What is the Ethereum Cryptocurrency?

ethereum cryptoIn 2017, bitcoin hit $20k for the first time in its history — and with good reason (the price of ETH has also been on an upswing recently). It’s one thing to invest in cryptocurrencies as speculation or hope that they will rise in value — but what if you want to use them? What are their uses today and how can you actually make money from using them? 

This article aims to answer these questions by showing exactly why people should care about Ethereum and what kind of applications have already started being built upon this platform. 

Before we get into specifics, let’s talk about some basic concepts around blockchain technology. 

Blockchain vs Distributed Ledger Technology 

When most people think about blockchain technology, they tend to envision something like Bitcoin where there’s a central authority controlling all transactions. This isn’t entirely true though. Blockchain tech allows anyone who owns ether tokens (which represent ownership in the network) to validate information stored within blocks on the chain without needing any centralized control. In addition to data validation, this means that every user on the system needs only access to open-source code and no special privileges. 

Instead of having someone manage the entire transaction process, everyone running the software gets equal say through voting over whether changes occur. As long as enough users agree on new rules, those rules come into effect automatically. The idea behind blockchain was originally proposed by Satoshi Nakamoto back in 2008 when he created Bitcoin. 

While blockchains do require consensus, which usually takes several minutes, they’re often much faster than traditional databases because they don’t need complex processes like replication or complex interactions between different systems. They also allow for more advanced features such as smart contracts, tokenization, and cross-border payments. 

That said, not all blockchains are made equally. While Ethereum does provide many unique advantages, other platforms may be better suited for certain tasks depending on the nature of their underlying architecture. For example, Ripple’s XRP currency is designed specifically for international settlements so it’s very fast at processing requests while Stellar Lumens’ XLM coin is optimized for high throughput between exchanges. 

Now that we know a little bit more about how blockchains work, let’s dive right into our topic. 

The Basics of Ethereum

Etherum is a decentralized app platform based on blockchain technology. One of the main reasons why developers choose to build apps on top of Ethereum instead of another platform is due to Ethereum’s versatility. Not only can developers create whatever type of application they desire, they can also customize it however they please since each node on the network runs identical copies of the same code. 

On Ethereum, nodes run independently of one another and therefore aren’t subject to downtime during attacks. Unlike other networks, Ethereum doesn’t rely on mining to verify transactions and balances. Instead, miners receive rewards when validating newly added blocks onto the chain. Since miner fees depend directly on the amount of gas spent on a given operation, even small operations end up costing real money. Miners must then decide whether or not they wish to continue working on a specific task in order to earn rewards. 

These two factors lead to increased security on Ethereum compared to other digital currencies. If miners stop paying attention or go rogue, they won’t reap profits and might start attacking the network. On top of this, Ethereum offers tools such as automated audits to ensure that this never happens. 

One important aspect worth noting here is that unlike Bitcoin, Etherum requires the usage of gas — a measure of computational effort used to pay miners for adding a new block onto the chain. Gas is consumed whenever an action occurs inside of a contract or function call and depends on the complexity of the task itself. When too much gas is burned, users lose funds temporarily until more becomes available via inflationary measures. However, this is offset somewhat by the fact that gas prices fluctuate according to demand rather than remaining static. 

Gas costs vary per state variable and can range from fractions of cents to hundreds of dollars depending on the computing power required to run the smart contract code, and the current market conditions. To prevent malicious behavior such as spamming, gas limits are set per operation and function depth. Users cannot exceed these limits unless the owner explicitly releases additional gas permissions. 

 

How Does It Work?

So now you’ve learned about the basics — namely, what crypto is and how it works. Let’s take a look at some examples of actual projects that are currently building atop Ethereum’s infrastructure. 

A few years ago, Vitalik Buterin came up with the concept of “smart contracts” which were essentially self-contained agreements written in code that could execute themselves once certain criteria were met. Smart contracts would typically involve things like exchanging assets or sending out payments, making them ideal for use cases involving finance. 

Today, Ethereum is arguably best known for supporting development of dApps (decentralized apps), although most dApp builders still prefer to host their services elsewhere. Most popular ones include OpenSea, Kyber Network, Bancor, Digifox, etc. Developers simply integrate dApps into Ethereum’s native programming language Solidity and deploy them to individual nodes across the network. Once deployed, clients can interact with the service just as regular users would except that these interactions happen virtually and transparently. 

Since Ethereum operates exclusively online, client computers act as bridges between the blockchain and external servers. These clients send instructions to the server, which executes them locally before translating results back to the computer that asked for them. By doing so, Ethereum eliminates the need for trusted third parties and provides both sides with near instantaneous communication channels. 

As mentioned earlier, most Ethereum accounts contain ether tokens, which serve as fuel for computations performed by validators and other nodes. New blocks are verified by solving Proof of Work problems, which involves finding hashes that match values calculated beforehand. Validators compete against others in solving puzzles in exchange for rewards. 

Once mined, tokens become tradable commodities that can later be converted to fiat currency. Because of the way Ethereum functions, tokens retain their value and are infinitely divisible unlike fiat currencies. Tokens can literally be split down to zero bits and still remain valuable thanks to the immutability of the ledger. 

For example, consider the following situation. There’s a company called Bitfinex that handles trading for large financial institutions. Now imagine that a single trader decides to short sell thousands of bitcoins (worth tens of billions of dollars at the time) and intentionally crashes the market. He did so by selling bitcoins below market rates to manipulate investors who believed otherwise. If this event happened on the stock market, his actions wouldn’t last long.

People would realize losses pretty quickly and move on. With Ethereum, however, traders would have to find ways to cover their bets before the crash occurred. Even after losing millions, the trader could theoretically redeem the shorts sold months prior and walk away relatively unscathed. 

Of course, that’s far-fetched from reality. At present, the majority of trades on major exchanges such as Coinbase and Gemini are done offline. Nevertheless, this shows how Ethereum’s flexibility can potentially mitigate risks associated with trading activities. 

Another interesting point is that Ethereum’s popularity among startups led to the creation of ERC-20, a standard interface written in solidity that facilitates creating new types of products. Using this protocol, companies can easily issue their own coins and tokens while retaining full control over their intellectual property. 

 

Where Can You Use it Today?

Over the past year or so, Ethereum has seen significant growth in terms of adoption rate. According to CoinMarketCap, Ethereum had a 24 hour trade volume of nearly $1 billion as of April 2018. That number dwarfs the likes of Bitcoin ($250B) and Litecoin ($75B). Currently, the largest project on Ethereum is undoubtedly OmiseGo, a mobile payment solution that lets individuals store cash in digital wallets or spend it instantly wherever Visa cards are accepted. Founded in 2015, it raised $25 million less than a month ago and has plans to raise an additional $60 million soon. 

Other notable projects include Synthetix Token, Aave, Paradex, Chainlink, Loopring, MakerDAO, Wanchain, Orchid, Civic, Bluzelle, Vechain, Polygon, Everipedia, Status Protocol, Cofound.it, Hashgraph, Melonport, Trustology, Ternio, and ZenCash. Many of these projects use Ethereum primarily to issue tokens representing shares in their respective organizations. Others leverage Ethereum’s ability to handle machine learning algorithms to accomplish various goals ranging from prediction markets to identity verification. 

Still, Ethereum’s potential goes beyond merely issuing new tokens. Recently, numerous proposals have been put forth suggesting how Ethereum could be modified to support non-fungible tokens (NFTs) similar to CryptoKitties. NFTs work similarly to collectibles/artworks in that owners can mint their own unique virtual items and transfer them to friends. However, unlike artwork, NFTs can also carry monetary value and thus facilitate crowdfunding campaigns, asset storage, and game mechanics. Popular games that utilize this feature include CryptoPunks and CryptoZombies.

Jeffrey Camerda

Dr. Jeffery Camerda, PhD, is a financial planner who specializes in wealth management and retirement planning.With a PhD in Economics and Financial Planning, Jeffery represents the highest level of financial planning expertise and achievement in the USAIn addition to preparing you for a career in financial planning, a PhD in economics and finance also prepares you for academic pursuits, such as becoming a university professor in teaching or doing research.Here at the Wealth Builder, our financial advisory company was founded in 2007 and services all across the USA with over 16 years of expertise.In order to provide the finest advice and services, we pay close attention to the specific financial circumstances and requirements of each client.In order to guarantee that our clients don't get a sales pitch for insurance or investments, as well as a lack of conflict of interest from a prospective commission-bearing corporations, Jeffery focuses on fee-based services. Financial planning for wealth managers, financial well-being workshops, and personal financial planning packages are all part of the company's offering.Jeffrey Camarda, PhD, CFA, EA is also the founder of the Family Wealth Education Institute, is a member of the Financial Planning Association and serves as the Chairman of Camarda Wealth Advisory Group

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