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What is Ethereum And Should You Invest In It?

What is Ethereum And Should You Invest In It?
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Ethereum is the second largest cryptocurrency by volume, but its many uses can create a much larger learning curve for investors new to Bitcoin.

“Ethereum serves two purposes: First, it acts as a perfection and can be a store of value,” says Bill Noble, chief technical analyst at Token Metrics, a crypto-analytics platform. “But Ethereum is also a superhighway for decentralized finance.”

Instead of creating value as “digital gold” like Bitcoin, Ethereum is a software platform that runs on the blockchain. Users can interact with the platform using ether, the cryptocurrency linked to 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 cryptocurrency due to the potential of it becoming more valuable over time.

What is Ethereum?

The programmer invented Ethereum Vitalik Buterin In 2015, on the heels of Bitcoin.

“I understand that bitcoin is like a pocket calculator, it’s designed to do one thing, and it works really well, but you can’t do anything else with it,” says Olly Leech, 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 much more.

While you can buy and trade Ethereum as an investment like Bitcoin, developers of software platforms can also use it to create new apps – often adjacent to cryptocurrencies or otherwise designed to make buying, selling and using cryptocurrency a smoother process. Like the ones on your phone, these apps could be anything from lending apps to payment platforms.

Think of Ethereum like a smartphone, says Leech. Developers can create apps on smartphones, similar to how they create apps on Ethereum. While mobile apps have a more universal applicability these days, Ethereum apps are more geared towards crypto users. Using the example of a lending application, the developer can create the application, which other crypto users can use to lend and borrow.

“It’s all supported by this idea of ​​smart contracts,” he says. Leech says the smart contract is software that runs independently on the Ethereum blockchain. Smart contracts perform all the functions that some third party would normally have to take care of.

For example, people can complete direct transactions over the network. Leach says peer-to-peer lending is gaining popularity on Ethereum at the moment. A lending application developed on the Ethereum network allows individuals to lend money to each other without involving a bank.

The smart contracts that power these applications are basically just algorithms designed to perform a specific function when certain conditions are met. In the case of a peer-to-peer loan, the contract runs from the outcome (money lending) when the collateral is placed in the correct wallet or account. The potential benefits of using a smart contract instead of a traditional lender include speed of execution, no human error or bias, and lower fees.

Other uses for Ethereum

Like other popular cryptocurrencies, Ethereum is built on the principles of decentralized finance, because the products and services that live on Ethereum are available to anyone with access to the Internet.

Smart contracts allow creators to build decentralized applications that can serve different purposes. These applications include financial tools such as cryptocurrency exchanges, decentralized lending platforms, and data services such as Matcha, which searches various cryptocurrency exchanges for the best rates. But there are also categories of dapps for things like buying and selling digital artwork, games, and developer technology.

The open source concept of Ethereum allows developers to build entirely new digital currencies on top of it, such as Chainlink and XRP, which are known as tokens. Some of these assets come in the form of different digital currencies that you may have heard of, such as Tether (USDT), Uniswap (UNI) or USD Coin (USDC).

But cryptocurrencies aren’t the only digital assets that can be created on Ethereum — more recently NFTs, or non-fungible tokens, are another example of something created with Ethereum. These digital tokens are powered by Ethereum and used to represent ownership of unique items, according to the Ethereum website.

Ethereum vs Ether

Developers have to pay a fee to the Ethereum network to create new tokens or decentralized applications on the network. They make these payments in ether, the native currency of Ethereum. According to Nobel, this fee is also known as “gas”.

Gas is the price for using the system, like paying a subway fare to take a train. Ether is the amount of cash you use to purchase your Metro Card. Think of it “like the fees you have to pay in order to do things and trade on Ethereum,” Noble says. Different actions are worth different amounts of ether, and the fees increase as more people join the network.

Those gas prices, and all the uses developers are paying for exploration, help explain Ether’s rise in value over the years. As more and more developers are looking to build things on Ethereum, they have to buy more Ether to pay the gas fee, which in turn increases the price of Ether. Ether investors are betting on the continued use of the most widely used blockchain, and the potential that its applications have in the future.

Gas fees are also one of the biggest obstacles to Ethereum’s growth potential, according to Noble. But the network’s ongoing update, Ethereum 2.0, seeks to help address the issue. According to the Ethereum website, the update will not have any impact on investors or dapp users, only developers.

If you want to invest in Ethereum, buy ether. One Ether token is currently trading at around $2,700. Similar to how you would invest in Bitcoin, investing in Ethereum means buying and holding the token (ether) with the hope that it will increase in value over time.

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