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Ethereum is the second largest cryptocurrency by volume and the most widely used blockchain in the world, 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 Noble, chief technical analyst at Token Metrics, a cryptocurrency analysis platform. But Ethereum is also like a highway 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 more valuable over time.
What is Ethereum?
Ethereum was invented by programmer Vitalik Buterin in 2015, in the wake 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, editor at Coindesk, a cryptocurrency media.
So Buterin created Ethereum, a blockchain network with an associated cryptocurrency called ether (ETH), with the potential to do much more.
While you can buy and trade Ethereum as an investment like Bitcoin, it is also a software platform that developers can use to create new applications that are often crypto-adjacent or otherwise designed to facilitate buying, selling. and the use of cryptocurrency. Like those on your phone, these apps can range from loaner apps to payment platforms.
Think of Ethereum as a smartphone, says Leech. Developers can build apps on smartphones, in the same way they can build apps on Ethereum. While mobile phone apps have more universal applicability these days, Ethereum apps are more geared towards crypto users. With the sample loan app, a developer can build the app, which other crypto users can in turn use to lend and borrow.
Everything is fueled by this idea of smart contracts, he says. A smart contract is a program that runs autonomously on the Ethereum blockchain, explains Leech. Smart contracts perform all the functions that a third party would normally take care of.
For example, people can make direct transactions on the network. Peer-to-peer lending is gaining popularity on Ethereum right now, Leech says. A loan application developed on the Ethereum network allows individuals to lend each other money without involving a bank.
The smart contracts that power these apps are basically 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 (loan of money) when the collateral is placed in the correct wallet or account. The potential benefits of using a smart contract instead of a traditional lender include speed of execution, no 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 build decentralized applications that can serve different purposes. These apps include financial tools like cryptocurrency exchanges, decentralized lending platforms, and data services like Matcha, which search for the best prices in multiple cryptocurrency exchanges. But there are also dapp categories for things like buying and selling digital artwork, games, and developer tech.
Ethereum’s open source concept 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 that you may have heard of, like Tether (USDT), Uniswap (UNI), or USD Coin (USDC).
But cryptocurrencies aren’t the only digital assets that can be created on Ethereum. NFTs, or non-fungible tokens, are 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 vs. Ether
Developers have to pay fees to the Ethereum network to create new tokens or decentralized applications on the network. They make these payments in Ether, Ethereum’s native currency. This tax is also known as gas, according to Noble.
Gas is the price of using the system, like paying for your metro ticket to take the train. Ether is the money you would use to purchase your metrocard. Think of it like the tolls you have to pay to do things and trade on Ethereum, Noble says. Different stocks are worth different amounts of Ether, and the fees increase as more people join the network.
These gas prices, and all the uses developers pay to explore, help explain the rise in the value of ethers over the years. As more developers look to build things on Ethereum, they have to buy more Ether to pay for gasoline charges, which increases the price of Ether. Investors in the ether are betting on the continued use of the most used blockchain and the potential of its applications for the future.
Gas charges are also one of the biggest obstacles to Ethereum’s growth potential, according to Noble. But an ongoing update to the network, Ethereum 2.0, seeks to help fix the problem. The update will have no impact on investors or dapp users, only developers, according to the Ethereum site.
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 (ether) token in the hope that it will increase in value over time.
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