Ethereum is the second-largest cryptocurrency by volume, but its many uses can create a much larger learning curve for new investors than Bitcoin.
“Ethereum serves two purposes: One, it acts as money and can be a store of value,” says Bill Noble, chief technical analyst at Token Metrics, a cryptocurrency analytics platform. “But Ethereum is also like a highway for decentralized finance.”
Instead of creating value as a “digital gold” like Bitcoin, Ethereum is a software platform that runs on a blockchain. Users can interact with the platform using ether, the cryptocurrency associated with Ethereum — or buy and hold it as a store of value. Ethereum is commonly used by developers, but there are people who also invest in the crypto for its potential to be worth more over time.
Ethereum was invented by programmer Vitalik Buterin in 2015, on the heels of Bitcoin.
“He realized that Bitcoin is like a pocket calculator, designed to do one thing, and it does it really well, but you can’t do anything else with it,” says Ollie Leech, learn editor at Coindesk, a cryptocurrency news outlet.
So Buterin created Ethereum, a blockchain network with an associated cryptocurrency called ether (ETH), with the potential to do far more.
While you can buy and trade Ethereum as an investment like Bitcoin, it’s also a software platform developer can use to create new applications – often crypto-adjacent or otherwise designed to make buying, selling, and using cryptocurrency a smoother process. Like the ones on your phone, these apps may be anything from lending apps to payment platforms.
Think of Ethereum like a smartphone, says Leech. Developers can build apps on smartphones, similarly to how they can build apps on Ethereum. While mobile phone apps have a more universal applicability these days, Ethereum apps are more geared toward crypto users. With the lending app example, a developer could create the app, which other crypto users can in turn use to lend and borrow.
“It’s all powered by this idea of smart contracts,” he says. A smart contract is a program that runs autonomously on the Ethereum blockchain, says Leech. Smart contracts perform all the functions that normally some third-party would have to take care of.
For example, people can complete direct transactions over the network. Peer-to-peer lending is gaining popularity on Ethereum right now, says Leech. A lending app developed on the Ethereum network allows individuals to lend money to one another without involving a bank.
The smart contracts that power these apps are basically just algorithms designed to perform a specific function when certain conditions are met. In the case of the peer-to-peer loan, the contract fires off the result (lending the money) when the collateral is placed into the correct wallet or account. Potential benefits of using a smart contract instead of a traditional lender include speed of execution, lack of human error or bias, and lower fees.
Like other popular cryptos, Ethereum was built on the principles of decentralized finance, because the products and services that live on Ethereum are available to anyone who can access the internet.
The smart contracts allow creators to build decentralized applications which can serve different purposes. These applications include financial tools like cryptocurrency exchanges, decentralized lending platforms, and data services like Matcha, which searches multiple cryptocurrency exchanges for the best prices. But there are also categories of dapps for things like buying and selling digital artwork, gaming, and developer technology.
Ethereum’s open source concept allows for developers to build entirely new cryptocurrencies on top of it, like Chainlink and XRP, which are known as tokens. Some of these assets come in the form of different cryptocurrencies you may have heard of, like Tether (USDT), Uniswap (UNI), or USD Coin (USDC).
But cryptocurrencies aren’t the only digital assets that can be created on Ethereum — recently NFTs, or non-fungible tokens, are another example of something created using Ethereum. These digital tokens are powered by Ethereum and are used to represent ownership of unique items, according to Ethereum’s website.
Developers have to pay a fee to the Ethereum network to create new tokens or decentralized apps on the network. They make these payments in ether, Ethereum’s native currency. This fee is also known as “gas,” according to Noble.
Gas is the price for using the system, like paying your subway fare in order to ride the train. Ether is the cash you’d use to purchase your metrocard. Think of it “like tolls that you have to pay in order to do things and trade on Ethereum,” says Noble. Different actions are worth different amounts of ether, and the fees get higher when more people join the network.
These gas prices, and all the uses developers are paying to explore, help explain the rise in Ether’s value over the years. As more and more developers look to create things on Ethereum, they must buy more ether to pay gas fees, which in turn increases ether’s price. Investors in ether are betting on the continued use of the most-used blockchain, and the potential its applications have for the future.
Gas fees are also one of the biggest barriers to Ethereum’s potential for growth, according to Noble. But an in-progress update to the network, Ethereum 2.0, is seeking to help address the issue. The update will have no impact on investors or dapp users, just developers, according to the Ethereum site.
If you want to invest in Ethereum, buy ether. One token of ether trades for about $2,700 currently. Similar to how you would invest in Bitcoin, investing in Ethereum means buying and holding the token (ether) with a hope that it will increase in value over time.