You may have heard of Ethereum, and along with Bitcoin, it is one of the two leading cryptocurrencies in the world right now. There’s a chance you may have even bought some Ethereum in the past or own some now. Even if this is the case, you may still not fully understand what Ethereum is. You just heard that it’s a good cryptocurrency to have and you decided to buy and HODL (Hold On for Dear Life).
So what is Ethereum? Ethereum is a cryptocurrency that builds upon the capabilities of Bitcoin. Ethereum is a decentralized blockchain that allows programmers to create decentralized applications (dApps) that run on the Ethereum blockchain with the native token of the blockchain being called, Ether.
Many experts predict that Ethereum will be the technology that will dominate the crypto market within a few years and that it’ll even be the world’s reference currency. But what is Ethereum, how does it work, what are its possibilities, and what does the nearest future hold for it?
In this guide, What is Ethereum? Ethereum for Beginners, we’ll give you the answers to these and other questions about Ethereum, so that when you finish reading, you’ll be almost an expert on the subject insha’Allah.
What is Ethereum?
Ethereum is a blockchain-based network – similar to the Bitcoin blockchain – that supports its own cryptocurrency called Ether (ETH), and which also allows the development of other programs based on its technology.
What does this mean?
It means that it is a platform that offers tools to “create” other things, such as:
- Other cryptocurrencies
- Smart contracts
- Decentralized applications (dApps)
- Centralized payment bridges
- Decentralized autonomous organizations (DAO)
- Crowdfunding offers (ICO)
Ethereum was initially proposed by Vitalik Buterin at the end of 2013, a project that other people quickly joined, such as Anthony Di Lorio, Gavin Wood, and Joseph Lubin, among others.
Finally, Ethereum was formally launched on July 30, 2015, with the mining of its first block – the genesis block.
What is the difference between Bitcoin and Ethereum?
Although Bitcoin and Ethereum have many things in common, they also have many differences.
The main difference between both blockchains is their objectives. The purpose of Bitcoin is to represent wealth, like gold. It could even replace traditional money.
On the other hand, the purpose of Ethereum is to be a platform for other applications to work, mainly Smart Contracts – more on that later.
Bitcoin is a digital currency and is not used for anything else, while the Ethereum platform also has its digital currency called Ether (ETH), but this is used for network maintenance.
In the technical aspect, there are quite a few differences and if we had to choose between the most relevant, these would be the following:
1- Emission limit
Currently, the Bitcoin network creates 12.5 BTC every 10 minutes (75 BTC per hour), while the Ethereum network can create 3 Ethers every 15 seconds (720 Ether per hour).
2- Units limit
While Bitcoin limits its production to 21 million bitcoin – and there are about 18 million in circulation – the amount of Ether that can be produced is unlimited.
3- Operating cost
In Bitcoin, the cost of transactions is linked to the size of the transaction. In Ethereum, the cost (gas fees) is assigned to each operation.
4- Node size
The size of the Bitcoin node is limited to 1MB, while in Ethereum it’s limited by the amount of gas. This means that Bitcoin only processes 4 transactions per second, while Ethereum processes 20.
The Bitcoin hash algorithm (SHA-256) is performed efficiently with specific hardware such as ASIC. In Ethereum, its algorithm, the KECCAK-256, is not as specific to one type of hardware, which guarantees further mining decentralization.
What can you do with the Ethereum blockchain?
Before answering this question, it’s important to first understand how Ethereum works.
If you want to do something on the Ethereum network you need Ether, which is its native cryptocurrency. Ether is like food for Ethereum. Each transaction requires an amount of Ether and the larger and more complex the work, the more Ether is needed.
Imagine for a moment that you need someone to prepare a report of your business’ sales, which will cost 12 Ether.
Traditionally and for security reasons, you first wait for the report to be prepared for you, and then you transfer the money, right? But sometimes it happens that they ask you for the money before they can start the job.
But what happens if you pay and then the other person doesn’t do their part? You’ve been scammed…
With Ethereum, the transaction can be linked to a Smart Contract in which it’s reflected that if Carl prepares and delivers the report for Peter, Carl will receive 12 Ether in his wallet automatically. All this would be reflected in a transparent way for both parties in the Ethereum network. There is no place for scams.
The goal of Ethereum is to allow developers to write programs that allow self-governance and transaction automation. In addition to this, the use of decentralized applications or dApps within the Ethereum network allows the development of all kinds of digital products and services.
The Ethereum blockchain allows the principles of trust, transparency, security, and efficiency to be transferred to any service, business, or industry. In this way, Ethereum has managed to integrate into a wide variety of services and industries, including:
- File custody services
- Platforms for the exchange of goods and services
- Product shipment tracking
- Insurance contracts
- Web services of all kinds
- Collectible tokens (NFTs)
- Prediction markets
- Social media
- Information records
Your imagination is the limit.
What are Ethereum Smart Contracts?
Smart Contracts are the feature that best identifies the Ethereum network. These are programs that replicate traditional contracts, but instead of being made on paper, they’re written in computer code stored in the blockchain.
These “contracts” are no longer analyzed, interpreted, and executed by people, but are executed by the computers that are part of the Ethereum network, in exchange for a financial reward.
As we mentioned before, these contracts are executed automatically – after payment to the network – according to the agreement established between the parties involved. That is, the software will execute a series of predetermined tasks, according to the instructions written in its code.
The payment to the network is necessary so that there is an economic incentive to dedicate the computational power necessary to execute the contract. This implies that the more complex and lengthy a contract is, the more expensive it’ll be – one of Ethereum’s current problems.
Now, the most interesting and innovative part of all this, is that there is no need for a trusted third party to ensure compliance with the contract, but rather, technology that ensures that the conditions are met.
In addition, it’s not possible to modify or censor the contract, since it’s written in a public and immutable database such as the blockchain.
What are Ethereum gas fees?
Up to this point, you already know that Ethereum and Ether are not the same thing; Ethereum is the base platform, while Ether is the cryptocurrency used on that platform.
Every time you send ETH or use an application on Ethereum, you’ll have to pay a small fee in ETH to use the network. This is an incentive for miners to process and verify what you want to do.
Of course, you can also use ETH as a payment method, or invest in it and wait for a subsequent price increase and collect your profits.
It’s also important to say that each ETH is divisible by up to 18 decimal places (0.000000000000000001 ETH). This is important when it comes to gas fees.
What exactly are gas fees?
On the Bitcoin network, each time a transaction takes place, this includes a small commission for the miners who maintain the network. The equivalent within Ethereum is what we know as “gas.”
It’s not another currency, it’s the name that is given to the measure you have to pay to use the network, be it a transfer, a smart contract, a game, etc.
Now, we can see two different concepts here: the gas limit and the gas price.
The limit refers to how many units of gas you are willing to spend on a particular transaction and usually, it doesn’t vary; while the price is the amount of ETH that each unit of gas costs. To get the total cost, you must then multiply the limit by the price.
Here is an excellent website that will help you to determine the cost of Ether gas prices, Ethereum Gas Tracker.
Pros and Cons of Ethereum
Many people think that Ethereum is the cryptocurrency destined to replace Bitcoin as the queen of the crypto world, however, everything has its pros and cons. Let’s see.
1.- Decentralized automation
Ethereum is a global access platform on which it’s possible to run complex smart contracts. This totally eliminates the need to depend on services provided by third parties for its operation.
2.- Platform for other products or services
This ability allows Ethereum to be an increasingly robust ecosystem. As time goes by, there will be a greater quantity and better quality of information on the platform insha’Allah.
3.- Defined goals
The future of Ethereum is clear, so the community has the standards for what to expect in the next few years, much clearer than with other blockchains.
4- Great support
Beyond the founders of Ethereum, there are many companies involved in its study and development. After Bitcoin, Ethereum (and Ether) is the most business-supported crypto network.
The fact that Ethereum is intended as a platform and not as a cryptocurrency, causes it to never be as effective as other blockchains. Bitcoin is simple and effective, it only has one approach. Instead, Ethereum is designed to be a kind of supercomputer. That complexity makes it less optimized.
2- Possible failures
Ethereum will soon undergo major changes transitioning to the Ethereum 2.0 network (Eth 2.0). If there are any problems during this period, it could seriously damage the platform architecture and crash the system.
3- Difficult for newbies
There is no availability of a large amount of quality documentation on the platform, which is an obstacle for those who want to develop projects in Ethereum for the first time. Over time it will improve, but for the moment, getting involved in developing Smart Contracts is difficult for many.
4– High gas fees
Due to the high congestion of transactions on the Ethereum network, miners are charging higher gas fees as they get to pick and choose what transactions they want to validate and this has been a major pain point with Ethereum as many people are not able to have their transactions processed on the network as they are not willing or do not have the funds to pay for the high gas fees.
The future of Ethereum
Certainly, the Ethereum network is one of the most used blockchains in the world and since its launch in 2015, it has been moving towards the proposed goal of becoming a huge global network of decentralized applications.
However, Ethereum still has a lot to improve, and the community behind its development is working hard to make this goal come true.
Ethereum 2.0 (Serenity) will be the largest and most comprehensive update ever made by the Ethereum community and is supposed to improve almost all current network problems:
This is the main current problem for Ethereum, as the network supports a large number of applications and can only process about 20 transactions per second. To solve this, the development community will use a process called sharding.
The consensus currently used in Ethereum is known as Proof of Work (PoW) and requires a huge amount of computational power and electricity, which makes it very inefficient and expensive.
Eth 2.0 will seek the transition of the network from a PoW protocol to a Proof of Stake (PoS) protocol called “Casper”, which will help improve scalability, efficiency, and sustainability for the network, as well as lower gas fees for transactions and smart contracts.
Aside from correcting problems, Eth2 will also bring the possibility for users to invest their Ether and earn rewards by running nodes or joining staking pools, or even staking through external exchanges.
This possibility of staking of Eth2, could also be a factor that makes the price of Ether rise in the future.
Islamic perspective on Ethereum
Some of our scholars have been closely studying Ethereum. Amanie Advisors, a shariah advisory firm that specializes in Islamic finance, has written a whitepaper on Ethereum where they have concluded that Ethereum does meet the requirements to be categorized as mal (property) according to the shariah.
Amanie Advisors also categorizes Ethereum as an asset and not a currency.
Their goal of researching and producing a whitepaper on Ethereum is to encourage scholars of Islamic finance to find ways to utilize blockchain technology for the good of the ummah and the world at large.