Ethereum is the second largest cryptocurrency in volume, but its many uses can create a much steeper learning curve for new investors than Bitcoin.
“Ethereum serves two purposes: first, it acts like money and can be a store of value,” says Bill Noblechief technical analyst at Token Metrics, a cryptocurrency analysis platform. “But Ethereum is also like a superhighway for decentralized finance.”
Instead of creating value as “digital gold” like Bitcoin, Ethereum is a software platform that runs on a blockchain. Users can interact with the platform using ether, the cryptocurrency associated with Ethereum – or buy it and hold it as a store of value. Ethereum is commonly used by developers, but there are people who also invest in crypto to make its potential worth more over time.
What is Ethereum?
Ethereum was invented by a programmer Vitalik Buterin in 2015, on the heels of Bitcoin.
“He realized that Bitcoin is like a pocket calculator, designed to do one thing, and it does it very well, but you can’t do anything else with it,” says Ollie Leech, learning editor at Coindeska cryptocurrency medium.
So Buterin created Ethereum, a blockchain network with an associated cryptocurrency called ether (ETH), with the potential to do so much more.
Although you can buy and trade Ethereum as an investment like Bitcoin, it’s also a software platform that developers can use to create new applications – often crypto-adjacent or otherwise designed to make buying, selling and using cryptocurrency a smoother process. Like the ones on your phone, these apps can be anything from lending apps to payment platforms.
Think of Ethereum as a smartphone, says Leech. Developers can build apps on smartphones, the same way they can build apps on Ethereum. While mobile phone apps have more universal applicability these days, Ethereum apps are geared more towards crypto users. With the lending app sample, a developer can create the app, which other crypto users can in turn use to lend and borrow.
“Everything is powered by this idea of smart contracts,” he says. A smart contract is a program that runs autonomously on the Ethereum blockchain, Leech explains. Smart contracts perform all the functions that a third party would normally take care of.
For example, people can transact directly on the network. Peer-to-peer lending is gaining popularity on Ethereum right now, says Leech. A lending application developed on the Ethereum network allows individuals to lend money to each other without involving a bank.
The smart contracts that power these applications are essentially just algorithms designed to perform a specific function when certain conditions are met. In the case of peer-to-peer lending, the contract triggers the outcome (money lending) when the collateral is placed in the correct wallet or account. Potential benefits of using a smart contract instead of a traditional lender include speed of execution, lack of human error or bias, and lower fees.
Other uses of Ethereum
Like other popular cryptos, Ethereum was built on the principles of decentralized finance, as the products and services that live on Ethereum are available to anyone who can access the internet.
Smart contracts allow creators to create decentralized applications that can serve different purposes. These apps include financial tools like cryptocurrency exchanges, decentralized lending platforms, and data services like Matcha, which searches multiple cryptocurrency exchanges for the best prices. But there are also dapp categories for things like buying and selling digital artwork, games, and developer tech.
The open source concept of Ethereum allows developers to create entirely new cryptocurrencies, like Chainlink and XRP, which are known as tokens. Some of these assets come in the form of different cryptocurrencies you may have heard of, such as Tether (USDT), Uniswap (UNI), or USD Coin (USDC).
But cryptocurrencies aren’t the only digital assets that can be created on Ethereum — recently NFT, or non-fungible tokens, is another example of something created using Ethereum. These digital tokens are powered by Ethereum and are used to represent ownership of unique items, according to the Ethereum website.
Ethereum versus Ether
Developers must pay fees to the Ethereum network to create new tokens or decentralized applications on the network. They make these payments in ether, the native currency of Ethereum. This tax is also known as “gas,” according to Noble.
Gas is the price for using the system, like paying for your metro ticket to take the train. Ether is the money you would use to buy your metro card. Think of it “like tolls you have to pay to do things and trade on Ethereum,” says Noble. Different stocks are worth different amounts of ether, and the fee increases as more people join the network.
These gas prices and all the uses that developers pay to explore are the reason for the increase in value of Ether over the years. As more developers look to build things on Ethereum, they have to buy more Ether to pay gas fees, which in turn increases the price of Ether. Ether investors are betting on the continued use of the most popular blockchain and the potential for its applications in the future.
Gas fees are also one of the main obstacles to Ethereum’s growth potential, according to Noble. But an ongoing network update, Ethereum 2.0, seeks to fix the problem. The update will have no impact on investors or dapp users, just developers, according to the Ethereum website.
If you want to invest in Ethereum, buy ether. An ether token is currently trading for around $2,700. Similar to how you would invest in Bitcoin, investing in Ethereum means buying and holding the token (ether) in the hope that it will increase in value over time.