Ethereum is the second largest cryptocurrency by market cap.
The Ethereum network is built by some extremely clever people, and has wide ranging use cases that make the cryptocurrency which it powers: Ether, very valuable.
It is also less volatile and responds less to sentiment-related fluctuations than Bitcoin does.
This is the non-technical person's guide to Ethereum. It's intended to give you enough background knowledge to make sounds investment decisions about Ethereum, and a good base on which to build your knowledge if you want to get into the nitty-gritty of it in more detail.
If you stop reading from now, leave with this: the Ethereum network is an extremely powerful piece of technology that will likely be the guiding light in a wave of widespread disruption underpinned by blockchain technology.
Let's jump in!
Ethereum is basically a large amount of computers, working together to form one super-computer, which executes code that powers decentralized applications (Dapps).
Ethereum provides the tools and framework for anyone who wants to build decentralized applications.
Let's get into some more detail...
By now, you should know what a blockchain is, and the fundamentals behind how it works. If you don't, get the low-down here [link].
Ethereum is slightly different in that instead of each node only holding and verifying the state of a ledger of transactions, each node now agrees upon and holds a copy of the state of a canonical computer - or virtual machine.
The state of the machine changes when a transaction takes place. This transaction is verified, validated and then executed by the other participants in the network. Once complete, the state of the virtual machine is changed, and each copy at each node is updated.
Ethereum was the creation of Vitalik Buterin, a Canadian-Russian developer who first thought of the idea in 2013. After a round of crowdfunding in 2014, Ethereum was officially launched in July 2015.
The most significant event in the history of Ethereum was the 2016 fork. A hacker was able to exploit a flaw in the network and steal approximately $50 million USD worth of Ether. In an unprecedented move, the network voted to 'hard fork' the Ethereum network to reverse the theft. The fork created two versions of Ethereum: "Ethereum Classic", and just "Ethereum". The theft record lives on in the Ethereum Classic blockchain.
Cryptocurrencies behave on the same fundamental rules of normal currencies, though the method of transfer is different. That is: You can't spend more Bitcoin (or Ether) than you have in your wallet.
In this way, Bitcoin and Ether are very similar.
While we use the terminology of a distributed ledger to describe the Bitcoin blockchain, the Ethereum network has a more powerful mechanism underpinning it. The Ethereum network is better described as a distributed state machine. This enables an extremely powerful component of the Ethereum network: Smart Contracts.
The Bitcoin blockchain can only understand a very small set of parameters (who sent money to who). Technically speaking, it is called being turing incomplete.
So the fundamental structural difference is this:
The fundamental use-case difference is:
Smart Contracts on the Ethereum network are the mechanism through which Dapps run.
Ethereum developers write conditions (contracts) for their Dapps, and the Ethereum network then executes them. These are smart contracts.
The Ethereum network enforces all parts of the contract from enforcement through to payment.
Here's an example to illustrate:
I am renting a house from Nicky through an Ethereum smart contract. Nicky doesn't need to actively collect the money. The smart contract knows whether the money has been paid, and will restrict access to my house until such time as the money has been transferred.
Ethereum is the platform on which a wide variety of decentralized applications (Dapps) can be built.
Remember I was explaining that I am bullish on the long term prospects of Ethereum? This is why.
Ethereum is arming developers and disruptors with the tools to decentralize any traditional systems that need disrupting: Banks, insurance, digital storage, social networks, marketplaces etc. The list goes on.
To wrap your head around how these work, here are some examples of already-existing Dapps:
Golem: Everyone's super-computer.
Golem takes advantage of one of the fundamental principles of blockchain technology: there are multiple computers which power it. It aims to provide ad-hoc computing power to those who need it, as well as allow idle computing power to be put to use.
It puts a large amount of computing power in the hands of anyone who needs it.
EtherTweet: Free-speech Twitter.
EtherTweet is a micro-blogging platform almost exactly like Twitter. The only difference is that there is no one controlling power, it is decentralized.
This means no "tweet's" can be censored, deleted or altered without approval from the whole blockchain. It is the ultimate free-speech platform.
Brave: The privacy-driven browser.
Brave's goal is to give back a user's privacy while they're scrolling the internet. Ever felt like Google's watching and listening to you? Well, that's what they're trying to solve.
It has features like ad-blocking, true-incognito and uses it's own cryptocurrency called the Basic Attention Token (BAT) [Link] (623.807M market cap at time of writing). Instead of having ads forced on you, browsers can opt in to view a certain amount of ads, and then get rewards with BAT when they do.
What makes Ethereum such an exciting prospect is the disruption that it may potentially cause, and be the power behind.
Banking is only the start. The smart contract capabilities of the Ethereum blockchain could be the power behind a change in almost all industries. Here are just a few examples:
Voting is meant to be one of the most independent systems in the world, and yet we constantly here about dodgy elections and ballot counting.
A voting Dapp would mean there is no central authority which you have to trust to administer and control the voting procedure. No external human involvement = no opportunity for tampering in results.
It also means no counting, recounting and would yield much faster (almost) instant results.
The recent news about the censorship of media on certain platforms like Facebook and Twitter has sparked debate about the control which media companies have over general public narrative. Should they be able to control what user's on their platforms post and consume?
Some people don't think so. A truly democratized form of social media would have a set of rules on which it is founded, which would have to be interperted by the blockchain.
If these rules are met, then the post would be allowed. This would create a true 'free speech' environment (depending on the rules of the platform you join).
Supply chains are notoriously inefficient, with poor data processing and middle men all taking costs which end up driving up the price of the goods at the end of the chain.
They are the prime candidate for disruption. A smart contract between the supplier, logistics partner and buyer would be transparent pricing, fee's and terms for the contract. This means that farmers and producers are getting a fair and predictable price for the goods they are producing and supplying, and middle-men who are providing no value are removed from the process.
With the power of smart phones and computers continually increasing, and being continually under-utilized, there is a glut of computing power which goes unused every day.
If your laptop or computer or smart device lives plugged into the wall, they can essentially become mini computers that can make computations for people who need the computing power (now try say that fast 3 times!).
Blockchain makes that process quick and easy, and it's a win-win.
Ether is the cryptocurrency which powers the Ethereum network.
It is different from Bitcoin in that it is not only transacted by investors in the Cryptocurrency itself, but also by developers and users on the Ethereum network. Ether is the gas that keeps the Ethereum network running.
Ether can be bought and sold on almost all cryptocurrency exchanges. I personally use Coinbase, as I find it is reliable, quick, easy and cheap. It also has a wide range of other cryptocurrencies should you look at diversifying your crypto portfolio.
You can sign up to Coinbase free, here.
Please note, this is not financial advice. Remember to only invest what you can afford to lose!
In crypto circles, you'll see the word HODL thrown around a lot. It's just the crypto version of going 'long'.
It essentially is based on the principle that the long-term prospects of specific crypto's are going to be very lucrative, compared to the value of most popular crypto's today.
If you are a believer in the fundamentals behind Ethereum, the technology it is built with, and empowers - you might consider playing the long (5, 10, 20 year) game.
Hodl-ers are of the belief that we will look back on the valuation of crypto's like Ethereum today and wished we had bought more at today's price, the same way we look back at the early investors of Bitcoin.
The advantages of going long include:
Naturally, it does come with it's risks. If the Ethereum network were to shut down, or a significant security-breach happened, or another fundamental collapse or failure happened, you would stand to lose your whole investment.
Active trading means you are more involved in the day to day price fluctuations of Ether. That means you're constantly looking for an arbitrage: Buy low and sell high.
Generally, active trading requires active market and news monitoring and will need you to move your money quickly into and out of various positions.
Because of the high transaction fee's on the Ethereum network at the moment, active trading will be very expensive. You will need to be making large 'bets' on the movements of Ether to justify the transaction fee's. That means it will be high risk, and high reward.
Active trading is not for beginners.
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