How did everything start?
Satoshi Nakamoto, a pseudonymous inventor of Bitcoin (BTC), might have never believed that his creation of the first virtual currency would stir up such a gigantic revolution. His initial idea was to facilitate money transfers and get rid of unnecessary delays typical of banks and financial institutions. However, over the course of time, BTC turned into something much more striking and unique.
The abstract and mysterious, yet fascinating notion of cryptocurrency drew the attention of many people. Some were just curious, not wanting to go into much detail, while others were striving to get the nuts and bolts of crypto and its underlying concept of cryptography. One of them was Vitalik Buterin, a Russian settled in Canada.
It was in 2011 when Buterin learned about Bitcoin. At the time, he was 17 and BTC two years old. Initially, he had very little knowledge and not much interest in BTC, believing it was doomed to fail, as it had no intrinsic value. However, he decided to give the currency a second chance. Buterin never fully elaborated on what attracted him to BTC. He personally believes that he just needed a new obsession to commit to after quitting World of Warcraft.
Entering the world of Bitcoin
Having researched BTC, Buterin wished to obtain some. Unfortunately, he couldn’t buy it as he had no money, nor was he able to mine it since he didn’t have sufficient computing power. Determined to get into the world of BTC, he went through Bitcoin forums, looking for someone who would pay him for writing for a blog. He eventually managed to do so and started earning 5 BTC per post.
The blog gig enabled him to network with other Bitcoin enthusiasts, one of whom was Mihai Alisie from Romania. Buterin and Alisie founded Bitcoin Magazine in 2011, where Buterin had the position of head writer. As he was eager to acquire more skills, he attended even five courses at the University of Waterloo in Ontario, Canada. He also landed another part-time job, working as a research assistant for Ian Goldberg, a cryptographer who created the Off-the-Record Messaging protocol in 2004. The protocol is still widely implemented for instant messaging encryption.
The decisive moment happened in May 2013, at the Bitcoin conference in San Jose, California. Being a representative of Bitcoin Magazine, Buterin got an opportunity to meet Bitcoin connoisseurs and veterans of the .com era who were comparing crypto and the beginning of the Internet. He also witnessed the introduction of new hardware wallets, BTC ATMs, and merchant payment platforms. The event spurred Buterin to drop out of college and search for more substantial ways to contribute to the crypto movement.
The rest is history
Several months after the conference, Buterin drafted a whitepaper for the new project he named Ethereum. He sent the paper to his friends who forwarded it to other people. He expected negative comments and harsh criticism, but they never came. The fundamental idea of Ethereum sounded so solid, Buterin had people reaching out to him regarding his idea, with Stephen Tual standing out. This crypto enthusiast later joined Buterin’s team as a CCO.
A few months later, during the Bitcoin conference in Miami, Buterin got an opportunity to present his project on stage. After the presentation, he earned not only standing ovations but also fans who believed that Ethereum could offer the second big fix. Several months following the conference, a group of founders united to fundraise via a crowdsale of Ether (ETH), the native currency of Ethereum. They managed to raise over 31,000 BTC and implemented it to establish the Ethereum Foundation, a non-profit organization headquartered in Switzerland.
In the spring of 2014, Buterin launched the introductory version of the Ethereum whitepaper, together with an initial coin offering (ICO). The campaign lasted for 42 days – from July 22 until September 2, 2014. The average ETH price amounted to about $0,31, and investors could obtain ETH in exchange for BTC. At the beginning of the campaign, it was possible to exchange 2,000 ETH for 1 BTC (its price was $650 at the time). As the end of the sale was approaching, the value of ETH was increasing to 1,337 ETH for 1 BTC.
Approximately a year after the ICO, in July 2015, Ethereum eventually went live.
So, what is Ethereum?
In essence, Ethereum is a decentralized and open-source software platform powered by blockchain technology. It functions as a platform where multiple cryptocurrencies are built, along with the execution of smart contracts (more on them later). The protocol features its own native currency Ether (ETH), for which is widely popular even outside the crypto realm.
Ethereum’s primary objective is to become a universal platform for decentralized applications (dApps), allowing users from any part of the world to create and run software immune to fraud, downtime, and censorship. Being open-source, Ethereum lets anyone build and deploy any kind of secured digital technology.
Ethereum is intended to be decentralized, secure, programmable, and scalable. Due to its characteristics and potential, it is the blockchain of choice for not only developers but also enterprises that create software technologies. Even other crypto projects and tokens such as Polygon (MATIC), USD Coin (USDC), Aave (AAVE) Uniswap (UNI), Cronos (CRO), to name a few, are built upon it.
What are smart contracts?
Back in 1994, Nick Szabo, a computer scientist and cryptographer from the USA was the first person ever to introduce the concept of smart contracts. With emergence of Ethereum, however, they gained huge popularity and wide adoption. The reason behind this is their use cases, i.e., the fact that they can be implemented in every day, mundane tasks and purposes. But what are smart contracts?
In essence, a smart contract is a fundamental and powerful tool behind dApps. Essentially, a smart contract is a program stored on a blockchain and self-executes when specific conditions or prerequisites are met. A smart contract is commonly implemented to automate the execution of an agreement between participants without the need for any middlemen.
Smart contracts rely on “if/when…then…” statements inserted into code on a blockchain. When the predetermined conditions are satisfied, a network of computers completes an action. It can be any activity involving issuing a ticket, sending a notification, releasing funds, or registering a vehicle. When the transaction is finished, the blockchain receives an update. It’s worth noting that a transaction can’t be modified, and only participants are able to see the outcome.
To create a smart contract, the participants have to establish the terms and the “if/when…then…” rules governing the transactions. They should also research potential exceptions and determine a framework for resolving disputes. When all the terms are set, the smart contract is ready to be programmed by a software developer.
How does Ethereum work?
Ethereum used to rely on the Proof of Work (PoW) consensus mechanism but switched to the Proof of Stake (PoS) algorithm in mid-September 2022. The switch was made due to several reasons, some of them being cost-effectiveness and protection of the environment. Namely, PoW is notorious for being not-so-environmentally friendly as it consumes a lot of electric energy.
The primary difference between the two protocols is in the way new transactions are validated and blockchains secured. For verification, the PoW algorithm involves solving complex cryptographic operations referred to as mining. Due to the complexity of operations and the number of transactions, it may take time to verify all transactions, resulting in delays and higher fees.
In the Proof of Stake consensus mechanism, participants called validators build new blocks and unite to verify data contained in the block. Typically, blocks may contain data about the blockchain state, transactions, a list of attestations (a validator’s signature and vote on the validity of a block), etc. To become a validator, participants “stake” or invest a specific amount of crypto. In the case of Ethereum, that amount is 32 ETH.
How do Bitcoin and Ethereum differ?
The two protocols are essentially different, which precisely was Buterin’s vantage point when coming up with the idea of Ethereum. In his view, Bitcoin had “too limited functionality.” Explaining the fundamental discrepancy between Bitcoin and Ethereum in the interview for Business Insider, Buterin compared BTC with a pocket calculator and the potential of a new blockchain with a smartphone.
In his words, the pocket calculator excels in doing one thing, but people want to do other things as well. A smartphone enables people to use a calculator app along with a bunch of other applications. Hence, the same idea has the capacity to boost the power of a system, make its purpose more general, and apply it to blockchains.
As is already known, Bitcoin was built as a peer-to-peer payment system, with the primary goal to make money transfers more effective. Ethereum, on the other hand, isn’t constrained solely to transactions. Since the essence of Ethereum lies in smart contracts, it’s capable of building and powering decentralized applications (dApps) and non-fungible tokens (NFTs).
Another notable difference is that Bitcoin is capped at 21 million BTC. The circulating supply of BTC as of January 12, 2023, amounts to more than 19.2 million BTC, implying that 92% of Bitcoin has been mined so far. Ethereum, however, has an unlimited supply, with a current circulation of over 122.3 million ETH.
ETH price history
Ether (ETH) has certainly had an eventful ride over the course of time. In August 2015, ETH’s initial price revolved around $2. The first notable jump to somewhat less than $400 was recorded in June 2017. A few months later, in January 2018. ETH plummets to an incredible $1,300, only to end the year at $ roughly $85. In the 2019-2020 period, it revolved around $100-$200. In mid-January 2021, ETH hit about $1,300, keeping the growing trend. In May 2021, it nearly reached $4,000 but declined shortly afterward. The summer and autumn of 2022 saw big bumps and oscillations.
On November 16, ETH reached its all-time high at $4,891.70. By the end of 2021 and the beginning of 2022, ETH started to decline again, dropping to about $2,500 on January 29, 2022. The winter and spring of 2022 were again bumpy. The first severe plunge took place on June 17, 2022, marking the beginning of crypto winter. At the time, ETH plummeted to about $1,000. Two months later, in August, it managed to rise to around $2,000, making holders believe the bear market would end. Another remarkable jump was noted in November when ETH hit around $1,500. Unfortunately, it kept falling and started the new year at $1,200. All of a sudden, after January 10, it began to show growing trends, getting closer to $1,400.
Source: CoinMarketCap
Pros and cons of Ethereum
Since nothing is ever perfect, neither is Ethereum – it has its own advantages and disadvantages. Whether the upsides outweigh the downsides, and consequently, whether ETH is worth investing in is up to you to decide.
Pros
Ethereum is a household name in the crypto realm. Within only a year after it went live, Ethereum manage to reach the top-five cryptocurrencies according to the total value of its circulating supply. Soon afterward, in 2017, it became the second-largest cryptocurrency, next to Bitcoin, keeping its flattering status even today.
Ethereum is not only a cryptocurrency. Contrary to BTC, which is virtually digital money, Ethereum has had far-reaching ambitions. Its objective was not to focus on peer-to-peer payment transactions but to create an entirely new ecosystem beneficial not only to crypto professionals and enthusiasts but to the general public as well.
You can earn extra ETH by staking. Following the Merge, i.e., Ethereum’s switch to the Proof of Stake protocol, ETH holders have an opportunity to earn extra passive rewards. According to Ethereum, by staking ETH, it’s possible to reap up to 4% APY.
Cons
Transaction fees can be a nuisance. Ethereum has been notorious for high transaction fees. As the network is based on the supply and demand principle, fees tend to be higher when the network is busy. Another issue is scalability, i.e., the capacity to process and manage a greater amount of data. Before the Merge, Ethereum was able to process 10-15 transactions per second, which further resulted in exorbitant fees. Time will show whether the Merge will manage to fix these two issues.
ETH is extremely volatile. Similarly to BTC, ETH tends to be pretty volatile, i.e., its value isn’t stable. While this may be a huge earning opportunity, it still poses a significant risk. One day, you can see ETH surging, then suddenly plummeting by even 50%.
Holding crypto may be risky. Crypto platforms aren’t resistant to crashing or being hacked, which may consequently leave users deprived of their funds. What’s more, there is always the danger that the crypto company may file for bankruptcy, as was the case with FTX recently. Regarding the security of your assets, opting for a reliable wallet is always a good idea.
