Almost everyone starts their adventure with cryptocurrencies by getting acquainted with one of the two largest projects. These are, of course, Bitcoin and the Ethereum described today. If this text is not your first encounter with this market, you have probably already heard of Ethereum, but what exactly is it? What makes it the most recognizable project next to Bitcoin, and what does it offer?
Get to know Ethereum
Learning about what Ethereum is and what sets it apart from Bitcoin is important because it allows you to explore the much broader possibilities of cryptocurrencies that go beyond simple financial transactions.
In this article, we will explain the basics of Ethereum and the main differences between this project and Bitcoin. I will try to answer the questions posed in the introduction in a simple way without going into the details of how Ethereum works, which can be a bit complicated, and certainly more so than in the case of Bitcoin. Fortunately, we don’t need to know them to take advantage of the opportunities offered by the second largest cryptocurrency on the market.
If you already know what Bitcoin is, that’s great. This will help us understand the difference between Ethereum, but still, this knowledge, while useful, is not required. Either way, I encourage you to read the linked text about Bitcoin.
Recall that Bitcoin was created as an electronic payment system. It allows you to perform simple transactions transferring value in the form of BTC units, and this is its main practical purpose, although not the only one.
However, cryptocurrencies do not have to be limited to simple financial transactions involving the transfer of funds, as Vitalik Buterin noted in 2013. Together with a group of other figures known in the world of cryptocurrencies today, he decided to create a project called Ethereum. In addition to Vitalik, the group of co-founders included, among others, Dr. Gavin Wood, responsible for the technical side of Ethereum, today working on Polkadot, and Charles Hoskinson, later the founder of Cardano.
Okay. So if not just the simple transactions known from Bitcoin, then what is? What is Ethereum and what new has it introduced?
What is Ethereum?
Ethereum is moving away from becoming just a payment system and going much further. It is a global, decentralized computer running on the basis of a blockchain.
A blockchain is a cryptographically secured and tamper-proof database from which added information cannot be deleted. It records all the activity of a given network. It is the only and indisputable source of truth on the web. All transactions that have been made can be verified on your own.
The term I used, which is to describe Ethereum as a computer, means that you can run any programs on it. Almost like on a regular computer. However, this one is decentralized and operates globally, which makes it impossible to stop it easily and there is no single person who controls its operation, ensures the security and consistency of the data. A global network of cooperating – already ordinary – computers is responsible for this.
Today, in keeping with the nature of cryptocurrencies, applications deployed on Ethereum are mainly focused on finance, but they don’t have to. You can create a base for games, social media and other applications that go beyond the financial sphere.
However, there is no denying that it is financial solutions that are in the lead. At the time of writing, the capital locked in various financial applications on Ethereum is over $22 billion.
Smart contracts
Ethereum significantly expands the capabilities known from Bitcoin by adding something called “smart contracts”. The possibilities of creating applications are based on smart contracts, which are neither smart nor contracts. They are immutable computer programs that work exactly as they were programmed and in a deterministic way.
A smart contract is nothing more than a program written by programmers that is supposed to perform specific operations when someone interacts with it. This means that if, for example, a transaction is sent that does X, the result will always be Y and for everyone executing that statement.
Anyone, without any permissions, can create and deploy their own application to the network, which will work exactly as it was programmed, and in an open, censorship-resistant and continuous way, just like the entire Ethereum.
Of course, simple transactions of transferring funds from address A to B are also possible, but thanks to the ability to support smart contracts, Ethereum became the first “smart contract platform”. The aforementioned financial applications running on Ethereum are generally known as Decentralized Finance (DeFi). Decentralized “companies” or decision-making centers known as Decentralized Autonomous Organizations, or DAOs, can also be created.
Cryptocurrency? Token? Coin?
We immediately explain the difference, which has long been irrelevant in the crypto world anyway. Cryptocurrency is BTC, or ETH, i.e. the main units of exchange operating in a given network. It can be said that cryptocurrencies have their own blockchain. On the other hand, tokens can be called “subordinate” units that have been created in a given network using smart contracts, e.g. on Ethereum. They are not the main currency of a given network, but act as additional assets, with any role.
The term token and cryptocurrency – and sometimes “coin” – is often used interchangeably, and in most cases it doesn’t really mean as we say, but it’s useful to know this subtle difference as a curiosity or to hang out in company.
The same is true of the amount of rewards, i.e. ETH inflation. In Ethereum, it depends on several factors. At the time of writing, around 1700 ETH per day is circulating as validator rewards.
Ether provides the main fuel for executing transactions, just like BTC on the Bitcoin network. You have to pay for each operation performed on this network. However, the fees, unlike those from Bitcoin, do not go to the “miners” but are destroyed. This destruction, or the removal of ETH used for fees from circulation, is called burning. In Ethereum, there are no miners, because there is no “mining” process, which you have probably heard of with Bitcoin. There is staking, which we will discuss in a moment.
By burning fees, the amount of available ETH in circulation, despite the lack of restrictions, can not only grow very slowly, but it may not grow