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Ethereum explained: A guide to Ethereum (ETH)

Ethereum is a platform that uses decentralized blockchain technology to allow anyone to create and share applications across the internet. Its currency Ether (ETH) is required as a fee to create an application or carry out transactions using Ethereum’s smart contracts. Keep reading to learn more about Ethereum and what factors to consider when trading ETH.

What is Ethereum and how does it work?

Ethereum is a decentralized, open-source blockchain that hosts the cryptocurrency token Ether, but the name is frequently used in reference to the crypto. Ethereum was built as a decentralized computing platform in 2015 to extend the security and capabilities of blockchains to a broader range of applications. Anyone can create and share applications on Ethereum, and the decentralized nature of the platform means no one can shut down or block anyone else’s creations.

The cryptocurrency used on Ethereum is called Ether (ETH). Ether can be traded and invested in as a financial asset, but its main use case is to carry out tasks and transactions on the Ethereum network. This includes building, running, and accessing applications on the Ethereum blockchain. The more people there are who utilize the Ethereum network and hold Ether, the more its value becomes and the cost of Ethereum fees increase.

Ether as a digital currency was introduced in an Initial Coin Offering (ICO) with the launch of Ethereum in 2015 when 72 million tokens were sold in exchange for Bitcoin, but more have been mined since. There is no limit on how much Ether can be mined, but Ethereum as a platform has undergone a major overhaul, called Ethereum 2.0, that may eventually eliminate ether mining completely.

What is Ethereum 2.0?

Ethereum 2.0 is an updated version of the platform intended to change how transactions are verified to make the blockchain more secure and less energy-intensive. In this update, the Ethereum network moves from proof-of-work algorithms to proof-of-stake over a two-year period from 2020 to 2022. Other updates in Ethereum 2.0 include improvements to the network’s scalability and security.

The above details are historical and provided for context only; they do not predict future performance

Read more about the Ethereum 2.0 update here

Ethereum vs. Bitcoin

Ethereum’s main difference from Bitcoin is how their blockchains operate. While Bitcoin’s blockchain functions like a ledger with each block succeeding the next in a chain, Ethereum’s blockchain is better thought of as an entire computer with all blocks connected to one another. This structure makes Ethereum much more flexible in comparison to Bitcoin, allowing for the creation of entire applications and smart contracts which can execute independently at a predetermined date.

Once the rollout of Ethereum 2.0 is finished, Ethereum will differ even more from Bitcoin. The updated network will use a proof-of-stake algorithm to execute actions instead of the proof-of-work algorithm used by Bitcoin. This new algorithm will make Ethereum more secure and much less energy-intensive, something that has become a major concern for environmentally conscious cryptocurrency enthusiasts.

Ether’s value is also derived from its use within the Ethereum platform. If more applications are being built and maintained on the platform, Ether will continue to gain value. This is very different from Bitcoin’s value, which is viewed more and more as a safe-haven currency to store wealth.

Read more about how Ethereum compares to Bitcoin

What affects the price of ETH?

The price of Ether is directly affected by the value and use of the Ethereum platform. Ether is used to conduct every smart contract and application that Ethereum hosts, so the more people there are who use the Ethereum platform, the more valuable Ether becomes. The amount of ETH charged for a transaction on Ethereum is referred to as the gas fee.

Other typical influences on cryptocurrencies also affect ETH:

Government regulation: Ethereum isn’t regulated by federal officials, but negative or positive opinions on cryptocurrency made public by regulatory bodies can still impact sentiment on cryptos like ETH

Supply and demand: Like all tradable assets, the rise and fall of Ethereum’s demand greatly impacts the value of ETH

Blockchain developments: Updates and changes to the Ethereum network can greatly affect the price of ETH. In September 2022, Ethereum merged to become Ethereum 2.0. The merge brought many changes to Ethereum’s mining and governance processes, and has caused price swings in both directions before and after the event

Bitcoin’s price: Because Bitcoin is the leading cryptocurrency, any disruption to its price reverberates throughout the greater crypto economy. Changes in BTC’s value can sometimes indicate changes to come in the value of ETH

Learn more about what drives cryptocurrency prices

This content is provided for informational and educational purposes only and should not be construed as investment advice. FOREX.com Canada does not currently offer digital currencies or cryptocurrency trading

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Ethereum FAQs

Who invented Ethereum?

Ethereum was invented by Vitalik Buterin, a Russian-Canadian programmer who, along with a small team of developers, created Ethereum as a technical improvement of Bitcoin. Buterin’s main improvements were speeding up transaction times and creating a more accessible mining process.
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How many Ethereum tokens are there?

There are roughly 122.5 million Ethereum tokens in circulation as of September 2022. Previously, Ethereum’s supply grew by one to one-half million tokens every month. The merge to Ethereum 2.0 has greatly reduced the number of tokens minted per month.
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Are Ethereum transactions anonymous?

Ethereum transactions are pseudo-anonymous. Blockchain ledgers which track and publicize all Ethereum transactions are public, but the identities behind each transaction are obscured by a public wallet and address that keeps the user’s personal identity anonymous.
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