What Is Ethereum? How Does It Work? (2023)

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Ethereum (ETH) is the second most popular cryptocurrency after Bitcoin. Founded by Vitalik Buterin and Gavin Wood in 2015, today Ethereum’s market capitalization represents more than 17% of the $1.2 trillion global crypto market.

There are some distinct differences between Ethereum and the original crypto. Unlike Bitcoin (BTC), Ethereum is intended to be much more than just a medium of exchange or a store of value. Instead, Ethereum is a decentralized computing network built on blockchain technology.

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(Video) What is Ethereum? Everything you need to know!

What Is Ethereum?

In the crypto’s own words, Ethereum is “a global, decentralized platform for money and new kinds of applications,” with thousands of games and financial apps running on top of the Ethereum blockchain. The crypto is so popular that even other crypto coins run on its network.

Central to Ethereum is its blockchain network. A blockchain is a decentralized, distributed public ledger where transactions are verified and recorded.

It’s distributed in the sense that everyone participating in the Ethereum network holds an identical copy of this ledger, letting them see all past transactions. It’s decentralized in that the network isn’t operated or managed by any centralized entity—instead, it’s managed by all of the distributed ledger holders.

Blockchain transactions use cryptography to keep the network secure and verify transactions.

Ether, the native token on Ethereum, can be used to buy and sell goods and services just like Bitcoin. But what’s unique about Ethereum is that users can build applications that “run” on the blockchain like software “runs” on a computer. These applications can store and transfer personal data or handle complex financial transactions.

Ether and Ethereum: What’s the Difference?

You can use Ether as a digital currency in financial transactions, as an investment or as a store of value. Ethereum is the blockchain network where Ether is held and exchanged. As mentioned above, this network offers a variety of other functions outside of ETH.

“These can be simple movements of funds, but they may also be complex transactions that do anything from exchanging assets to taking out loans to acquiring a piece of digital art,” says Boaz Avital, head of product at Anchorage. The transactions are processed and stored on the Ethereum network.

The Ethereum network can also be used to store data and run decentralized applications. Rather than hosting software on a server owned and operated by Google (GOOGL) or Amazon (AMZN), where the one company controls the data, people can host applications on the Ethereum blockchain. This gives users control over their data and they have open use of the app as there’s no central authority managing everything.

One of the most intriguing use cases involving Ethereum is self-executing contracts, or so-called smart contracts. Like any other contract, two parties agree to deliver goods or services in the future. Unlike conventional contracts, lawyers aren’t necessary: The parties code the agreement on the Ethereum blockchain. Once the contract conditions are met, it self-executes and delivers Ether to the appropriate party.

Ethereum vs. Bitcoin

Bitcoin’s primary use is as a virtual currency and store of value. Ether also works as a virtual currency and store of value. But the decentralized Ethereum network also makes it possible to create and run applications, smart contracts and other transactions on the network. Bitcoin doesn’t offer these functions.

Ethereum also processes transactions more quickly.

“New blocks are validated on the Bitcoin network once every 10 minutes while new blocks are validated on the Ethereum network once every 12 seconds,” says Gary DeWaal, chair of Katten’s financial markets and regulation group. And future developments could speed up Ethereum transactions, even more, he notes.

Last, there is no limit on the number of potential Ether tokens, while Bitcoin will release no more than 21 million coins. Currently, Bitcoin has 19 million coins in circulation.

Ethereum Benefits

  • Large, existing network. The benefits of Ethereum are a tried-and-true network that has been tested through years of operation and billions of value trading hands. It has a large and committed global community and the largest ecosystem in blockchain and cryptocurrency.
  • Wide range of functions. Besides being used as a digital currency, Ethereum can also process other financial transactions, execute smart contracts and store data for third-party applications.
  • Constant innovation. A large community of Ethereum developers is constantly looking for new ways to improve the network and develop new applications. “Because of Ethereum’s popularity, it tends to be the preferred blockchain network for new and exciting (and sometimes risky) decentralized applications,” Avital says.
  • Avoids intermediaries. Ethereum’s decentralized network promises to let users leave behind third-party intermediaries, like lawyers who write and interpret contracts, banks that are intermediaries in financial transactions or third-party web hosting services.

Ethereum Disadvantages

  • Rising transaction costs. Ethereum’s growing popularity has led to higher transaction costs. Ethereum transaction fees, also known as “gas,” can fluctuate and be quite costly. That’s great if you’re earning money as a miner but less so if you’re trying to use the network. Unlike Bitcoin, where the network rewards transaction verifiers, Ethereum requires those participating in the transaction to cover the fee.
  • Potential for crypto inflation. While Ethereum has an annual limit of releasing 18 million Ether per year, there’s no lifetime limit on the potential number of coins. This could mean that as an investment, Ethereum might function more like dollars and may not appreciate as much as Bitcoin, which has a strict lifetime limit on the number of coins.
  • Steep learning curve for developers. Ethereum can be difficult for developers to pick up as they migrate from centralized processing to decentralized networks.

Ethereum 2.0 Is Coming

Coming soon is Ethereum 2.0, which promises to upgrade Ethereum’s Mainnet to increase scalability. The long-awaited update to the Ethereum blockchain could finally happen this summer, likely in August.

The most significant change with Ethereum 2.0 is that the crypto will switch from a proof-of-work consensus mechanism to proof of stake. This will phase out the need for miners, who run validations on expensive crypto mining equipment and consume a lot of energy.

Staking, which involves locking away a certain amount of cryptocurrency to participate in the transaction verification process, will replace mining to verify Ethereum transactions once the merge is complete.

Ethereum 2.0 is expected to reduce the crypto’s carbon footprint by up to 99.95%.

How to Buy Ethereum

It’s a common misconception among people new to the Ethereum network. You don’t buy Ethereum itself—that’s the network. Instead, you buy Ether and then use it on the Ethereum network. Given Ethereum’s popularity, it’s very easy to buy Ether:

  • Pick a cryptocurrency exchange. Crypto exchanges and trading platforms are used to buy and sell different cryptocurrencies. Coinbase, Binance.US and Kraken are a few of the larger exchanges. If you are just interested in purchasing the most common coins like Ether and Bitcoin, you could also use an online brokerage like Robinhood or SoFi. Be prepared to pay some amount of trading or processing fees almost universally.
  • Deposit fiat money. You can deposit cash, like dollars, in your trading platform or link your bank account or debit card to fund purchases of Ether.
  • Buy Ether. Once you’ve funded your account, you can use the money to purchase Ether at the current Ethereum price along with other assets. Once the coins are in your account, you could hold them, sell them or trade them for other cryptocurrencies in the future. Keep in mind you may incur taxes whenever you sell or trade cryptocurrencies.
  • Use a wallet. While you could store the Ether in your trading platform’s default digital wallet, this can be a security risk. If someone hacks the exchange, they could easily steal your coins. Another option is to transfer coins you aren’t planning on selling or trading soon into another digital wallet or a cold wallet that’s not connected to the internet for safety.

Should You Buy Ether?

You might consider investing in the Ethereum network for a few reasons, according to DeWaal. “First, it has value and uses as a virtual currency. Second, the Ethereum blockchain could become more attractive when it migrates to the new protocol. And third, as more people utilize Ethereum distributed apps, demand for ETH may increase,” he says.

Besides buying Ether directly, you could also try investing in companies building applications using the Ethereum network. If you’d like help managing your investment, you could also buy into a professional investment fund like the Bitwise Ethereum Fund or Grayscale Ethereum Trust.

Before making any significant investment in Ether or other cryptocurrencies, consider speaking with a financial advisor first about the potential risks. Given the high risk and volatility in this market, make sure it’s money you can afford to lose, even if you believe in Ethereum’s potential.

FAQs

What is Ethereum How does it work? ›

Ethereum is a decentralized blockchain platform that establishes a peer-to-peer network that securely executes and verifies application code, called smart contracts. Smart contracts allow participants to transact with each other without a trusted central authority.

What is ETH in simple terms? ›

Ether (ETH) is Ethereum's cryptocurrency. It is the fuel that runs the network. It is used to pay for the computational resources and the transaction fees for any transaction executed on the Ethereum network. Like Bitcoins, ether is a peer-to-peer currency.

What is Ethereum and why is it important? ›

Ethereum is open source and used primarily to support the second-largest cryptocurrency in the world known as Ether. Ethereum enables the smart contracts and applications built on its blockchain to run smoothly without fraud, downtime, control, or any third-party interference.

How do you explain Ethereum to a child? ›

To understand what Ethereum is, let's break down each key term in the one-sentence definition above. Ethereum is the name of the technology itself. You can think of the term like the word “internet.” It's a network, a technology, and a platform for a huge variety of different applications.

How does Ethereum work for beginners? ›

Ethereum is an open-source, decentralized computing platform network. The Ethereum network works like the Bitcoin network in that it's built on blockchain technology, essentially a digital public ledger where financial agreements can be verified and stored entirely by software — without intervention of a third party.

How does Ethereum become real money? ›

At a Glance: Ethereum can be cashed out simply by selling it on an crypto exchange. The use needs to sell their ETH against their preferred currency and withdraw they sale money to their bank account. As a rapidly growing cryptocurrency, compared to other crypto, buying and mining Ethereum is exciting and rewarding.

What is Ethereum in one sentence? ›

Ethereum is a blockchain-based platform best known for its cryptocurrency, ether (ETH). The blockchain technology that powers Ethereum enables secure digital ledgers to be publicly created and maintained.

Is Ethereum better than Bitcoin? ›

Transactions are faster on the Ethereum network than on Bitcoin's. Bitcoin is primarily a store of value and medium of exchange; Ethereum is seen as a general purpose blockchain. Bitcoin uses a proof-of-work (PoW) consensus algorithm, while Ethereum uses a proof-of-stake (PoS) consensus algorithm.

What is the difference between Bitcoin and Ethereum? ›

Bitcoin (abbreviation: BTC; sign: ₿) is a decentralized digital currency that can be transferred on the peer-to-peer bitcoin network. Ethereum is a decentralized global software platform powered by blockchain technology. It is most commonly known for its native cryptocurrency, ether (ETH).

What is the main advantage of Ethereum over Bitcoin? ›

The main difference between Ethereum and Bitcoin is the fact that Ethereum is programmable. That feature broadens the scope of Ethereum, making it more than just a digital currency. It makes Ethereum a marketplace for financial services, games and apps.

What is the benefit of Ethereum? ›

Ethereum is excellent for arbitrating transactional events in trade finance, supply networks, government registries, energy grids, real estate, law, and many other industries because these digital agreements, or "smart contracts," may have endless forms, conditions, and even call on other contracts.

What is Ethereum most known for? ›

Ethereum is a decentralized blockchain network powered by the Ether token that enables users to make transactions, earn interest on their holdings through staking, use and store nonfungible tokens (NFTs), trade cryptocurrencies, play games, use social media and so much more.

How do you explain cryptocurrency for dummies? ›

A cryptocurrency is a digital currency, which is an alternative form of payment created using encryption algorithms. The use of encryption technologies means that cryptocurrencies function both as a currency and as a virtual accounting system. To use cryptocurrencies, you need a cryptocurrency wallet.

How much is 1 Ethereum coin worth? ›

Ethereum Price Chart (ETH/USD)
24 Hour High24 Hour LowMarket Capitalization
1,622.37 USD1,561.17 USD192,441,418,330.83 USD

Do you need money to start Ethereum? ›

Get started with as little as $25, and you can pay with a debit card or bank account.

How long does it take to make 1 Ethereum? ›

Q #2) How long does it take to mine 1 Ethereum? Answer: It takes around 7.5 days to mine Ethereum as of September 13, 2021, at the hash rate or hashing power of 500 mh/s with an NVIDIA GTX 3090 that hashes at around 500MH/s. With a GPU that hashes at around 28.2 MH/S, it should take much longer.

Can you still make money on Ethereum? ›

An Ethereum holder can earn staking fees by running their own validator node to process transactions and to help secure the Ethereum network. However, one needs to own and commit 32 ETH, or ether, tokens to do this, which at a cost of about $32,000 can be prohibitive for many investors.

Who controls Ethereum? ›

Decentralized governance

No one person owns or controls the Ethereum protocol, but decisions still need to be made about implementing changes to best ensure the longevity and prosperity of the network. This lack of ownership makes traditional organizational governance an incompatible solution.

What happens when I invest in Ethereum? ›

You don't buy shares of Ether like you would stocks or ETFs. Instead, you are exchanging your dollars for Ether tokens. There are no dividends, no payouts. Your only hope is that in the future, other people on the Internet will pay you more for your tokens than you bought them for.

How many Ethereum are left? ›

There is a wide range of currencies that have a finite supply. Ethereum, however, has an infinite supply. In January 2021, there were 113.5 million tokens in circulation. As of April 2022, there are roughly 120 million.

Who owns the most Ethereum? ›

Top 10 Owners of Grayscale Ethereum Trust (ETH)
StockholderStakeShares owned
Parkwood LLC0.26%790,000
Rye Brook Capital LLC0.10%304,200
Benedetti & Gucer, Inc.0.02%70,491
Rothschild Investment Corp.0.01%43,492
6 more rows

Why Ethereum is the future? ›

The reasons that Ethereum crypto is the future of cryptocurrency, and why it has the potential to be worth more than Bitcoin, are simple. It's a decentralized platform that allows developers to create their own applications on top of it, as opposed to Bitcoin which only allows for one application.

Is Ethereum a real coin? ›

Ethereum is one kind of digital currency or cryptocurrency, a medium of exchange that exists exclusively online. Ethereum is among the most popular cryptocurrencies, and ranks second in total size (as of April 2022), behind Bitcoin, a coin that's become synonymous with crypto.

Should you hold Ethereum long term? ›

For 2022-3 in general, we think recession risks pose a risk to ETH and so now might not be the best time to buy ethereum if you have a medium-term outlook. We think ethereum is a good long-term investment for the next one to three years and are bullish overall.

Will ETH ever overtake Bitcoin? ›

This price is expected to rise in the on-coming year (2022), with quite a few experts in finance and cryptocurrency believing that ether will overtake bitcoin.

How high can Ethereum go? ›

The ETH price prediction from CoinPriceForecast estimated the coin could trade at $3,355 by the end of 2030. By the end of 2034, the site suggested, ether could trade at $4,661.

Is Ethereum still worth buying? ›

For 2022-3 in general, we think recession risks pose a risk to ETH and so now might not be the best time to buy ethereum if you have a medium-term outlook. We think ethereum is a good long-term investment for the next one to three years and are bullish overall.

Is it worth it to invest in Ethereum? ›

Ether (ETH), the native token on the blockchain network Ethereum and the second-largest cryptocurrency by market cap, is a risky and volatile investment. It should only be considered if you have a high risk tolerance, are in a strong financial position and can afford to lose whatever you invest in it.

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