the complete guide
Ethereum is the second largest public blockchain in terms of value and the largest in terms of usage. Like Bitcoin, Ethereum operates on what is known as a public blockchain: a global distributed network which is uncensored, open to all and doesn’t have any central authority.
The fundamental difference with Bitcoin is the ability to create applications on Ethereum, which run and are stored on the blockchain itself, the basis for decentralised finance (DeFi). Strictly speaking, Ethereum is not a cryptocurrency. Read this guide to find out everything you need to know about Ethereum: its definition, its back story, how it works, its future…
1. The birth of Ethereum
Ethereum was presented in 2013 in a white paper on the development of the Bitcoin protocol. It was written by Vitalik Buterin, a young programmer on Bitcoin’s teams and the co-founder of Bitcoin Magazine. The concept quickly attracted the interest of other cryptocurrency enthusiasts at the time, who joined the project. These included Anthony Di Iorio, Charles Hoskinson, Joseph Lubin and Gavin Wood. These people are now considered the co-founders of Ethereum. The Bitcoin development team did not adopt the proposal, so the founders decided to create their own blockchain.
To turn his project into a reality, Vitalik Buterin launched a crowdfunding campaign. A Bitcoin fundraiser was held from 2 September 2014 to finance the developments needed to launch the network. Pre-sales of the first Ether tokens (ETH) helped Buterin to raise $18.3 million. This represented 30,000 ETH. Inspired by the project’s objectives, programmers got involved and the first version of the Ethereum blockchain was launched on 30 July 2015; it was called Frontier.
Ether’s price began to increase in 2016. This cryptocurrency became a real success, even rivalling Bitcoin. It was not until 2017 that it was available on trading platforms. Its price rose to over $400, up from $1 in 2015. Today, the number of ETH in circulation is estimated at over 110 million.
In addition to buying and selling Ethereum, it is now possible to mine it without any particular restrictions. This can be done by downloading mining software (such as Ethermine). However, as with the mining of any cryptocurrency, a powerful computer is required. There is strong competition when it comes to Ethereum mining. There are many miners; some of them benefit from significant competitive advantages, including an incredibly powerful graphics card, more affordable electricity, lower taxes, etc. This is why miners come together in “mining pools” to make their efforts more profitable. To find out more about this, read our guide How to mine Ethereum. You’ll learn how to mine Ethereum, the questions to ask before you start and the key points to consider.
2. Ether vs Ethereum: not to be confused
et son actif natif : l’ether (ETH)
Ether is the cryptocurrency of Ethereum. Ether, represented by the symbol ETH, is a currency of exchange on the Ethereum network. Ethers are traded on marketplaces and the price is set by supply and demand. ETH can thus be used for trading, mining or simple storage in a portfolio.
Ether has several specific characteristics. Perhaps the most important feature is that its annual money supply is fixed and relatively low.
In other words, very few new Ethers are created every year. It is therefore a rare asset, but unlike Bitcoin with its 21 million units, there is no absolute maximum limit.
Investing in Ether therefore means backing the development of the Ethereum ecosystem: it is already the second largest market capitalisation and has been used to create numerous projects and applications built on its network.
3. Ethereum: how it works
Ether is a virtual money which is accessible to all and created through mining. Ethereum is a network which requires Ether to function. The Ethereum blockchain is used to store the history of transactions made on the network. It is also capable of storing computer code. Ethereum is a technology which works like a bank, with a system of accounts. The network records all information related to these accounts. Ether tokens are placed in a wallet. Each node in the Ethereum network has a copy of the transaction history. If a user performs an action, such as sending Ether to someone, thousands of computers process this request simultaneously. The transaction will only be validated if all nodes in the network accept the request. This is a safeguarding measure. Miners and nodes share responsibilities, rather than a banking institution. Miners ensure that transactions are carried out properly.
Ether finances the computing resources needed to run applications. The way it works is relatively simple. For instance, an Ethereum user wants to send a defined amount of Ether to another person. The user doesn’t want to carry out the transaction immediately, preferring to do so at a later date and time. He or she then creates a smart contract (a concept we explain in more detail later in the article). The payment of Ether is therefore subject to a specific condition: a specific date chosen by the user. When this date finally arrives, the contract is executed and the person automatically receives the agreed amount of Ether. This is made possible by Ethereum. Everything is processed directly on the network, so no entity is needed to store or control the data. Once defined, the procedure runs automatically. The waiting time is reduced. This also eliminates the costs associated with manual execution.
This is a simple example, but it can be applied to much more complex configurations. Because of its flexibility, Ethereum offers extremely extensive or even unlimited possibilities. As a result, projects are developing in areas including insurance, finance, real estate, entertainment and more. Do you want to buy Ethereum? Read this article to learn about the procedure to follow and for advice on how to invest.
4. Ethereum and the fundamental concept of smart contracts
The fundamental difference between Ethereum and Bitcoin is that Ethereum can execute so-called “conditional” transactions. For example, it is possible to create a payment transaction which will only be executed if another transaction has taken place or if the price of an asset has exceeded a certain threshold.
These conditional transaction mechanisms are usually grouped under the term “smart contracts”.
However, this phrase isn’t particularly clear. These “smart contracts” are programs which aim to automate one or more actions when pre-requisite conditions, defined by the creator of the program, are met.
For example, let’s imagine an auction system. A smart contract could be created which receives bids for a particular item for sale, which is able to determine the highest bid, which rejects lower bids at the end of a specified period and so on.
Of course, this kind of program can be created on a conventional computer through a website such as eBay, for instance. However, smart contracts have a number of advantages:
- They are autonomous: there’s no need to host them on a computer, they are stored directly on the blockchain itself.
- They can store funds in Ethers and any kind of data.
- They are immutable, cannot be hacked and are available 24 hours a day.
- They are transparent: anyone can verify how they work.
They are interoperable: any smart contract can easily interact with another.
But smart contracts also have a number of disadvantages:
- Like any software, there can be bugs, which attackers can exploit.
- Once stored on the blockchain, they cannot be edited.
- Any interaction with a smart contract requires the payment of commission; in the long run, this can be very expensive.
5. Understanding “gas”: the fuel behind the Ethereum network
On the Bitcoin network, the cost of a transaction depends on two factors: the saturation of the network at a given moment and the transaction’s size in terms of the number of characters.
On Ethereum, the cost of each transaction depends on network saturation but another factor also has an impact: the computational complexity required to execute the transaction. A simple transaction to send Ethers from one user to another will have a low cost. A smart contract call which triggers complex computation will have a significant cost.
This cost, which is known as the “gas”, must be paid by the issuer of each transaction, in Ethers.
Remember that every smart contract call is processed on each machine which makes up the Ethereum blockchain and therefore has an impact on the entire network. Intensive computation for video games or artificial intelligence on Ethereum will not be possible for at least a few years.
6. Ethereum: understanding tokenisation
The Ethereum network offers vast possibilities for developers. Anyone can develop applications on Ethereum. The only prerequisite is the ability to code in Solidity, the network’s programming language.
One of the first functions which has been used is “tokenisation”, i.e. the creation of new cryptocurrencies. They are called “tokens”, issued through and hosted on the Ethereum blockchain. Tokens can be held, quantified and traded digitally between two people.
Before the development of Ethereum, creating a new cryptoasset was extremely complicated: a blockchain had to be created, along with a mining network, wallets, a system of economic management, demand and widespread adoption.
With Ethereum, creating a new cryptoasset involves generating a smart contract and publishing it, which can take just a few minutes.
Instantly, the new asset is tradable, secured by the network and interoperable with the entire Ethereum ecosystem. Creators make their lives easier by using the existing infrastructure for free (more or less).
The importance of the ERC20 token type
A new token on the Ethereum blockchain must comply with certain “standards” imposed by the network. The most popular of these standards is called ERC20. Each ERC20 token is managed by a smart contract which presents a list of minimal functions: how to create new units, divide them into fractions, destroy them, transfer them to another portfolio, etc.
There are several standards for tokens. We discuss this in more detail in this article. While many tokens only represent their own value, some can now represent traditional financial products or even real-world items.
7. Looking back on 2017 and the ICO craze
The tokens we have discussed are linked to the deployment of a new service or application within the Ethereum blockchain.
The token in question may be used as a currency but may also represent a stake in a project, similar to a share. In the latter case, it may even give the holder the right to make decisions in the form of a vote.
What is an ICO (Initial Coin Offering)
The primary use of tokens has been to raise funds for various projects: this is known as an ICO (Initial Coin Offering). This is the equivalent of an IPO in the cryptocurrency world.
Thanks to Ethereum’s smart contracts, almost every cryptocurrency project which was looking for funding in 2017 carried out an ICO, setting specific conditions such as the minimum amount of funds to be raised, the maximum amount of funds which could be raised, etc. Once the process was complete, the tokens were sent to investors.
For instance, Augur, a prediction market platform, was the first project built on the Ethereum blockchain to raise funds via an ICO in 2015. The company raised $5 million in Ether by selling each of their tokens for $0.6.
The ICO craze has now largely fizzled out, with a number of projects failing to deliver on their initial promises.
8. Decentralised applications and their key use: decentralised finance (DeFi)
Interacting with a smart contract is relatively complicated, as you have to write computer code to do so. But if a web interface is created to interact with the services it offers, anyone can now access them. This is the concept of “dapps” (decentralised applications).
Decentralised finance is a rapidly emerging area of development. This field now has a name: DeFi (for decentralised finance). In short, these applications make it possible to take out a loan, lend money and trade without using a centralised intermediary, all in just a few clicks.
Some projects have already become well known within their field, such as MakerDAO for pawnbroker loans in Ethers and Aave which makes it possible to lend cryptocurrencies and earn interest in return.
Today, several tokens in the DeFi sector are fairly mature products and most tokens offer an interesting return on investment, financed by the use of the platform itself.
9. New uses on the rise: non-fungible tokens (NFTs)
As we have seen, the Ethereum blockchain makes it possible to issue several standards of tokens. One of these standards was widely adopted 2021: the ERC721 standard for so-called non-fungible tokens (NFTs). Ether is a virtual money, but NFTs aren’t, even though these two concepts are similar. Just like a cryptocurrency, NFTs can be transferred from one wallet to another. They are also stored on the blockchain. However, NFTs are said to be “non-fungible” because it’s impossible to replace one NFT with another. Each token is unique, which is not the case with cryptocurrencies like Ether or Bitcoin.
NFTs have made the headlines since 2021. What makes these tokens so different is that they are unique (or at least strictly limited and numbered). They are impossible to counterfeit and offer new possibilities, particularly when it comes to proving the authenticity of music or digital work, all thanks to the blockchain. An NFT can contain different metadata, such as a signature, a creation date and more.
10. What future for Ethereum?
The value of Ethereum is represented by the price of Ether which, like Bitcoin, is set by supply and demand. Ether is also listed on many trading platforms. Its price is influenced by the news about its ecosystem and also by speculation, as with any financial asset.
Ethereum has become a major platform in the cryptocurrency ecosystem. New projects are created almost every day on its blockchain. Although the network was the subject of some criticism in 2021, particularly regarding transaction fees, there have been many developments, improvements are ongoing and the price of Ether should reflect this at some point.
But beware: although investing in Ether in the medium or long term can be a wise choice, its significant volatility should not be ignored. Its value can rise or fall sharply in the space of just a few days. As with Bitcoin, buying or selling Ethereum is risky and you need to keep a cool head.
For example, at the beginning of 2018, Ether’s price hit a record of €1,100 before suffering a sharp decline of almost 90%. By December 2018, the price dropped to €75. Since the summer of 2020, there’s been a strong bullish trend, with the price increasing by 1,200% in a year to reach €1,500.
Ethereum therefore goes further than Bitcoin and allows for alternatives which are of growing interest to the business world, with flexible value propositions. What’s more, the entire framework of decentralised finance applications (DeFi) and non-fungible tokens (NFTs) depends on the project.
Today, there’s an alliance of Ethereum companies, including names such as Microsoft, Samsung and Intel, which is looking to test and develop the technology. As such, the Ethereum ecosystem is thriving and there are many new developments. In our view, this is a key project in the world of digital assets.
To go further
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