header banner
Default

Explain the Functions of Ethereum (ETH) and What Is It?


Ethereum, also commonly known as Ether, is the world’s second largest cryptocurrency behind Bitcoin, and like any digital currency, it has experienced its fair share of ups and downs over its relatively short lifetime.

The price of Ethereum rose to a record $US4800 in late 2021, which signified a rise of more than 900% over the previous 12 months and sparked speculation that Ether would overtake Bitcoin in value.

However, Ether was not immune from the bear market of 2022 and tumbled in value alongside many other cryptocurrencies. Despite the poor market conditions, Ethereum underwent its largest upgrade ever in September last year, transitioning from a proof-of-work (PoW) consensus mechanism to proof-of-stake (PoS). This upgrade, known as “The Merge”, reduced the Ethereum Network’s energy consumption by around 99.9%, eradicating concerns that it was driving some of the energy inflation and reducing its impact on the environment. This change also led to significant architectural changes for Ethereum, and creating a mechanism in which the Ether token could be deflationary under certain conditions.

After the upgrade occurred successfully back in September, Ether remained in a downtrend in price for the rest of 2022, reaching prices as low as $US1070. However, since the beginning of the new year, Ether and other digital assets have soared in value, currently sitting at a little over $US1800. The deflationary effect of “The Merge” could be attributed to some of Ether’s price action, as over 72,000 Ether have been removed from the circulating supply, making the asset scarcer and potentially driving up the price.

Related: Crypto News Australia Updates

What Are Cryptocurrencies?

VIDEO: What is ethereum, and how does it work?
CNBC International

In the truest sense, cryptocurrencies are a digital means of exchange which use cryptography as a form of security. However, in more recent times, the term ‘cryptocurrency’ has evolved to encompass a decentralised financial system (DeFi), a highly volatile asset class that can nose-dive or surge on the back of a Tweet, a space for bad actors to steal vulnerable investors’ identities and money, a mode of asset diversification, and a form of digital payment.

Ethereum once had an effective market capitalisation of over$500 billion, however, the crypto bear market of 2022 took its toll and despite a strong start to 2023, it is now sitting at around $219 billion in market cap (March 30, 2023).

If you’re familiar with Bitcoin but less au fait with its closest rival, here’s what you need to know about Ethereum including why, one day, it could still become the dominant player on the cryptocurrency stage.

First, a Crypto Wealth Warning

VIDEO: Ethereum Explained! 🚀 (Ultimate Beginners’ Guide! 📚) How Ethereum Works 💻 & Why it's Undervalued 🤑
Crypto Casey

You don’t need to follow the financial world that closely to know that cryptocurrencies have become one of its biggest stories in recent years.

Nowadays, they pre-occupy the thoughts of governments and major financial institutions alike and divide opinion as to whether they are essentially Ponzi schemes that need to be severely regulated, or are simply volatile asset classes for investors who enjoy a high-stakes gamble.

If your financial plans revolve around capital preservation—hanging onto what you’ve got—then the volatile behaviour of cryptocurrencies is most definitely not for you.

In June, Jerome Powell, the chairman of the US Federal Reserve, described crypto-assets as no better than “vehicles for speculation”. And at its May AGM, the legendary Berkshire Hathaway vice-chairman and investor, Charlie Munger, said Bitcoin was “disgusting and contrary to the interests of civilisation”.

Comments such as these, however, fail to put off millions of aficionados around the world from trying to make money from cryptocurrencies, including Bitcoin.

This includes Australians, who are increasingly getting in on the act: recent Roy Morgan research has revealed that 5%, or more than one million adult Australians, own at least one cryptocurrency.

If that includes you, Laith Khalaf, UK financial analyst at brokers AJ Bell, offers some simple guidance: “Those who wish to gain exposure to cryptocurrencies should only do so with a small amount of money that they are willing to lose,” he suggests.

It’s worth adding that crypto-asset investing is unregulated in Australia—although the Federal Government is planning on introducing regulation in 2023—as well as in most EU countries and in the UK, and there’s no consumer protection should things go wrong.

Which brings us back to Ethereum.

Related: The Future of Crypto In Australia

Ethereum is a decentralised, open-source platform launched in 2015 that enables the creation and execution of smart contracts and decentralised applications (dApps) on its blockchain. By offering a programmable blockchain, Ethereum allows developers to build a wide range of applications, from decentralised finance (DeFi) to digital identity solutions, without relying on a central authority.

Ethereum’s native cryptocurrency is called Ether (trading ticker is ETH) which is used  to facilitate transactions and incentivise network participants, called miners, to validate and secure the platform. Ethereum refers to the network built on blockchain technology, providing an unchangeable digital record of transactions, which ensures transparency and security without needing a central authority.

Think of Ether as the cryptocurrency token derived from the Ethereum blockchain. A blockchain allows encrypted dat a to be transferred securely, making it almost impossible to counterfeit. As with Bitcoin, these tokens are currently “mined” via computers solving mathematical problems.

Bitcoin uses blockchain technology as well (see above for the differences between the two cryptocurrencies), but Ethereum was built as the base-layer for smart contracts, decentralised applications and other blockchain related use cases.. It’s this aspect, some commentators say, which could one day help it to shunt Bitcoin from the top cryptocurrency spot.

In recent times, Ethereum’s popularity has grown among both retail and institutional investors alike.

Advantages of Buying into Ethereum

VIDEO: What is Ethereum? Everything you need to know!
Blockgeeks

Investing in Ethereum offers several notable advantages, particularly as it plays a central role in the emerging world of decentralised finance (DeFi). As the backbone for an extensive array of decentralised applications and smart contracts, Ethereum’s secure and public blockchain has the potential to reshape various industries, making it a compelling proposition for forward-thinking investors.

One key advantage of buying into Ethereum is the opportunity to participate in and benefit from the growth of DeFi, which aims to democratise access to financial services. Through Ethereum, individuals can access lending, borrowing, and trading services without the need for intermediaries such as banks, reducing fees and increasing efficiency. This financial revolution has the potential to unlock new economic opportunities and disrupt traditional financial systems.

Moreover, Ethereum’s ongoing transition to a Proof of Stake (PoS) consensus mechanism, known as “the Merge,” aims to improve scalability, energy efficiency, and security. This development presents investors with additional advantages, such as the ability to stake Ether and earn a consistent yield on their investment. Staking allows investors to support the network’s security and operation by locking up a portion of their Ether, and in return, they receive rewards in the form of additional Ether over time.

In addition, the investing platform eToro says Ether can be used at a growing number of online and bricks-and-mortar retailers. Transaction times are often faster when compared to those for Bitcoin and it also provides access to a number of decentralised applications (dApps) enabling developers to create new online tools to facilitate these real world payments.

Progress in the retail payments sphere was emphasised in March 2021 when British-based Christie’s became the first auction house of its kind to accept Ether as payment for a work of art by Beeple. Called ‘Everydays: The First 5000 Days’, the purchase price equated to a figure of $US69.3 million.

At the end of April 2021 and confirming the financial sector’s growing interest in the cryptocurrency sphere, the European Investment Bank issued its first ever €100 million two-year digital bond via the Ethereum blockchain.

Meanwhile, at the beginning of May 2022, , including one for Ethereum, aimed at measuring the performance of digital assets.

As time passes, more and more companies are looking to accept cryptocurrency as a form of payment, increasing the use cases and adoption of digital assets like Ether.

How Do you Buy Ethereum in Australia?

VIDEO: What is Ethereum? A Beginner's Explanation in Plain English
99Bitcoins

Ethereum can be purchased from a wide range of crypto exchanges, such as Binance Australia or Kraken, or via an investment platform, such as eToro.

You create an account with the chosen provider confirming your place of residence and identity and then link to your bank account in order to buy the currency. Fees will vary from one provider to another and can depend on the amount you want to deposit, (eventually) withdraw and for the transactions you want to carry out.

Payment methods can include those via debit/credit cards to PayPal and instant Osko payments. New investors may need greater levels of customer assistance compared with seasoned traders.

Could Ethereum’s Price Rise Again?

VIDEO: What is Ethereum? (Ultimate Guide for Beginners)
Humphrey Yang

In the world of cryptocurrencies, few things can be taken for granted, and there are no certainties. And as we’ve reported above, there are plenty of senior figures in the financial community who hold deep reservations about the safety, perhaps even the viability, of the overall concept of crypto.

But Nigel Green, chief executive and founder of the international deVere Group financial consultancy, has previously suggested Ethereum is the crypto to watch: “Ether can be expected to significantly dent Bitcoin’s market dominance over the next year and beyond. Compared to its bigger rival, Ethereum is more scalable, offers more uses and solutions, such as smart contracts which are already used across many sectors, and is backed with superior blockchain technology,” he added.

AJ Bell’s Laith Khalaf acknowledges Ether’s relative strengths within the cryptocurrency context, but he advocates extreme caution: “Ether, or Ethereum, is more flexible than Bitcoin because it is programmable according to use, so it can be used to verify business transactions or contracts as well as make payments.

“However, the value of that asset is still only what someone else will pay for it, and while that might be quite a lot right now, once crypto fever has died down, it may not be worth the code it’s written in.”

This article is not an endorsement of any particular cryptocurrency, broker or exchange nor does it constitute a recommendation of cryptocurrency as an investment class. 

Frequently Asked Questions (FAQs)

VIDEO: How Cryptocurrency ACTUALLY works.
Mrwhosetheboss

What is Ethereum 2.0?

VIDEO: What is Ethereum Gas? (Examples + Easy Explanation)
Whiteboard Crypto

Ethereum has been running on two parallel blockchains: one that operates using the energy-intensive ‘proof of work’ model to verify transactions, and another that operates via ‘proof of stake’. Proof of stake will replace proof of work as Ethereum’s only consensus mechanism in two stages. Ethereum 2.0 refers to the new unified Ethereum blockchain that comes into being once these two blockchains merge.

How is Ethereum bad for the environment?

VIDEO: Vitalik Buterin explains Ethereum
Ethereum

Until recently, Ethereum has been verifying transaction via an energy-intensive ‘proof of work’, and ‘proof of stake’ model. The former involves members of the network competing for the chance to add their copy of transactions to the ledger. They do this by guessing a long string of letters and numbers out of trillions of possible combinations, which requires powerful computer networks. The good news is that Ethereum is merging the two blockchains and the more environmentally friendly proof of stake model is becoming the single consensus mechanism.

What is Ethereum Classic?

VIDEO: BTC, ETH, XRP: Are They Going Lower?
Elliott Wave + Technical Analysis by Lara Iriarte.

Ethereum Classic (ETC) is both a decentralised cryptocurrency, as well as an open-source computing platform, which allows users to create “smart contracts”, without the need for  human involvement or a middleman. It can also host decentralized applications, known more commonly as DApps. ETC has a market cap of more than $5 billion and unlike Ethereum doesn’t plan to change its consensus mechanism from ‘proof of work’ to ‘proof of stake’.

How does Ethereum make money?

VIDEO: Ethereum To CRASH -12.90% After Sell Signal? (CATCH THE BOTTOM) | ETH Price Prediction
Trade Confident

Ethereum itself, as a decentralised platform, doesn’t make money like a traditional company. However, the Ethereum network generates revenue for its stakers and validators, who help secure and maintain the network. These participants earn Ether (ETH), Ethereum’s native cryptocurrency, as a reward for validating transactions and creating new blocks. Users of the network also pay transaction fees in Ether, which contribute to the income of stakers and validators.

How do you explain Ethereum to a beginner?

VIDEO: PREPARE: The Ethereum & Bitcoin ETFs Explained
Andrei Jikh

Ethereum is a decentralised platform that allows people to build and use digital applications and agreements, called smart contracts, without relying on a central authority or middleman. It’s based on blockchain technology, which is a digital ledger that records all transactions securely and transparently. Ethereum uses a cryptocurrency called Ether (ETH) to enable transactions and reward those who help maintain the network. In essence, Ethereum allows developers to create a wide variety of applications, from financial services to games, all running on a secure and open network.

Is Ethereum better than Bitcoin?

VIDEO: Ethereum Classic (ETC) Is On The Verge of Legendary Rise
moon333

It’s not accurate to say that Ethereum is “better” than Bitcoin, as they serve different purposes and have unique features. Bitcoin was created as a digital currency to enable peer-to-peer transactions without a central authority, focusing primarily on being a store of value and a medium of exchange. Ethereum, on the other hand, was designed as a platform for creating decentralised applications (dApps) and smart contracts, using its cryptocurrency Ether (ETH) for transactions and incentivising network participation.

In summary, Bitcoin is better suited for financial transactions and storing value, while Ethereum excels at enabling a wide range of decentralised applications and programmable use cases. Your preference between the two will depend on your specific needs and interests.

Can Ethereum be used as real money?

VIDEO: Vitalik Buterin - Ethereum in the Next Decade | EDCON2023
De University of Ethereum

Yes, Ethereum’s native cryptocurrency, Ether (ETH), can be used as real money in certain contexts. You can use Ether to buy goods and services from merchants who accept it as payment, or you can convert it to other cryptocurrencies or traditional currencies like Australian dollars. However, it’s important to note that Ether is not yet as widely accepted as traditional currencies, and its value can be more volatile. While it is not a perfect substitute for real money, it is a widely-used digital asset with growing acceptance and utility.

Sources


Article information

Author: Frank Griffith

Last Updated: 1702340761

Views: 792

Rating: 4.1 / 5 (34 voted)

Reviews: 91% of readers found this page helpful

Author information

Name: Frank Griffith

Birthday: 1969-10-21

Address: 777 Benjamin Tunnel, Lake Jessicamouth, TN 21891

Phone: +4232757884855092

Job: Construction Manager

Hobby: Astronomy, Motorcycling, Orienteering, Coin Collecting, Surfing, Wine Tasting, Knitting

Introduction: My name is Frank Griffith, I am a resolute, intrepid, dazzling, cherished, risk-taking, proficient, brilliant person who loves writing and wants to share my knowledge and understanding with you.