Ethereum 101 Introduction
To get an edge in the cryptocurrency world, we’ve found that it helps to understand how things function to be able to search for the proper market trends in recent news. As the great Albert Einstein once said “Any fool can know. The point is to understand.”
Ethereum and Bitcoin are currently the most popular implementations of blockchain technology. However, the way these two implementations were made is significantly different. Bitcoins blockchain is all about verifying the transactions of people sending and receiving bitcoin. Ethereum’s blockchain, on the other hand, is very versatile and does way more than simply verify crypto transactions.
On this page, we will share everything you need to know about Ethereum, its use cases, and its future compared to other blockchain implementations. Let’s get started!
What Is Ethereum?
Ethereum is an open-source, decentralized blockchain platform that uses smart contract functionality to host a series of applications. Ether (ETH) is the default cryptocurrency used on the Ethereum blockchain. It is the second most popular cryptocurrency after bitcoin and is currently used by millions of people worldwide.
Ethereum was founded in 2015 by Vitalik Buterin, a crypto-enthusiast who picked a lot of inspiration from bitcoin. Ethereum’s implementation was, however, aimed at correcting some of the shortcomings of bitcoin’s blockchain. Some of these include the slow transaction speeds and the limited versatility of bitcoin’s blockchain.
The Mighty Ethereum Blockchain!
The power of Ethereum largely lies in the versatility of its blockchain. Instead of verifying crypto transactions, this blockchain also enables developers to build decentralized applications using Solidity – Ethereum’s programming language. Decentralized applications (dApps) take advantage of smart contracts to run autonomously without involving any third parties.
Since it is an open-source platform, any developer around the world can build their decentralized applications and deploy them on the Ethereum blockchain for people to use. Some of the applications on this blockchain include gaming apps, crypto-exchanging platforms, and many more.
Like other blockchain implementations, every block of data added on this platform is permanently chained with the parent block, making it immutable. The verification of each block added to Ethereum’s blockchain, which is also known as mining, is done using the proof-of work concept.
What is "Proof of Work"?
Let’s try and get a good grasp on what proof of work means to help better understand how Ethereum is so versatile. Proof of work refers to a decentralized consensus mechanism that requires different miners to solve a complex mathematical puzzle before authenticating a particular transaction to be added to the blockchain. So, the miners or a group of miners with the most computing resources are the ones that usually solve this puzzle.
So, every block of data that is added to Ethereum’s blockchain must go through the proof of work process to avoid double-spending. Unlike centralized payment processing platforms controlled by a central body, cryptocurrencies use proof of work to authenticate transactions, making it incredibly hard for any fake transactions to go through.
However, the challenge with the proof-of work methodology is the significant computing resources required by miners to solve a complex mathematical puzzle. More computing resources mean more energy consumption, which is not good for our environment. To solve this problem, developers on the Ethereum blockchain plan to adopt an alternative method for verifying transactions called Proof of Stake.
With proof of stake, priority is given to miners who hold more coins on the platform instead of those with more computing resources. So, miners with more coins have more mining power on the platform. This method reduces the amount of energy used by the platform and the time required to verify every transaction before it is added to the blockchain.
Different use cases of Ethereum
As we have previously stated, the power of Ethereum lies in its versatility, which makes it possible to be used in many ways besides processing crypto-transactions. Before getting into the use cases of Ethereum, I want to first explain the term smart contracts because it will appear a couple of times in almost every use case.
What is a “Smart Contract”?
A smart contract is a computer program or transaction protocol that self-executes based on the terms agreed between the parties involved in the contract. Smart contracts are what make it possible to have a trustless transaction on Ethereum’s blockchain. With a smart contract, two people that have never met can have a successful transaction without the need for any central authority.
Now that we know what smart contracts are, let me share with you some of the popular use cases of Ethereum.
Non-Fungible Token
Non-Fungible Tokens or NFTs refer to a unique and non-interchangeable unit of data stored on the blockchain. The idea behind NFTs is to prove ownership of digital assets such as videos, photos, tweets, etc. Just like we have owners of physical assets in the real world, we can have owners of digital assets using NFTs.
For example, if I am the only person who recorded a video of something funny happening on the streets of New York, I can decide to attach an NFT of this video to prove ownership. I will also have the option of selling it to anyone who needs it at a price determined by the market forces of demand and supply.
NFTs have made it possible for digital creators to monetize their Art by selling their work as NFTs on different marketplaces, including OpenSea, NBA Top shorts marketplace, SuperRare, and many more. The beauty of NFTs is that you can attach terms to the smart contract that allow you to earn a specific percentage of the selling price every time your digital assets change ownership.
We have already seen Beeple – a popular digital artist, sell his collection of 5000 digital art pieces for $69 million. Many may not believe that a Jpeg file can be sold for millions of dollars, but this has been made possible with NFTs. People value authenticity: that is why someone is willing to pay hundreds of dollars for a Nike sneaker but won’t pay as much if a less popular brand makes the same sneaker, even if it has the same quality as Nike’s.
Decentralized Finance (DeFi)
One of the most promising use cases of Ethereum’s blockchain is the possibility of executing various financial activities in a trustless manner. With smart contracts, it is now possible to borrow and lend money on the Ethereum blockchain through decentralized apps such as Aave, Maker Dao, Compound, and many more.
With these apps, the borrower and the lender agree on the terms of payment which are turned into a smart contract. All the possibilities are to be decided upon before processing the transaction because once the smart contract is written, it cannot be changed. Borrowers use their digital assets as collateral for security. So, in case they default, these assets will automatically be transferred to the lender.
Another DeFi use case is decentralized insurance. With decentralized insurance, people can provide cover for their digital assets on the Ethereum blockchain. The terms and conditions of the insurance policy, including the monthly premium to be paid, the conditions for compensation, and the duration of the policy, are all laid out in a smart contract.
With decentralized insurance, there is no need to have a central authority to oversee the processes. All the processes are self-executed using the terms agreed upon in the smart contract.
Prediction Markets
A prediction market on the blockchain refers to a platform that allows users to monetize their ability to forecast the outcome of an event, including sports, election outcomes, and many more. Prediction markets have been around for many years. Smart contracts have made it possible to have autonomous prediction market platforms that operate without the input of any centralized authority.
For instance, if you predict the outcome of a football match, the conditions made in the smart contract are executed as soon as the match ends. Some of the popular prediction market platforms on the Ethereum blockchain include Augur, PlotX, Polymarket, and many more.
Escrow Replacement
Over the years, the escrow system has made it possible for two parties to agree on a payment to be made when specific conditions have been met. In the centralized system, a third-party company holds the payment made until the recipients meet certain conditions. The main disadvantage of these centralized systems is the high charges involved.
With Ethereum’s blockchain, this problem is solved with smart contracts. So, no third party is involved in between, making it way cheaper for two parties to make a transaction in a trustless manner. With smart contracts, someone can offer a service and receive payment when the person who needs the services approves their work.
One of the most popular decentralized escrow platforms is SmartLink. This platform enables different parties to make online payments to anyone worldwide in exchange for a product or service. With SmartLink, both parties involved in the transaction agree on terms that are converted into a smart contract. Transactions are completed only when the terms in the contract have been fulfilled.
Digital Identity Management
While signing up on any platform on the internet, you are required to share information about yourself, including your date of birth, email address, phone number, and many more. Most of these platforms claim to use this information to enhance the experience of users. However, we have seen several websites and web apps, including popular ones like Facebook, being involved in data breach scandals.
By using Ethereum’s blockchain, this problem is now solved through decentralized digital identification systems. With such systems, you can sign up on any platform without sharing your personal information using a Digital Identifier key that proves you are the rightful owner of the encrypted profile.
Crypto Exchange Platforms
Most of the exchange platforms, including Coinbase and Binance, are centralized. However, we also have decentralized crypto exchange platforms that use Ethereum’s blockchain and do not need a centralized authority to control them. With decentralized exchange platforms, transactions are peer-to-peer, which significantly lowers the fees involved.
Decentralized exchanges also use smart contracts to execute the transfer of crypto between one user to another. Some of the most popular decentralized exchange platforms include CoinStomper, dYdX, UniSwap, PancakeSwap, SushiSwap, and many more.
The Future of Ethereum
Over the years, the price of Ethereum as a cryptocurrency and the total value of all the assets on the Ethereum blockchain has been growing. With the integration of new use cases such as NFTs, prediction markets, and decentralized finance, we expect Ethereum to continue growing even further.
Some experts predict the price of each Ethereum coin to be over $100,000 by 2030. This prediction is mainly based on the possible use cases of this blockchain, which will further increase the number of people using the decentralized apps running on Ethereum’s blockchain. With new technological inventions like Metaverse, more use cases for the Ethereum blockchain will continue to emerge.
With the Metaverse, ownership of digital goods will likely become a mainstream thing, which presents an opportunity for Ethereum Blockchain-based inventions to thrive. So, digital artists and creators will have a bigger market for their creations due to the rise in the demand to own digital assets on the Metaverse.
In Conclusion to Our Ethereum 101 Guide
The Ethereum blockchain and cryptocurrency have been growing tremendously in the last five years. The many benefits and versatility of Ethereum’s blockchain is the primary driver behind this growth. Of course, cryptocurrencies and blockchain technology are still in their early stages, and no one really knows what the future holds.
However, the many benefits and opportunities they present are a strong reason for optimism about these technologies. If you intend to invest in any asset on Ethereum’s blockchain, you first of all need to be aware of the risks involved. However, the potential benefits of this investment are what make it worth the gamble.