programmer Vitalik Buterin became interested in blockchain technology and Bitcoin. Buterin presented technical documentation on Ethereum after 2 years and spoke about its capabilities and areas of application. It should be said right away that two different concepts and two names should be distinguished. Ethereum is a blockchain and network, and ether (ETH) is a cryptocurrency on this network.
Purpose of Ethereum (Ether)
Ethereum offers great opportunities for earning and investment. And Buterin did not initially build the network as an investment platform. He wanted to create an ecosystem for a new form of money, completely decentralized and open. Buterin in general, it seems, is far from the idea of making a fortune and resting on his laurels. On the contrary, he and his team are constantly working on their network, bringing new consensus and principles to it, and Buterin makes himself multimillion-dollar donations to charity.
Ethereum was conceived as a fast payment system and a network for building decentralized applications. Apps can run on the web thanks to smart contracts supported by Ethereum. It is smart contracts that make it possible to use the network for the operation of a wide variety of applications, including third-party ones.
Ethereum blockchain stores data about all transactions performed on the network like Bitcoin. However, in Ethereum, each node also stores information about the latest state of the smart contract.
What are smart contracts and what are they for?
Smart contracts serve as a regulator and guarantor for transactions, which does not require an additional supervisory authority. Smart contracts can be used in a wide variety of applications:
- control of goods sold in stores and their accounting;
- registration of cars and storage of data about their owners;
- carrying out real estate transactions and storing owner data in the blockchain (which cannot be hacked and faked);
- smart voting;
- reception and accounting of decisions on inventions;
- organization of work of decentralized exchanges;
- protection against double selling and much, much more.
New coins on the Ethereum network were created by PoW (Proof-of-Work) consensus. This is the same consensus that the Bitcoin blockchain is built on. As part of it, new blocks with all transaction records are decrypted and put into the blockchain by miners – computers that make calculations to decrypt transactions. For each block, the miner receives a reward in the form of 2 ETH. Until recently, this consensus worked fine, but with the growing popularity of Ethereum and applications on it, the network became more loaded and its bandwidth decreased. In such conditions, fees for transfers within the network (the so-called “gas” or gas fee) also greatly increase, which cannot be liked by all Ethereum users and ETH holders. Because of this, the question arose about network scalability and increased throughput. Then the development team proposed a new concept for Ethereum 2.0.
What is Ethereum 2.0?
To address the issue of throughput fees and reduce fees, the developers decided to implement the Ethereum 2.0 concept, which involves the transition from PoW consensus to PoS (Proof-of-Stake) consensus. Ethereum 2.0 test mode was launched in early December 2020. In this consensus, miners will no longer be needed, since the network will be supported by validators that will block their ETH in pools and “validate”, i.e. confirm, transactions. The process of placing ETH into a pool is called “staking”, hence the name of the consensus – Proof-of-Stake.
The new concept also envisions burning part of the transaction fees. Now all commissions that users pay for transactions are sent to miners, and after the implementation of Ethererum 2.0, some of the commissions will be destroyed. Thus, the number of Eth coins will become smaller, which will lead to a deflationary mechanism in the Ethereum network. The supply of Ether (ETH) will decrease, which means that it will decrease and its price will rise.
As mentioned above, it is the ability to create and maintain decentralized applications that makes Ethereum so popular and in demand, and the demand for ether is constant and even growing.
In general, purely formally, ether is called altcoin (there is the main “coin” – bitcoin, and there are all the others – alternative coins or “altcoins”). However, broadcast apologists disagree. They can be understood, because Ethereum is the basis of many applications and even the new Internet 3.0, and ether is the currency of the new economy. By the way, ether is the best suited for the role of money, and in this sense it is more preferable than fiat currencies. In one of the following articles, we will tell you that ether is perhaps the first phenomenon in the history of mankind that fits the definition of all three values. It can act as a capital asset, as a consumable asset, and as a store of value.
So why is ether so valuable, and what is its main value?
To answer this question, let’s give a small analogy with the Internet.
The Internet runs on several network protocols. Without going into details, let’s just say that they include physical, channel, network, transport, session protocols, presentation protocol and application protocol. And thanks to them, all the services that we use work: messengers, social networks, news sites, video hosting, file hosting and much more. We love the Internet not for its technical stuffing, but for all those things that can be built on it. But without technical stuffing, there will be no services!
Likewise with Ethereum. Ethereum, its blockchain, is the basis for many, many applications and services of the Internet 3.0.
Ethereum has created numerous solutions for the new value transfer system. Among them:
- services for ether staking;
- integration of stablecoins into exchanges;
- blocking ethers in DeFi applications for these applications to work;
- providing liquidity to exchanges.
The lion’s share of it all runs on Ethereum, so Ethereum can be compared to the network protocols of the Internet. By itself, the Ethereum blockchain is not visible to us, but we can see and use all the services and applications that are built on it. Ethereum can be called the “blood” of the new economy. To be precise, the blockchain itself is the circulatory system, and the ether is its blood cells. This is where the value of Ethereum and Ether lies. With the transition to Ethereum 2.0 and the increase in network bandwidth, its scope will increase many times, which means that the price will also rise. Some analysts are predicting a $ 20,000 price tag for Ether over the next few years. Perhaps this seems fantastic, but it is enough to recall the same bitcoin: at the beginning of 2017, it cost $ 1000, and now its price has increased ~ 60 times.
Ether as “superhard money”
Some analysts compare ether and bitcoin and conclude that ether is a more stable and valuable currency than bitcoin. They say that Bitcoin, powered by a PoW consensus, requires a lot of input and energy to run. Ethereum, after the transition to Proof-of-Stake, will be deprived of this drawback, and it will be enough to “stake”, i.e. put into the staking pool. As such, mining on computing power for Ethereum will soon become unnecessary. Ethereum PoS has another elegant solution, which we will discuss in another article completely devoted to Ethereum 2.0. Now let’s dwell on two principles of the future of Ethereum, which can be called truly revolutionary.
First, with the transition to version 2.0, the emission rate of ether will decrease from the current 4% per year to about 1%. In other words, if now every year 4% of the total mass is created every year, then in the new version this figure will become equal to 1%, i.e. there will be a 4-fold reduction.
Secondly, the new standard provides for the burning of commissions in the amount of about 1.9% of the total mass of ethers. Thus, 1% of ethers will be created, and 1.9% will be burned, i.e. every year there will be less and less airtime!
If there are 21 million bitcoins (in fact, less, since some of the bitcoins are lost forever), and there will be no less, then the ether will be less and less every year! That is why some call ether ultra sound money (super-hard money), as opposed to just sound money (hard money), which includes bitcoin.
Ether Prospects (ETH)
There is no doubt about the further development of decentralized applications (DApps) and, in particular, the field of decentralized finance DeFi (which will be discussed in one of the following articles). This means that the demand for ether as a fuel for DApps and cryptocurrency for transactions will also grow. The price of ether will definitely grow, but it should be borne in mind that this is true for long-term investments, with a prospect of 2 or more years. If we talk about short-term investments, it should be remembered that no one is immune from the onset of “crypto winter” (when the entire market falls and it seems that the crypt is not interesting to anyone). A period similar to 2018-2019 may well happen, and investments will turn out to be unprofitable.
But for the long term, we repeat, such investments are worth making. Over 3 years, from 2018 to 2021, the price of ether has increased 7 times, from $ 300 to $ 2,100 per coin, and it can demonstrate a similar dynamics in the future. For example, the Predictions Global company predicted an increase in the price of ETH to $ 20 thousand after the update. However, in investing, you always need to think with your own head.
Bitcoin and Ether play a special role in the cryptosphere and these are the main players. Now bitcoin is a locomotive that “drags” the entire crypto industry with it. It has some undeniable advantages, but it is ether that carries all the basic value of the cryptosphere. So far, due to the limited knowledge of the general public, the broadcast has not shown all its power and capabilities, but this moment will certainly come in the future. And then the balance of power will change.
An interesting point: according to esoteric views, ether is a substance that envelops the entire universe and is the basis of life in the universe. Vitalik Buterin chose the same name for his blockchain. Who knows, maybe in the future we will have to make sure of the correctness of such a decision.