What is Ethereum? Here’s What You Need to Know

While Bitcoin, a decentralized digital currency, is the world's largest blockchain and crypto currency by market capitalization, Ethereum is the world’s 2nd largest.  

Ethereum is a blockchain based technology platform that enables developers around the world to create 1,000’s of diverse decentralized applications “dApps” without the need for complex algorithms and hugely expensive systems to build.  

Ethereum was created by Vitalik Buterin, who in 2013 wrote a whitepaper that described a “next generation smart contract and decentralized application platform” that would take blockchain technology to the next level.  He believed that an open source programmable blockchain could be used for many different purposes beyond digital money.

The Ethereum blockchain is driven by smart contracts. These are self-operating computer programs which are automatically executed when specific conditions are met.  Today, if you purchase an item on Amazon, Amazon confirms that the item is available and ensures that when you pay for your item you receive it.  A smart contract is designed to remove the need for a person, or organization to be in the middle of that transaction, so a smart contract will be coded to an “if/then” rule - if the product is available and the money is paid, then the item will automatically be sent to the customer.  As long as the conditions of the smart contract code are met, the transaction will be made.

So how has Ethereum become so valuable?

Not only is it due to the groundbreaking innovation leading to the mass adoption by thousands of developers, but it's the value of Ethereum’s own native currency Ether (ETH).  ETH is used to pay for transactions on the Ethereum platform, ensuring the protocol’s efficiency and incentivizing developers to build their applications and earn from it.

The more developers build on the Ethereum blockchain the more ETH transaction fees are generated, which leads to an increase in the demand for ETH and hence an increase in ETH’s value.

Ethereum, like Bitcoin, is a Layer 1 blockchain. As a Layer 1 it provides the foundation on which developers can build upon to create Layer 2 solutions. A great example is Polygon (MATIC) which is a Layer 2 scaling solution built on the Ethereum layer 1. While Ethereum has focused on security and scalability, Polygon has used Ethereum’s Layer 1 to build a solution which provides faster and cheaper transactions for its users. Polygon has become one of the most successful Layer 2 applications with over 3 million transactions processed per day.

Ethereum has built its success on being an open architecture that anyone can build on. Its lead to a whole new ecosystem of NFTs, Decentralized Finance (DeFi) solutions and smart contract platforms.

As more and more services and solutions are built on Ethereum it continues to reign supreme as the worlds 2nd largest and 2nd most valuable blockchain.

Today’s Takeaway:

Ethereum’s value has grown as a DIY platform for the creation of decentralized applications which run on the basis of smart contracts. The increase in innovations built on the Ethereum network, such as NFT’s, decentralized finance, data storage, gaming platforms and more, is driving its adoption, popularity and the value in its native token ETH. Although we never know what the future holds for ETH’s price and valuation, its setting a good trajectory so far!

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The content of this newsletter is strictly for educational purposes and does not amount to professional advice. It's not a substitute for independent financial advice from a professional who can advise on your circumstances and individual situation.