What is Ethereum?
Welcome to the beginners guide to Ethereum, one of the world’s most popular cryptocurrencies. Here we’ll cover how to buy Ethereum on Backpack, how it differs from Bitcoin, how it utilizes smart contracts, and much more.
Ethereum (ETH) is the second-biggest cryptocurrency by market cap after Bitcoin. But unlike Bitcoin, which was primarily created as digital money, Ethereum was built as a global, decentralized computing platform. In simple terms, Ethereum is a network of computers across the world that enables anyone, anywhere to build and deploy their own software.
Ethereum was launched in 2015 by a Russian-Canadian programmer, Vitalik Buterin and built around the premise of decentralization, which means its code runs independent of any single controlling authority. This unique platform leverages the security and openness of blockchain technology to support a diverse range of decentralized applications (called “Dapps”), from databases and social networks, to financial tools and beyond.
Ethereum’s Dapps are built using “smart contracts”. Smart contracts are similar in theory to traditional paper contracts - they establish an arrangement between parties. The difference here is that smart contracts are programmed to automatically execute when a certain set of criteria are achieved.
This means that they are trustless - not requiring any intermediary.
This combination of smart contracts and decentralized blockchain architecture allows Ethereum developers to build Dapps hypothetically free of censorship, third-party interference, or downtime and is a major part of why Ethereum has reached such a well-known and high market capitalization status.
What’s the Difference Between Ethereum, Ether, and ETH?
Understanding this terminology is crucial: Ethereum refers to the network. “Ether” (ETH) is the native cryptocurrency token that powers and secures the network. ETH is used to pay transaction fees, or "gas" fees, to execute smart contracts on the Ethereum network.
Commonly, ETH is used interchangeably with Ethereum in everyday conversations, but technically speaking, ETH refers to the token, not the network.
Is Ethereum Secure?
Ethereum's security is robust, underpinned by the blockchain technology that supports it.
While Ethereum itself is secure, applications built on it vary in security depending on how they are developed. It's essential to research any Dapp before use, as their security is only as good as the code they are built on.
How Does Ethereum Work?
To understand Ethereum it can be helpful to start with Bitcoin. Bitcoin is essentially a network of computers that work together to secure a running ledger - a list of transactions going back from now until the beginning of the chain. Ethereum, though, can be likened to a global computer which supports a wide range of applications, making it more versatile than Bitcoin as a foundation for building and deploying applications.
A user can interact with the network using smart contracts (such as minting an NFT). These interactions are paid for using ETH, and these transaction fees are referred to as "gas” fees. These gas fees in turn help keep the network running, investing back into hardware and electricity.
Gas fees can vary depending on network usage. If there are many people interacting with the network at any given time, gas fees can increase, and vice versa.
What is Proof of Work?
With a decentralized, global network how do you make sure your crypto isn’t being spent multiple times? Enter consensus mechanisms, which allow computer networks to agree on a certain outcome being true or false.
Proof of Work (PoW) is a consensus mechanism utilized by the Bitcoin network that involves solving complex mathematical puzzles to validate transactions on the blockchain.
Computers race to solve the equations and the winning computer is rewarded with a certain amount of Bitcoin, thus incentivizing security. While incredibly secure, this method has been criticized for its high energy consumption and inefficiencies, especially as network traffic increases.
What is Ethereum 2.0?
In September 2022, the Ethereum network transitioned from Proof of Work (Bitcoin’s consensus mechanism) to Proof of Stake. Ethereum 2.0 represents a significant upgrade aimed at improving the network's security, speed, and efficiency, addressing issues like energy consumption and transaction speed.
There are a variety of upcoming upgrades coming to the Ethereum blockchain so stay tuned for more.
What is Staking?
Proof of Stake (PoS), is an alternative consensus mechanism to the mining seen in Proof of Work. In PoS, network participants stake (or essentially lock-up) their ETH to a collective pool to participate in transaction validation. These participants are called validators. (This is unlike PoW where miners use computational power to solve puzzles).
Validators are then selected by the network to verify and update the blockchain based on the amount and duration of their stake. Successfully validated blocks result in rewards distributed to validators proportional to their staked ETH. This system encourages long-term investment in the network's health and efficiency.
To summarize staking, validators lock up a portion of their tokens to support network operations, which helps secure the network and in return, they earn rewards.
What are Smart Contracts?
Smart contracts, one of the most important building blocks of Ethereum, were first proposed by Nick Szabo, a computer scientist and lawyer, in the 1990s. He likened a smart contract to a vending machine: if you insert money and select an item, the machine automatically completes the transaction by dispensing the item and returning the correct change, or by returning your money if the item is sold out.
This concept demonstrates how smart contracts facilitate exchanges automatically, without needing human intermediaries, streamlining processes across various applications.
How Do You Buy Ethereum?
Buying Ethereum is straightforward. Using a trusted and easy to use exchange such as Backpack is the easiest way to get started. Once you’ve purchased your ETH, there are some key elements you’ll want to know about how to hold it.
- Wallet: A digital wallet is a great place to store and manage your ETH. Backpack Wallet is secure, easy to use and allows you to grow along with your crypto knowledge with seamless interaction through DeFi protocols.
- Public Key: Consider this akin to an email address for cryptocurrencies. Your public key is what others will use to send you ETH and other tokens. It's safe to share publicly.
- Private Key: Similar to a password, this should be kept confidential. Losing your private key means losing access to your ETH permanently. A private key is a long string of letters and numbers which is often turned into a “seed phrase” (a series of 12-24 words)for human readability.
Always ensure your private keys are secure to protect your assets.
How Does Ethereum Have Value?
On a superficial level, the value of Ethereum is influenced by its demand in the market, similar to stocks or traditional currencies. While traditional currencies and stocks are generally more stable, Ethereum's price is more volatile due to its nature as an emerging technology that is still being priced out by the market.
On a more philosophical level, Ethereum’s value comes from its versatility as a platform that supports stablecoins and decentralized finance (DeFi) applications, which attract increasing numbers of users and generate higher transaction fees.
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