What is Ethereum, and how does it work?

What is Ethereum, and how does it work?

Ethereum is a decentralized computing platform capable of running many applications, including the entire DeFi ecosystem. It is also the second-largest cryptocurrency available on the market after Bitcoin. We explain how ETH works and what are its applications!

What is Ethereum?

Ethereum is an open-source, decentralized digital platform that embraces blockchain technology and extends its use to a wide range of applications. Ether (abbreviated as ETH), its native cryptocurrency, is the second-largest cryptocurrency on the market. Investors typically refer to it simply as Ethereum – much like the network on which it operates. ETH’s capitalization as of November 2021 was over $570 billion. 

History of Ethereum

The concept of the system was first described back in 2013. Development work on the launch of the platform began a year later. The Swiss software company Ethereum Switzerland GmbH was behind them. Ethereum was created at the end of July 2015. The originator of the cryptocurrency is programmer Vitalik Buterin, and its sponsors are a group of investors. The initial fund was raised through so-called crowdfunding or community investment. Ethereum aimed to introduce a tool for decentralized and collaborative applications

Upgrading from ETH 1.0 to 2.0

Ethereum 2.0 (often referred to as ETH2) is a significant upgrade to the Ethereum network. The transfer of the popular cryptocurrency, initiated in December 2020 to a new platform, was intended to ensure the scalability and growth of Ethereum. Ethereum 2.0 uses a consensus mechanism called proof of stake, which is faster, less resource-intensive and more secure than the proof of work used previously. The complete transition from Ethereum 1.0 to Ethereum 2.0 is expected to take about two years.

How does Ethereum work?

Introduced in August 2015, Ether was created as a virtual token based on Ethereum technology, an open-source software platform. As the virtual currency of the Ethereum network, Ether is used to make payments for transactions between users. 

Unlike the most popular cryptocurrency, Bitcoin, whose sole purpose is to act as an alternative currency, the Ethereum platform also serves additional functions. Ethereum is not only a cryptocurrency but also a powerful development platform that uses blockchain technology. First of all, it is used to create decentralized applications (dApps) and make so-called smart contracts. Ethereum also allows for creating new tokens that can be a means of exchange and for raising funds for a specific project within crowdfunding platforms.

How is Ethereum different from Bitcoin?

Ether, the currency used to finalize transactions on the Ethereum network, and its main competitor, Bitcoin, have many in common. Both are cryptocurrencies based on blockchain technology. Ethereum, like Bitcoin and other cryptocurrencies, remains outside the control of governments, central banks, and other regulatory institutions. The Ethereum blockchain works thanks to network users who provide the computing power of their computers to calculate complex mathematical operations. In practice, this means that independent computers widely dispersed around the world freely participate in maintaining a list of transactions, thus allowing the history of each coin to be checked and confirmed. 

As we mentioned earlier, the main difference between Ethereum and Bitcoin concerns the capabilities offered by both solutions. For example, blockchain only allows you to make payments based on the blockchain’s source of information about transactions. Ethereum, on the other hand, is a complete platform that allows, among other things, the creation of decentralized applications and smart contracts. Furthermore, Ethereum and Bitcoin operate on separate protocols, as a result of which some transactions can only be carried out on one of the platforms.

It is also important to note that transactions using Ethereum flow more smoothly than Bitcoin, and the entire payment system is much more efficient. For example, transactions using Ethereum can be completed in as little as a couple of seconds, while BTC time is as long as a dozen minutes. This makes Ethereum seen as a faster, more versatile and cheaper alternative to Bitcoin – for this reason, it is sometimes called Bitcoin 2.0.

How to invest in Ethereum?

Ether can be purchased through virtual currency exchanges or exchanged in any cryptocurrency exchange. We can count on favorable trading conditions in the case of such exchanges as Binance, BitBay, Coinbase, Kraken, Huobi or Bitfinex. On most of them, ETH can be traded in pairs with popular fiats (fiat currencies) such as EUR, USD or GBP and duos with stable coins like Tether. Purchased ETH can be stored in any popular cryptocurrency desktop wallet, mobile wallet, or hardware wallet. Cryptocurrencies for ongoing trading can be stored directly on the exchange.


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