As cryptocurrency keeps breaking new all-time highs, I am beginning to see more and more articles talking about cryptocurrencies other than Bitcoin, which is great! Although Bitcoin is a fantastic cryptocurrency, the cryptocurrency world has so much more to offer than just Bitcoin, and I'm thrilled to see that other cryptos are finally starting to make their way into the mainstream news. This post is designed to provide a beginner's overview of both the Ethereum blockchain and the Ether cryptocurrency while also explaining the differences between the two.
ETH Vs Ethereum
Before getting too deep, it's important to make a very brief clarification regarding naming conventions. Ether (also called ETH) is a cryptocurrency that runs on the underlying Ethereum blockchain. In reality, many people use ETH/Ether/Ethereum interchangeably, so it's not something to worry too much about, but has been included here just to prevent confusion.
Ethereum Expands Upon Bitcoin
If you are familiar with Bitcoin, it's easy to understand the basics of Ethereum as many of the underlying fundamentals work the same. They are both (currently) mined using a proof of work consensus mechanism, they are both decentralized, permissionless, etc. In a general sense, Ethereum can do many of the same things that Bitcoin can do, even if it does them in a slightly different way.
Although Ethereum can do much of what Bitcoin can do, its scope is far larger than simply being a digital, decentralized value transfer mechanism. Whereas Bitcoin was primarily designed to be a peer to peer form of electronic cash, the Ethereum blockchain was designed to also function as a “World Computer.”
Smart Contracts and dApps
The Ethereum Blockchain allows developers to create “Smart Contracts” that “live” on the blockchain. These smart contracts are pieces of code that are automatically executed if certain conditions are met. In turn, these smart contracts are hosted on the Ethereum blockchain to create dApps or Decentralized Applications that can be accessed from anywhere in the world. Smart contracts and dApps are key to understanding Ethereum’s value proposition, so I think it's worth the time to go into a bit of depth on the topic.
To revisit the Bitcoin point of reference, Bitcoin took money out of the hands of governments. With Bitcoin, You can send, receive, spend and transact in a currency that is completely outside of the hands of the government. You don't need to ask permission from a government to use Bitcoin, and you can send or receive Bitcoin regardless of your age, race, religion, or occupation. Obviously, this is a huge advantage for people living in countries with oppressive or corrupt governments.
If I had to simplify Ethereum’s value proposition to one sentence, I would say that “What Bitcoin did for money, Ethereum does for the whole spectrum of financial services.” Bitcoin’s approach of taking money out of the hands of the government and giving it to the people was a significant step that Ethereum built upon by putting a whole range of applications and services into the hands of the people.
Because smart contracts and decentralized applications live on the blockchain, it's possible for people anywhere in the world to lend money and earn interest on Harvest.Finance. It’s possible to receive loans on Compound or purchase tokenized assets. Its possible to automate employee payments with Sablier or automate escrow services with TrustSwap. Not only has Ethereum made the whole range of financial services available to the people, but it's also possible to play online games and breed virtual kittens if that’s more your style!
ETH, Tokens, and Gas
Now that We have a general understanding of the Ethereum blockchain, we can dive a little bit deeper into how it works. Just as with Bitcoin, transactions on the Ethereum blockchain are processed and verified by a decentralized network of computers that mine transactions and include them on the blockchain. This process takes an enormous amount of energy, computational power, and technical skill as well.
In order to pay for these transactions on the Ethereum blockchain, we must pay a small fee for every transaction that we make. This fee is known as “gas” and is denominated in gwei. Although there are many different tokens that run on top of the Ethereum blockchain, we must pay each transaction fee in ETH/Ether. Thus, ETH is the fuel of the Ethereum and the native token of the blockchain.
But what about those other tokens I mentioned? Just as Ethereum allows decentralized applications to be built on top of a common blockchain, it also allows a large variety of specialized tokens to be issued and created to fulfill a specific purpose. For example, the Basic Attention Token, 1UP token, and the USDC Stablecoin are all built upon the Ethereum blockchain. Instead of creating a separate blockchain to maintain a parity value with $1, reward people for viewing advertisements, or reward social media engagement, Ethereum and its extensibility allows us to have a single blockchain that supports multiple tokens for different purposes.
ERC-20 and ERC-721
Although Ethereum allows a huge amount of development, projects that are built on the Ethereum blockchain still must conform to the rules of the underlying blockchain to maintain compatibility. Part of this compatibility means that tokens created on the Ethereum blockchain must conform to certain standards. For example, the vast majority of tokens created to conform to the ERC-20 standard although the ERC-721 standard is important as well. Beginner’s don't need to worry about the technical differences between these two tokens, but it is useful to understand that ERC-20 type tokens are typically used for tokens that represent some form of fungible value (payment) whereas ERC-721 tokens are typically used to represent unique “non-fungible” collectible articles such as a virtual trading card or a piece of tokenized real estate.
To summarize, Ethereum is a blockchain that offers the ability to write and deploy smart contracts that live on a decentralized blockchain. Ethereum builds upon the privacy, security, and decentralized advantages offered by Bitcoin, and extends them not just to money but to a whole range of services including financial and gaming applications. Although Ethereum allows numerous projects and tokens to be issued, all transaction fees are paid with its native token known as ETH/Ether.
As always, nothing here should be taken as financial advice.
Thanks for reading!