Ethereum Explained (Introduction Guide)

Understand the potential of Ethereum and why it has become one of the leading cryptocurrencies and blockchain platforms.

Ethereum is one of the leading cryptocurrencies, competing for investors' interest. It is among the top-rated in terms of market capitalization and price growth. This guide introduces the basics of Ethereum and how it differs from other cryptocoins.

Ethereum has been named the most probable heir to Bitcoin, with the potential to displace "digital gold" from its leading position.

Near the price peak of 2017, Ethereum was also a wildly appreciating asset, growing by 5000% since the beginning of 2017. In the middle of July, the cryptocurrency corrected sharply, losing more than 25% of its value, but started a recovery soon after.

What is Ethereum

Ethereum was created by Russian programmer Vitalik Buterin in 2014, after he was involved for years in the Bitcoin community and for a while headed the Bitcoin magazine. Ethereum is an open-source, fully decentralized blockchain supporting a cryptocurrency of the same name.

The Ethereum network is mostly known for supporting smart contracts.

A smart contract is a computer protocol that can facilitate, verify or enforce the performance of a contract.

In the case of the Ethereum network, a smart contract may mean any program that needs computation and uses the network's resources. To avoid abusing resources, every computation is paid for with Ether, or "gas". The most important implication of smart contracts is that third parties can create new tokens, or cryptocurrencies, that run on the Ethereum network.

The cryptocoin Ethereum itself is a stake in the work of this network, and it is an exchange-traded asset in the cryptocurrencies market, just like Bitcoin, Litecoin and Dash. Ethereum shopping online is possible, though there are limited offers, and Ether is mostly meant to be the fuel for calculations on the Ethereum blockchain.

So how does this translate into value? Due to an agreement between the Ethereum Foundation and the Bitcoin community, Ether has been connected to Bitcoin since the beginning, ensuring transactions of value.

Ethereum is perhaps the most complicated cryptocurrency, because smart contracts are not easy to grasp. For a beginner, it is best to think of Ethereum as a tradable asset that can be exchanged for other cryptocurrencies or for cash.

Ethereum is a volatile asset with dramatic peaks and drops, making it risky for the beginner investor. For example, the Ethereum market price fell sharply around June 25, 2017, following a hoax about the death of Buterin. He is alive and well now, and accessible behind the Twitter handle @VitalikButerin.

For this moment, speculative interest and fresh fiat injected into Ethereum keeps its price rising.

Currency

Price (as of July 2017)

Units Available

24 Hour Trading Volume (as of July 2017)

Bitcoin

$2238.86.34

16,452,650

$1.2 billion

Litecoin

$43.05

52,030,007

$350 million

Ethereum

$191.75

93,345,936

$1.6 billion

Dash

$149.70

7,431,388

$28 million

Ethereum Price Chart

The spike in trading volume for Ethereum picked up in April and despite the drops in price there is still interest and buying spikes. The price future of Ethereum is uncertain as it wiped out some of the value since the peak, but the technology and the team behind this cryptocoin remain robust and promising. Interest in cryptocurrencies is becoming more mainstream and therefore Ethereum remains a promising cryptocoin for trading, storing value and the main purpose, fast and cheap transactions worldwide.

Where to Buy Ethereum

Ethereum has become important enough that in the past few months, it has entered the portfolios of some of the best online exchanges, and is even available for cash purchases. It is possible to buy Ethereum with USD, besides the opportunities to exchange it for Bitcoin.

Ethereum is available at:

Kraken - exchanged for fiat (USD, EUR, GBP, JPY)

BTC-E - ETH/USD, ETH/EUR

Bitfinex- ETH/USD

Poloniex - ETH/BTC

BitPanda -EUR/ETH

To buy Ethereum, a user needs to download and open a wallet first. The wallet will demand that it is loaded with some ether, offering the tool Shapeshift to easily convert Bitcoin into Ether. So to own Ethereum and store it on a local device, a certain amount of Bitcoin could be required. The wallet will also start downloading the network nodes, which may take a while.

Ethereum may be stored on the exchanges with their own online wallets, but is subject to security breaches and losses.

Ethereum Blockchain

The Ethereum blockchain is a unique in the cryptocurrency world, because it allows the creation of new tokens that can be traded on exchanges. Thus, the Ethereum network caused the spike in new cryptocurrencies.

There are currently 37 prominent tokens operating on the Ethereum blockchain, and many more issued. They operate like real tokens and are available on some exchanges. Here are some of the most actively traded tokens that work on the Ethereum network:

Coin

Price (as of July 2017)

24-hour Trading Volume

Golem

$0.23

$3.4 million

Qtum

$4.80

$8.82 million

Iconomi

$2.38

$1.9 million

Gnosis

$179.06

$753, 328

Augur

$17.76

$2.09 million

Programmers can create their own cryptocoins and easily raise capital through an Initial Coin Offering. Ethereum allows the creation of startups, much like the IPO boom in Silicon Valley. Each one of the new coins can be sold for cash and possibly exchanged for other cryptocurrencies.

Ethereum Vs. Bitcoin

Will Ethereum displace Bitcoin? The two projects have very different scopes and intentions, and only speculative interest may place Ethereum above Bitcoin as a storage for value. But still, Ethereum could enjoy a popularity of its own and build value independent of the success of Bitcoin.

The two assets have very different technological profiles:

 

Block Calculation Time

Coins mined from total supply

Ethereum

12 seconds

Approx. 50%

Bitcoin

10 minutes

Approx. 75%

 

The Ethereum network is faster and allows for lower transaction fees.

There is a difference in mining, as the Ethereum team created a special algorithm discouraging the use of specialized machines and instead using at-home calculations. In the past months, both difficulty levels and hashing rates have been rising for Ethereum, meaning a robust interest from miners.

Ethereum Risks

Sometimes, projects on the Ethereum blockchain cause trouble. The DAO project caused a hard fork in 2016 after funds of $53 million were stolen from the network and ended up in a temporarily locked account. A decision was made to hard-fork the Ethereum blockchain to reverse the theft. But some users refused to participate in the bailout and kept the old blockchain, which is now supporting the Ethereum Classic cryptocurrency.

Ethereum is therefore propped up by all those startup projects, but may also suffer a loss of confidence if the projects expose unforeseen risks. The DAO failure led to a drop in the price of Ethereum from $21 to $8 at the beginning of the year, and bad PR has been extremely damaging to the market price of this asset.

Now that you have a basic understanding of Ethereum, you may move on to acquiring your first coins. Continue on to the guides on How to Buy Ethereum and How to Mine Ethereum.