Welcome to the Ether!
In this guide we will look into the second biggest cryptocurrency which is called Ethereum. Ethereum might not be as well known as Bitcoin outside of the Crypto community, but it's definitely a very interesting type of cryptocurrency, so keep on reading!
This guide is divided into two major parts - In the first part I will discuss the basics of Ethereum; What it is, What it's used for etc. In the second part I will focus on how to get started with Ethereum; How to buy it, How to use it, Popular Ethereums apps etc.
- Part 1 - What is Ethereum
- Part 2 - Getting started with Ethereum
Part 1 - What is Ethereum?
Ethereum is the second largest cryptocurrency in terms of market cap and was created 2015 by the Russian/Canadian programmer Vitalik Buterin. Like Bitcoin, Ethereum is also based on the blockchain technology and it's native currency is called Ether (ETH).
There is currently 106 123 145 coins in circulation (with no max supply) and is trading around 235 $, with it's current all time high at 1 500 $ (Jan 15 - 2017).
What is a cryptocurrency?
A cryptocurrency is a type digital money that is border less and cheap to transfer and can be used to pay for goods and services, payment in apps etc.
Bitcoin was the first cryptocurrency when it was released 2009, however today there exist thousands of different cryptocurrencies.
Most cryptocurrencies use the Blockchain technology.
If you want to read more about Bitcoin we made a beginners guide here.
Ethereum offers many of the same features as Bitcoin -
- It's based on the blockchain technology - A blockchain is a digital ledger that is immutable.
- Purely digital and borderless - Money can be sent all over the world without the need of a bank account
- Instant and cheap money transfers - Like Bitcoin, Ether can be instantly sent all over the world for a fraction of the costs compared to todays international money transfer services.
- It's decentralised - No single entity or organisation controls it.
What is the difference between Bitcoin and Ethereum?
In the above list we concluded that there are a lot of similarities between Bitcoin and Ethereum, but surely there must be something that makes Ethereum unique and different from Bitcoin?
Yes, there is!
Ethereum is labeling itself as programmable money, which means that it gives developers and companies the possibility to build decentralized applications (daps) and run them on Ethereums blockchain.
Do you remember what a blockchain is?
A blockchain is an immutable digital ledger that is organized as a chain of blocks, where every block holds data (transactions, balances etc).
Bitcoin was the first cryptocurrency that used the blockchain technology, however the technology had already existed for nearly a decade before Bitcoin, but never found any commercial use.
Ethereum can be compared to Apples app store, where developers can build and publish apps.
The biggest difference however is that apps on Ethereum runs thousands of servers in a peer-to-peer network all over the world (the blockchain), in contrast Apple apps run on servers / software owned by a single company (Apple).
This is same for all big centralized companies like Google, Facebook, Microsoft etc.
Or think of it like this - since Apple owns the app store, it can decide which apps that are allowed and which are not, but on Ethereum any app can be published, there is no central power that controls it.
Besides letting developers create apps, Ethereum also offers the possibility to create new tokens on the blockchain, which we will cover later in the guide.
Ethereum - Second generation blockchain
Bitcoin is considered a first generation blockchain, which provides the possibility to transfer assets without the need of a third party.
Ethereum is considered a second generation blockchain, it supports all the functionality from a first generation blockchain, but it also enables app development via smart contracts and tokenization of assets.
Smart contracts on Ethererum
As I mentioned above, Ethereum offers the possibility to create decentralized applications to be deployed on it's blockchain.
A simplified picture is to think of Ethereum like Apples app store, except there is no central organization that controls it, which means anyone can develop an app (requires some programming knowledge thou) and publish it on Etereums blockchain and all miners (computers) in the network will run it, without enforcing censorship or any other centralized control.
Working behind the scenes of all decentralized apps on Ethereum is something called smart contracts. But what is a smart contract?
RSK (smart contracts platform) explains it as -
Well, the simple answer is that smart contracts are not very different from traditional contracts, except that they are coded and digitally recorded on the blockchain.
Smart contracts run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.
This qualities give smart contracts a host of significant advantages over traditional contracts — smart contracts are trustless, autonomous, and self-sufficient.
So, a smart contract is basically a digital version of a traditional contract, which contains instructions that is executed by all the miners in the Ethereum network.
Smart contract can be used in more or less all the situations where traditional contracts are used today, but it's also the "engine" that powers decentralized applications.
Decentralized Applications (Daps)
A decentralized application is similar to an regular app, except it's code is running on a decentralized peer-to-peer network, aka the blockchain.
A decentralized application does usually have a graphical front end with which the user can interact, and have a smart contract running in the background that executes the users commands.
Today there are thousands of different daps on Ethereum in a range of categories including; games, financial applications, trading platforms, wallets etc. Below I will list some of the most popular daps.
Popular Ethereum Daps
Since Ethereum was the first blockchain that had support for developing apps, thousands of apps have been made for it. Below is a list of the most popular apps for Ethereums, according to the website State Of The Dapps
- My Crypto Heroes - Browser game
- Idex - Decentralised Exchange
- Blockchain Cuties - Game
- CryptoKitties - Game
Why build decentralized apps on Ethereum?
Some of the advantages of decentralized applications are -
- Accuracy - They run exactly as specified without any downtime.
- Transparency - The source code is fully visible for all parties, which makes it clear what the app do (and not do).
- Security - Since they run exactly as specified in the code, it's not possible for other parties to manipulate or change the source code.
Tokenization of real world assets on Ethereum
As I mentioned above, Ethereum also offers tokenization of real world assets. This means that it's possible to take a real world assets (a car, a house, shares of a public traded company etc) and create a digital representation of these on the Ethereums blockchain.
Let's take an example - Imagine the shares of a public traded company. These shares could be created as token on Ethereum, and distributed to all share holders automatically and proportionally via a smart contract.
Now every shareholder owns a digital token that represents a real world asset (shares).
What benefits does Tokenization bring?
Having an asset digitalised as a token have multiple advantages -
- Instantly tradeable - You can instantly transfer and trade the assets with anyone Having an Ethereum wallet around the clock.
- You own your assets - You have real ownership over your assets.
- Administration automation - With smart contracts all administration tasks related to the assets can be fully automated, for example paying out dividents to tokenholders.
- Selling tokens as a part of fundraising - A lot of cryptocurrencies are created as Ethereum tokens and sold to speculators in a process called ICO (initial coin offering) as a mean of funding development.
Building cryptocurrencies on top of Ethereum
Besides the option to tokenize real world assets, Ethereum also supports to build new cryptocurrencies on top of it's blockchain by using the tokenization feature.
Today there exists thousands of different cryptocurrencies that are built on Ethereum and use the same blockchain, these are often referred to as tokens (as opposed to coins, which often have it's own native blockchain) .
List of popular cryptocurrency tokens on Ethereum
Today there are thousands of cryptocurrency tokens that are being built on Ethereums blockchain. Below is a list of some cryptocurrency tokens that I find very interesting.
- Telcoin (Tel) - Remittance solution for financial inclusion
- Basic Attention Token (BAT) - Digital advertising
- 0x - Protocol for trading tokens
- Decentraland (MANA) - A virtual world
- Loom Network (LOOM) - Platform for large scale online games
Ethereum as a project is pretty amazing in my opinion, however it have it's drawbacks as well. A major drawback is it's lack of scalability, in other words, when a lot of users use the network it gets really slow.
Today Ethereum supports around 5-7 transactions / second, which might sound like a big deal, but compared to Visa, that can handle around 33 000 transactions / second, it's really low.
Everyone that were involved in crypto around December 2017 when the Ethereum blockchain got really congested thanks to the highly popular game (at that time) Crypto Kitties.
The congested network led to really long transactions times with high fees, it was a pain to send transactions on the Ethereum network at that time.
For a blockchain that highlight the possibility to develop dapps as one of it's main selling points, it's definitely not good sign if a single game can slow down the entire network, then imagine what thousands of dapps can do.
The developers of Ethereum are well aware of the problem, and this issue is one of the main things that they hope to solve with the release of the new Ethereum version 2.0, called Serenity, that is set to be released late 2019.
Price of Ethereum
At the time this article is written they highest price for Ethereum was 1500 dollar, which it reached in January 2018. This was actually a couple of weeks after Bitcoin reached it's all time high (dec 2018).
Ethereums initial fundraising lasted between June - August 2014 in which they collected 16 million dollar to be used for building the Ethereum software. The price of 1 Ether was at that time 0.31 $.
The type of fundraising Ethereum had is called ICO - Intial Coin Offering and is very popular in the Crypto world.
For those who were lucky enough to be in the Ethereum ICO it was a very good investment, with todays price (240 $) it's a 790x return on investment.
If you invested 1000 $ in the ICO it would be worth 790 000 dollar with todays price, and 4 937 500 dollar with current all time high price.
ICO - Initial Coin Offering
An ICO is a common way of raising funds for a company developing a blockchain projekt. It's similar to an traditional IPO (initial public offering) but instead of buying shares in the company which you usually do in an IPO, you buy utility tokens that is meant to be used as a currency in the upcoming blockchain platform to access all of it's features.
Since you don't own any shares in the ICO company, you don't have the same legal rights as an shareholder do, something that have confused a lot of ICO investors.
ICO is an easy way for a startup to get funds for their project without having to do all the administration / legal that is required for example an IPO. Everyone can more or less conduct an ICO, which unfortunately have lead to a lot of scam ICO's where people have lost their money.
After 2017 and the beginning of the crypto bear market, the ICO boom kinda died out. Many people had bought the top on Bitcoin and other cryptos, so the interest to invest in risky ICO's was low.
Meet IEO - the new ICO
After the "death of ICO's" there emerged a new trend in crypto, IEO - Initial Exchange Offering. This initiative was lead by the cryptocurrency exchange Binance and is basically the same as an ordinary ICO, but the projects are selected by the exchange the token is expected to get listed shortly after the funding round is over.
ICO & IEO can be very rewarding, but are very high risk as well. A lot of startups fails. Always do your research before investing in any ICO/IEO.
Why did Ethereum price rise so high?
In 2017 there was an ICO rush, with Ethereums tokenization feature they made it very easy for other companies to create tokens and start their own ICO fundraising on Ethereums platform.
Many believe that the ICO rush was one of the biggest reason why Ethereums price rose so high, guess what the most common fundraising currency was....
Ether - hence there was a big demand to buy Ether to be able to participate in the ICO's.
But besides being used for ICO fundraising that, Ethereum brought something new to the Crypto / Blockchain scene with it's smart contract feature.
What problem does Ethereum solve?
As mentioned above, Ethereum label itself as programmable money. And with the addition of smart contracts, it gives the possibility for different parts to setup a digital smart contract that will automatically execute exactly as specified.
Let's look at an real world example on how a smart contract could look like.
Imagine you are about to rent an apartment and setting up a traditional contract with your landlord. After signing the contract, you still need manually to pay rent every month/week, this can somewhat be automated today with recurring payments in your bank, but it still requires a bit of setup.
If you later terminate the contract, you still have to remember to cancel the recurring payments to the landlord etc.
With a smart contract on Ethereum, all of this can be fully automated from the signing of the digital contract. In the smart contract all terms are specified, how much that should be paid, when it should be paid etc. To start the agreement, both you and the landlord will sign the agreement with your respective Ethereum wallets and everyone will be handled as specified in the smart contract.
You don't need to do anything else after the contract is signed, and if the contract is later terminated, all the payments will be automatically canceled.
This is a very simple example but the possibilities for smart contracts are endless, and can disrupt and revolutionize more or less any branch, automating resource intensive administration tasks and execute contract between parts without any human interaction.
Well, if you are reading this then you are still with us, awesome. Let's do a short summary on Ethereum.
Ethereum is a blockchain software that have it's own cryptocurrency called Ether (ETH). Ethereum share many similarities with Bitcoin, it can be used to transfer assets from one person to another, it's borderless and offers fast and cheap transactions.
Besides this, it also empowers thousands of different decentralized applications also known as daps; anyone can develop and publish an app to Ethereums network.
Besides decentralized applications, Ethereum also offers the possibility to tokenize real world assets and also create new cryptocurrencies on it's blockchain.
Behind all this is something called smart contracts, which is basically a way to digitalize and automatize traditional contracts between multiple parts.
A smart contract is a computer program and will always do exactly as told, and once a smart contract is deployed it's not possible to change it afterwards.
That's all for now, let's continue to Part 2 of the guide - Getting started with Ethereum.
Part 2 - Getting started with Ethereum
In this section we will describe how to get started with Ethereum. The first step would be to get a digital wallet where you can store it's native currency Ether.
How to store Ethereum
There are several types of wallets today that supports Ethereum across multiple platforms, desktop, web, hardware wallets and mobile.
The main thing that sets the different types of the wallets apart are the platform, security and accessibility.
Below we will discuss each wallet type, their advantages and disadvantages and list the most popular wallets within each category. But first a bit about digital wallets.
A digital wallet is a way to store and use cryptocurrencies such as Bitcoin and Ethereum. It consist of a private key and a public key.
The private key is what you use to get access to your wallet (and should never be shared with anyone).
The public key is your wallet adress, which other can use to transfer money to your wallet. This can be compared to an bank account number.
Desktop wallets for Ethereum
Desktop wallets are software programs downloaded to your desktop, in which you can interact with your funds. Desktop wallets are among the safest way to store cryptocurrency, but usually they require some more setup than web wallets.
Advantages with desktop wallets
- Safer than web wallets, the private key is encrypted and stored on your computer.
- It gives the possiblity to sign ethereum transactions offline, which is an even more secure way to interact with Ethereums blockchain.
Disadvantages with desktop wallets
- Since the private key is stored on your computer, it's not recomended to download a wallet to a shared / public computer.
- If your computer gets infected by virus, hacked or stolen, then there is a chance that the hackers can get access to your private keys. Always use anti-virus software!!
- It usually requires more setup to get started.
Popular desktop wallets for Ethereum
These desktop wallets are mentioned on Ethereums website and are considered high quality. Always do your own research before downloading any wallet, to make sure it's the right one for your purpose.
- My Crypto - https://mycrypto.com
- Exodus - https://www.exodus.io/
- Fetch - https://hellofetch.co/download
Web Wallets for Ethereum
Web wallets are digital wallets hosted on a website. Some web wallets allow you to store your private key on your computer and use a browser extension to connect to them, while others holds the private key as well (centralized exchanges).
Web wallets are easier to get started with, but is also less secure, especially if you don't control the private key. There is an saying in Crypto -
"Not your keys, not your Crypto"
Basically it says that if you don't control your private key, you don't control your crypto.
Advantages with web wallets
- Easier to get started with, most exchanges offers a web wallet for all their listed cryptocurrencies pair.
- With the help of a hardware wallet to store your private key, it can give both good security and accessibility.
Disadvantages with web wallets
- It the least secure of all wallets type, since it's requires both internet connection and trust to a third party.
- It's more likely to get hacked.
Some popular web wallets for Ethereum
- Metamask (Web browser extension) - https://metamask.io/
- MyEtherWallet - https://www.myetherwallet.com/
- My Crypto - https://mycrypto.com/
Both Metamask and MyEtherWallet can provide good security, since it's possible to use an hardware wallet like a Ledger or Trezor to access your funds. We will in the next section describe hardware wallets in detail.
But my recommendation is to look into other options for safely storing your Ethereum, for example on a Hardware wallet which will describe next.
Hardware wallets for Ethereum
Hardware wallets are the most secure way to access and store your Ethereum. They are about the same size as an USB memory with the addition of a display and buttons, and can be connected to your Mac, Windows or Linux computer via USB cable.
The beauty of hardware wallets is that the private key never leaves the device, which makes it more or less impossible to lose the private key due to an hack or infected computer, because all transactions going out must be signed on the device as well.
Advantages with hardware wallets
- The safest way to store cryptocurrency, because the private key never leaves the wallets.
- Offers the option to generate backups of your wallets and also let you restore the wallets on a new device via words passphrase (usually 24 words).
Disadvantages with hardware wallets
- Requires more setup than for example a web wallet.
- You need the usb device to be able to access your funds. It's advised to keep at least one hardware wallet as backup in case one get lost / broken.
- They are not free like most other wallets, and cost around 60-80$
Some popular hardware wallets
- Ledger Nano S - Ledger Nano S is an secure USB wallet from a company named Ledger and supports over 1100 cryptocurrencies such as Bitcoin, Ethereum, Ripple etc
- Trezor One - Trezor One is an secure USB wallet from the company SatoshiLabs s.r.o. It supports more or less the same cryptocurrencies as Ledger does.
Since they support more or less the same cryptocurrencies it really don't matter which one you selects, even thou my personal favorit is Ledger Nano S.
Mobile wallets for Ethereum
With mobile wallets your phone act as the digital wallet, you download a wallet app and use your smartphone as your wallet for storing Ethereum. It's the most mobile way access your funds, but it also relies on the security of your mobile phone.
If your phone get lost or stolen then your funds could be at risk, so if you are looking into a mobile wallet it is probably wise not to keep all your Ethereum there, but rather what you intended to use in the near future. You can always refill the mobile wallet if you need more funds.
Popular mobile wallets for Ethereum
- Coinbase Wallet - https://wallet.coinbase.com/
- Trust - https://trustwallet.com/
- Status - https://status.im/
- Balance - https://balance.io/
Finally, you have now reached the end of the wallet section. As you can see, there are some things to consider when selecting an wallet for storing Ethereum.
Personally I use and Ledger Nano S native Ethereum app, but I also use MyEtherWallet (MEW) for storing ERC20 tokens and using my Ledger to connect with MEW.
When friends and co-workers ask I always recommends to get a Ledger Nano S hardware wallet, even thou it cost a couple of bucks, it's worth every penny. If you are serious about cryptocurrencies then there is no other answer!
How to get Ethererum
Alright, now you know more about which digital wallets that exists for Ethereum, so let's talk about how to get Ethereum.
Well, it's actually quite easy to get some Ethereum these days. Basically there are two ways to get Ethereum -
- Buying - The easiest way to get Ethereum is to buy it from an online exchange.
- Mining - If you don't wanna buy Ethereum you can try to mine it, however it's more complicated to get started.
The easiest way to get Ethereum is to buy it from an online exchange. Today there exists tons of exchanges and it's very easy to buy Ethereum directly with a Visa / Mastercard.
Most exchanges also gives you an online wallet to store the Ethereum in, where you can keep it (temporary) until you have decided wallet type you want to use (our recommendation is Ledger Nano S).
Popular exchanges to buy Ethereum
Below are a list of exchanges that I personally use and that I know have a high degree of security and reliability.
- Coinbase - One of the biggest and most secure exchange to buy Bitcoin, Ethereum and other cryptocurrencies. Very easy and user friendly.
- Bitpanda - Another very secure and easy to use exchange. Have a bit higher fee's than Coinbase. Beginner friendly.
- Binance - One of the biggest and most famous crypto exchanges. Supports Bitcoin and tons of other cryptocurrencies.
- Kucoin - An easy to use and secure trading platform, but are smaller than Binance considering trading volume. Supports Bitcoin, Ethereum and many other cryptocurrencies, often smaller ones than have not yet been listed on Binance.
As I have already mentioned, it's usually fine to temporary store your Ethereum on any of the exchanges above, but you should definitely look into getting an hardware wallet if you plan to store your crypto for a longer time.
My personal recommendation is Ledger Nano S (it was the first I used), but Trezor are equally good.
If you don't wanna buy Ethereum you could try to mine it. Mining is the process where new coins are created, but it also secure and validate all the transactions on the blockchain.
Anyone can become a miner by downloading Ethereum software
Ethereum use the same type of mining as Bitcoin does, the Proof of Work (PoS) mining. In a Proof of work blockchain all the miners competes to solve a very time and resource intensive mathematical problem. The solution is hard to find, but easy to validate for the other miners in the network.
When a miner believes it have found the solution it broadcast that to the network. This solution is called a Proof of Work. After it have been broadcasted, all the other miners validate the solution and if a majority of the network accept it as the correct solution, a new block in the blockchain is created and the miner who found the solution becomes the block producer for that block.
A block producer gets both a reward for creating the block (known as block reward) and also all transactions fee's that's in included in the block.
After a block is created the competition starts all over again to find a new solution for the next block.
For a regular miner that use a normal desktop computer, it's usually not worth trying to mine, because the energy consumption will be much higher than the mining rewards.
However there are some mining pools that one can join where you together with other mine as an collective, but that's out of scope for this article, but google will be your friend here.
How to use Ethereum
Great, now you know how to both get and store Ethereum, now let's move on to the fun part, how to use Ethereum.
Ethereum can be used in multiple ways, for instance -
- Transfer of value - Like Bitcoin, Ethereum can be used for instant, low cost value transfer.
- Payment for goods and services - Ethereum can be used as payment for goods and services.
- Payment in decentralized applications - Ethereum can be used in any of the thousands of decentralised apps on Ethereum.
- Trading - Ethereum can be used to trade basically any other cryptocurrencies like Bitcoin, Litecoin etc.
- Investing - Ethereum can be treated as an investment.
Transfer of Value
Ethereum can be used to transfer money from one wallet to another. This is one of the most common use cases. As Bitcoin, Ethereum offers borderless, near instant low cost money transfers.
You have the possibility to send money (in the form of Ether) anywhere in the world, and the only thing you need is the receivers wallets public key.
Payment for goods and services
Believe it or not, Ethereum is actually used by real merchants and companies as a way of payment for services and goods. One example or a large retailer is Overstock, and also Wikipedia is accepting Ethereum and other cryptocurrencies.
There are a several companies like Square.com that helps merchants to easily integrate and accept Ethereum payments in their business.
Payment in decentralized applications
Ether is the native currency of Ethereum and is used as payment in almost all of the the dapps on the Ethereum network. Check out the Dapps mentioned above or go to the website State of the Dapps
If you want to deploy smart contract (dapp / token) to Ethereums blockchain your need to pay a fee in Ether.
Since Ethereum is one of the "major" cryptocurrencies, it's a base trading pair on almost all exchanges. You can trade almost any other cryptocurrency against Ether.
Since it's usually faster than Bitcoin it's sometimes preferred over Bitcoin for trading purposes.
Popular trading exchanges
- Binance - One of the biggest and most secure exchanges go trade cryptocurrencies. It's focus is on large and well known cryptocurrencies.
- Kucoin - Smaller than Binance in trading volume, but is also a very secure exchange to trade cryptocurrencies. It's focus is on smaller less known cryptos, also known as "gems".
Ethereum (and other cryptocurrency assets) can be bought as an investment, where the hope is that it will increase in price over time.
Historically this has worked out quite well for Ethereum, giving that the price have risen from a couple of cents to 1 500 dollar at current all time high (Dec 2017).
However crypto is still a emerging, high risk market, which is open 24/7 and still very much unregulated, which means that manipulation, wash / insider trading occurs. A lot of initiatives are taken to regulate cryptocurrencies so expect it to be more regulated in the future.
Ethereum is a little bit more risky to invest in compared to Bitcoin but still considered "safe" (in crypto terms).
It is the second largest cryptocurrency and have been in production for several years, is actively being developed and is used by companies all over the world.
Compared to a lot of other cryptocurrencies that might not even have launched a product yet, Ethereum is miles ahead.
However, all investments have risks tied to them and a general rule of thumb is -
Do no invest money you can't afford to lose
The next article - Ethereums future
Alright, now we have covered more or less all you need to know about and how to get started with Ethereum.
In the next article we will discuss the future of Ethereum, how it will compete with newer blockchain technologies which offers better scaling and supports smart contracts functionality and the journey towards Ethereum 2.0 called Serentity. Stay tuned!
Thank you for reading, if you enjoyed the article feel free to share it on social media. If you have any questions, don't hesitate to drop me an email on [email protected]
Disclaimer - None of the information published on this website should be considered as financial investment advice or trading advice and using the information available here is at your own risk. Be aware of the high risk that is involved in buying and trading Cryptocurrencies. Don’t trade money you cannot afford to lose!