Before Investing in Ethereum, Here’s What You Need to Know

In terms of volume, Ethereum is the second-largest cryptocurrency after Bitcoin, but due to its various uses, it can be a much bigger learning curve for new investors. 

Besides acting as a store of value and money, Ethereum serves as a highway for decentralized finance, says Bill Noble, chief technical analyst at Token Metrics, a cryptocurrency analytics platform. 

In contrast to Bitcoin, Ethereum is a blockchain-based software platform that creates value instead of digital gold. With Ethereum, users can interact with the platform with ether, its cryptocurrency — or purchase and hold it as a store of value. Besides developers who use Ethereum, investors also invest in the crypto because it has the potential to gain in value over time. 

What Is Ethereum?

The Ethereum cryptocurrency was created by Vitalik Buterin in 2015, shortly after Bitcoin.

“Olive Leech, learn editor at Coindesk, a cryptocurrency news site, says Bitcoin is like a pocket calculator; it does one thing well, but you can’t do anything else with it.

Ethereum is a blockchain network with an associated cryptocurrency called ether (ETH), which can do so much more. 

Unlike Bitcoin, Ethereum is also a software platform developers can use to develop new applications – often crypto-adjacent or designed to streamline the process of buying, selling, and using cryptocurrency. These apps can range from lending apps to payment platforms, just like the ones on your phone. 

It is important to think of Ethereum like a smartphone, says Leech. There are many things that developers can do on smartphones, similar to how they can do on Ethereum. While mobile phone apps tend to be more universal these days, Ethereum apps tend to be more geared towards crypto users. As an example, if a developer wants to create a lending app, they can do so, and then other crypto users can lend money and borrow money using the app.

“It’s all powered by the idea of smart contracts,” Leech explains. What a smart contract is, according to Leech, is a program that runs autonomously on the Ethereum blockchain in order to perform all the functions that would normally be handled by some third party. 

A peer-to-peer lending application built on the Ethereum network allows individuals to lend money without the need for a bank, for example. People can complete direct transactions over the network.

These apps are based on smart contracts, which are algorithms that perform a specific function when certain conditions are met. When the collateral is placed into the correct wallet or account, the contract fires off the result (lending the money). A smart contract can offer speed of execution, the absence of human error or bias, and lower fees compared to traditional lending. 

Other Uses of Ethereum

The products and services that live on Ethereum were built using the principles of decentralized finance, just like many other popular cryptos. 

Decentralized applications can be developed using smart contracts, allowing creators to serve a variety of purposes. Financial tools such as Cryptocurrency Trading Platform, decentralized lending platforms, and data services like Matcha, which searches multiple cryptocurrency exchanges for the best price, are included in these applications. However, there are also dapps for buying and selling digital artwork, gaming, and developer technology. 

Since Ethereum is an open source platform, developers are able to create new cryptocurrencies like Chainlink and XRP, which are known as tokens, on top of it. You may be familiar with some of these assets because they come in the form of cryptocurrencies, such as Tether (USDT), Uniswap (UNI), and USD Coin (USDC).

In fact, Ethereum is not the only digital asset that can be created on the platform — recently, the non-fungible token, or NFT, has been another example of something that has been made on the platform. According to Ethereum Trading Platform, these digital tokens are powered by Ethereum and represent ownership of unique items.

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