With the recent increase of influence by cryptocurrencies in global economies, financial experts agree that it’s more important than ever for everyone to learn as much as possible about the different options for transaction and investment purposes. Ethereum is one of the most prominent cryptocurrency platforms available today.
Before you start to use it to handle payments or invest in its Ether (ETH) cryptocurrency, review this breakdown of common Ethereum questions to help you make more informed financial decisions in the future. Our guide covers the basics about Ethereum’s beginnings, its handling of digital payments and other types of transactions and the reasons why it’s considered by many experts to be uniquely poised to change the world:
What is Ethereum?
Ether is Bitcoin’s biggest competitor. As a result, people often make comparisons between the two currencies. Think of Bitcoin as the predecessor to all current cryptocurrencies. When it was released in January 2009, digital currencies were new to the world. Bitcoin offered individuals and eventually businesses a new means of handling transactions without issuance or control by any banks or governments. Instead, digital payments between individuals could take place on a system known as a blockchain that records and validates transactions via a peer-to-peer network of computers.
In 2013, a programmer named Vitalik Buterin had a different idea and brought Ethereum and Ether to the cryptocurrency market On June 30, 2015. Yet, this alternative network and cryptocurrency differed greatly from Bitcoin and other digital options. Although the Ethereum platform has a decentralized payment network, it uses that network for more than peer-to-peer payment transactions. It offers users the means to perform smart contractual transactions involving computer code. Ethereum makes it possible for people to create and run applications on a global network without storing them via third-party internet companies. People running programs through Ethereum pay to do so using Ether. Ether is more than transactional currency. It’s also used to facilitate and track the transactions.
In simple terms, the Ethereum platform is a public network marketplace that allows people to make payments, share information and run computer code and applications in a decentralized way. The network isn’t the cryptocurrency. Ether or ETH is the name of the digital coin or token. Ether is used primarily to pay for the transaction fees and computer services made available through Ethereum. Anyone can buy, trade, save or invest in Ether in general as with any other digital currency, including Bitcoin. They can also enjoy creating decentralized applications. You only need an Ethereum account and wallet to perform transactions.
How Does an Account Differ from a Wallet?
Every Ethereum user receives an account that’s represented by a public or private key file that they can download to any computer. The file acts as proof of their identity and connection to the account. With an Ethereum account, they can maintain a balance and send transactions.
A wallet is an application tool for managing your Ether. Like a banking application, the wallet allows you to use the network, perform transactions and monitor and manage your balance. It can come with deposit and withdrawal limits and multi-signature signing features. Depending on the wallet product, you might not need an account before downloading the wallet since wallets usually have the ability to generate accounts.
Wallet options for interacting with an Ethereum account include desktop applications through a computer operating system, web wallets used through a browser, mobile device applications and secure, portable physical hardware wallets. Several Ethereum applications also exist to make use of the blockchain easier, including the command line interface known as Geth, the Ethminer standalone miner and the Mist browser user interface equivalent.
How Secure is Ethereum?
Ethereum is a public network. It doesn’t currently encrypt data or contracts. It only encodes information. That said, anyone can encrypt at a local level before they perform transactions on the network. You can also prevent phishing scams when using a browser, for example, by simply bookmarking the site that provides you with your wallet. Ethereum wallets utilize passwords known as seed phrases as a security feature. With this phrase, you can recover your wallet and access your Ethereum account and Ether.
It’s also not possible yet for anyone to store secrets or personal passwords. Anyone can access and see an Ethereum contract. That said, everyone must pay to use Ethereum with Ether. These transactions are tracked and validated in ways that enhance the network’s ability to prevent attacks and other malicious intentions. When a person performs a transaction with Ether, they must pay a small fee. The fee is a financial incentive for Ethereum record-keepers known as miners who validate the transaction and create new blocks on the blockchain. This is known as a proof-of-work consensus model.
Developers are making changes this year to improve these areas. They’re trying to find ways for people to store secrets and passwords. With the changes, the process to validate information is expected to become more secure as well because they’re switching to a proof-of-stake consensus model in which anyone who uses Ethereum must put up a stake of a specific amount from their Ether to become a validator, which is the equivalent of a miner. Instead of a user mining to process transactions and create new blocks, they’re expected to validate proposed blocks by other users and only create new blocks when randomly selected by an algorithm. If a validator fails to complete validation or performs in a harmful way, such as by attempting to validate a block of transactions based on malicious intent, they lose their stake.
For anyone to attack the Ethereum blockchain with the current proof-of-work model in place, one or more users must own enough Ether to control more than 50 percent of the computational power processing transactions on the network. The cost is so high that this is merely a hypothetical scenario. The proof-of-stake model adds to this security by introducing penalities and randomization to reduce the chance of what is commonly known as a 51 percent attack and other malicious actions on the network.
Why Should I Invest in Ethereum?
Ether is second only to Bitcoin in regards to current market value, which means that it’s unlikely to become unstable as compared to newer, less well-known cryptocurrencies. Given that Ethereum and Ether have value beyond simple peer-to-peer payment transactions, Ether is actually more likely than Bitcoin to weather market changes and upheavals that can adversely impact both traditional and digital currencies.
Ether and Ethereum offer more real-world flexibility and benefits than Bitcoin as well. For example, people can use the Ethereum platform to perform non-currency computer transactions without fewer chances of human errors. One of the most hopeful potential future uses of Ethereum is to create a decentralized anonymous voting application that prevents widescale fraud. Although you can’t currently pull data from external sources via Ethereum, you can push data for a fee to contracts via transactions, which means that Ethereum has huge potential of becoming one of the most popular secure decentralized tools for a wide range of computer-based transactions beyond digital financial payments.
Developers are also working on using the proof-of-stake consensus model to improve scalability and switch the way transactions are handled so that the entire process is more sustainable and uses less computing power and energy. These changes are expected to even make it possible for the network to process more than 10,000 transactions per second in a secure manner.
Given the current stability, features and amazing future potential, Ethereum represents a smart investment.
- Ethereum for Beginners
- How Does Ethereum Work?
- Where Do I Store my Ethereum?
- Keeping Your Ethereum Wallet Safe
- Buying and Storing Ethereum: An Introduction