What Is Ethereum (ETH) and Why Is It Needed?

If you are interested in digital finance, you are probably familiar with the name "Ethereum." It is a full-fledged platform that has changed the approach to finance, programming, and digital contracts, and its cryptocurrency, Ethereum, ranks second in capitalization after Bitcoin.

 

 

In this article, we will discuss the key features of Ethereum (ETH): what this cryptocurrency is, where it is used, and whether it is worth investing in. 

A brief definition of Ethereum 

Ethereum is a blockchain platform where applications can be developed and launched without the involvement of intermediaries.

ETH is an internal cryptocurrency used to pay transaction fees (gas) and interact with the network. It can also be used to invest and transfer funds. 

History of Ethereum 

The concept of Ethereum was proposed by programmer Vitalik Buterin. He became interested in blockchain after the emergence of Bitcoin and decided that this technology could offer the world more possibilities than just transferring money. 

Buterin shared his idea of a decentralized platform with the Bitcoin community, but the participants did not support it. As a result, Vitalik assembled a team and decided to launch his own project.

In 2014, a crowd sale (an event to attract investment) was held, during which approximately $18 million was raised. Participants invested Bitcoins and received the first ETH tokens in return.

The Ethereum network was launched in July 2015. It served as the basis for thousands of decentralized applications (DApps), and Ethereum became the second most important crypto asset in the world.

How Ethereum Works: Blockchain, Tokens, and Smart Contracts 

Instead of centralized servers, Ethereum uses a network of thousands of computers (nodes), which process transactions according to common rules. This ensures the system's independence and transparency. 

What is a smart contract?

These are digital agreements written in a programming language that automatically execute specified conditions without the involvement of third parties. For example, a smart contract can transfer money for goods only after they have been delivered. The Ethereum virtual machine (a software environment, or "global computer," capable of performing any computing task) is responsible for executing the conditions.  

Smart contracts are considered the main feature of the Ethereum network and enable the creation of DApps β€” games, wallets, crypto exchanges, etc.

Tokens and the ERC-20 Standard 

Based on Ethereum, anyone can create their own tokens. Most often, ERC-20 is used for this purpose β€” a standard that guarantees the compatibility of new coins with other services already operating on the blockchain. 

How is Ethereum different from Bitcoin? 

Bitcoin and Ethereum are two top cryptocurrencies that have many differences. Let's take a closer look at them:

Bitcoin and Ethereum: different goals and approaches

As we have already noted, Ethereum is a full-fledged ecosystem that supports smart contracts and allows you to launch DApps, developing the digital economy.

Bitcoin is the first cryptocurrency created as an alternative to fiat money. It can be used for payments and as a tool for investing and storing capital. Bitcoin does not have smart contracts or capabilities for creating applications. 

Different mining principles and the transition to Proof-of-Stake 

When considering how Ethereum differs from Bitcoin, it is also worth mentioning the different approaches to transaction confirmation.

Bitcoin uses a Proof-of-Work (PoW) mechanism, and new coins are mined using mining. To confirm transactions on this network, computers solve complex problems, which is energy-intensive. According to research, Bitcoin consumes more energy per year than Poland or Switzerland. Miners receive a reward for their work (a fixed amount + a portion of the transaction fee). 

The issuance of BTC is limited to 21 million coins. Every four years, the network undergoes halving, during which the reward for miners for mined blocks is automatically halved. The next such event is expected in 2028, resulting in a reduction from 3.125 BTC to 1.5625 BTC.

Ethereum also started out with PoW, but in 2022, it switched to a more environmentally friendly algorithm, Proof-of-Stake (PoS), which reduced energy consumption by 99.95%. Now, new blocks are formed by validators who lock their coins on staking and receive rewards. The yield is 4%–5% per annum of the "frozen" amount and additionally includes a portion of the network transaction fees. The issuance of the cryptocurrency is not limited, but tokens are periodically burned to prevent inflation. 

Where Ethereum Can Be Used: Real-Life Examples 

Now that we know what Ethereum is, let's talk about the key areas where this blockchain can be used.

Ethereum-based NFTs 

Ethereum became the first blockchain on which non-fungible tokens began to appear in 2015, and in 2017, Larva Labs' CryptoPunks collection sparked the NFT boom. Many tokens that were part of it are still selling for hundreds of thousands of dollars. 

Ethereum provides the issuance of tokens and the infrastructure for buying, selling, and storing them. Most NFT marketplaces use ETH as their primary currency.

DeFi projects and DApps 

Thanks to smart contracts, developers can create any financial instrument without intermediaries. The most popular ones are:

  • Uniswap β€” the largest DEX exchange that allows users to exchange tokens directly between each other. 
  • Aave β€” a platform for decentralized lending that allows users to borrow and lend cryptocurrencies. 
  • Lido β€” a platform for liquid staking of Ethereum, which helps you earn income without freezing your coins. 

Although competitors such as Solana and Polkadot are gaining popularity, Ethereum has become the foundation for the growth of the entire DeFi industry. Its main advantage is flexibility and broad developer support.

How to Buy and Store ETH?

Ethereum is one of the most sought-after cryptocurrencies, and it can be purchased in minutes online and offline. Storing coins is also not a problem since most modern crypto wallets support ETH.

Where can you buy Ethereum? 

You should choose a service based on your goals and experience: 

  • Crypto exchanges are an option for those who are already familiar with trading and want to work with orders. 
  • P2P platforms allow you to buy ETH directly from other users.
  • Online exchangers are the easiest way to buy digital coins without verification. 

ObmenAT24 offers the best conditions for buying ETH. You can exchange cash to cryptocurrency anonymously and at a favorable rate. We have branches in all major cities of Ukraine and Europe. 

How and where to store ETH safely?

There are two types of wallets you can use to store Ethereum:

  • Hot (online) β€” convenient for regular transactions but less secure against hacking. 
  • Cold (not connected to the internet) β€” provide a high level of security and are suitable for long-term storage of digital coins.

It is recommended to store large amounts in a software or hardware wallet, and for everyday transactions, use online storage with mandatory two-factor authentication.

Newbies often ask whether it is worth investing in Ethereum. The ETH cryptocurrency ranks second in terms of market capitalization and remains a key asset in the DeFi and NFT space. Its ecosystem is actively developing, and the technology is supported by major market players. Like any cryptocurrency, Ethereum remains volatile, but it is considered a promising asset in the long term. 

FAQ

1. How to choose a reliable service for buying ETH?

When choosing a platform, pay attention to several factors: the reputation of the service, the speed of processing requests, the exchange rate, and the availability of support. It is also important that the site uses a secure connection (HTTPS) and offers popular payment methods. Reviews from real users are a good guide.

2. What is Ethereum 2.0, and how does it affect users?

When explaining what Ethereum is and how it works, experts often mention "The Merge." This is a major network upgrade that replaced the old Proof-of-Work mechanism with the more energy-efficient Proof-of-Stake. Now, new blocks are created by validators who hold a certain amount of ETH in their accounts. For regular users, this means a faster and more environmentally friendly network with less load and cheaper transactions.

3. What are the fees on the Ethereum network, and what are they for?

All transactions performed on the Ethereum blockchain require the payment of fees (gas). The amount depends on the network load and the complexity of the transaction itself. When activity is high, the payment will be higher. The fees go to validators who maintain the blockchain's performance.

4. Is it worth investing in Ethereum?

Thanks to its active development and widespread support, ETH is considered a promising asset. However, the cryptocurrency market is unstable, so you should only invest for the long term and only with funds that you are prepared to temporarily part with.

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