An Introduction to Ethereum

The Pros & Cons of Ethereum & where to buy it.

Last year, I wrote an “An introduction to bitcoin: what is it, why it exists, and where to buy it” for my mom, who lamented on a weekly basis that she simply did not understand what this “bitcoin & cryptocurrency” stuff was all about.

While we can agree that blockchain (in whatever shape and form it exists in your mind) continues to eat the world, the gap between the Innovators and the Laggards continues to grow.

The cryptocurrency community is absorbing updates in real-time about technical, business & regulatory developments while the rest of the world catches up. I’ve occasionally joked that we’re watching Season 3 in the “Game of Crypto,” while the majority of the world that is not working in technology is now catching up and starting to watch Season 1.

Wherever you land in this spectrum, my hope with this article, is to move attention away from an introduction to Bitcoin (which is now in Season 3) to an introduction to Ethereum, the second largest cryptocurrency by market share on this date according to coinmarketcap.

So what is Ethereum?

Let’s start by revisiting Bitcoin in order to begin understanding Ethereum. To be clear, Bitcoin, (capital case) is the blockchain which introduced bitcoin (lower case), the digital currency, that sits on top of the blockchain that cannot be copied, or duplicated.

A Blockchain is a public decentralized ledger that securely records transactions between parties anonymously, thus cutting out the middleman. The word “block” refers to the way data is stored; on blocks. Any transaction is broadcasted to all the nodes on the blockchain which have to verify the transaction.

The power of the blockchain technology is immutable, irreversible, and decentralized and was so revolutionary that other competitors decided to create their own blockchain technology and introduce new blockchains with different functions beyond the first version with Bitcoin.

In the case of Ethereum, the founder Vitalik Buterin, decided that this new blockchain would be specifically used for smart contract execution, decentralized apps (largely known as DApps today), and autonomous organizations.

Ethereum also introduced its own digital currency, called Ether. Ether is largely known today as cryptocurrency or a “token”. This is important, because whenever developers execute a smart contract or transact using the Ethereum blockchain, they must include enough “gas”, aka ether to run the program. In other words, ether is what you pay when you program code on ethereum.

Like Bitcoin, Ethereum uses the “proof of work” methodology, so developers have to “mine” or validate the nodes on the ethereum blockchain which rewards them with ether tokens. However, at the time of this article, there is now discussion that Ethereum should move to a “proof of stake” model, which is a different way to validate transactions and achieve consensus on the blockchain.

Ethereum; The Pros

Functionality. First and foremost, Ethereum offers far more functionality than Bitcoin which makes it attractive to developers for a variety of reasons. Ethereum is Turing complete and staleful, which means that these smart contracts pick up where they left off, which is unlike the Bitcoin blockchain. The fact that the Ethereum blockchain can remember data makes it popular among developers.

While Bitcoin transactions are multi-signature transactions that only execute when two parties or more consent to it, Ethereum, on the other hand, allows anyone to run programs and applications on top of it. Developers can run decentralized code and create new products or even a new cryptocurrency on top of Ethereum. We are seeing this play out with the Initial Coin Offerings (ICO’s), which are creating new products on top of the Ethereum blockchain, and issuing their very own tokens, or cryptocurrencies. Ethereum is both a platform and an ecosystem, as opposed to Bitcoin, which largely only runs bitcoin.

Open-source availability. Like Bitcoin, Ethereum is open-source. Every node in the blockchain stores the same data. Because anybody can build applications and products on top of the Ethereum blockchain — it’s strongest value proposition — their contracts can either utilize ether as a currency or they create and issue their own currency.

Trusted. With smart contract executions, every program executed on the blockchain is by a signed program, and no third party or middle-man is needed. Smart contract executions on the blockchain remove third-parties and middle-men. So that actually makes it ‘trustless’ which makes it even more trusted. However, that contract data sits “on-chain” with Ethereum, meaning that the program is stored in the Ethereum blockchain itself, rather than just pointing to code that is sitting somewhere else.

Ethereum; The Cons

While speed is an issue for most blockchains, Ethereum’s speed is particularly important because of the many programs that are trying to run on top of it.

Speed & Capacity. Because Ethereum calculates every single transaction on any Dapp, the more transactions that run on the blockchain will eventually slow it down and prevent it from scaling. That’s exactly what we’re seeing play out now.

To date, I believe the only real application we’ve seen commercially deployed on Ethereum thus far is CryptoKitties, which took down the Ethereum blockchain with less than 100K users.

Because Ethereum is open-sourced — anyone can build a program on top of Ethereum — it is great for democratizing access to the blockchain, but the downside is that each new node will continue to work longer and longer which affects the speed of the software. This makes it difficult to scale.

Having said that, there are no fully functioning blockchains to date that can offer real decentralized apps and run faster than Ethereum. There are some blockchains that may compete with Ethereum like NEO & Stellar, and other post-blockchain protocols like Hashgraph and Dag that offer faster transactions per second, but to my knowledge, they may not have much on-chain smart contract usability.

Even still, many companies are using the a mix of on-chain and off-chain to circumvent the speed problem.

Safety. Like other cryptocurrency, a hack on exchanges with ether is possible, but note that the blockchain itself is immutable, and irreversible, and impossible to destroy or die as long as even one node is running. The blockchain Ethereum cannot and never will be hacked.

Where you can buy Ethereum

A majority of cryptocurrency investors start by purchasing Bitcoin, which is known as the “gateway” cryptocurrency. If you are brand new to cryptocurrency investing, there are a number of exchanges where you can buy Ethereum which are similar to where you can buy Bitcoin and other altcoins.

Not all exchanges are created equal, and it’s important that you do your homework in order to discover which exchanges offer the best transaction fees, customer service, and UI experience.

• Kraken
• Coinbase
• Gemini
• Binance
• Bitrex
• Poloniex
• Bitstamp

However, unless you’re a developer or company interested in using the Ethereum blockchain to transact or run your own program, the only other reason to buy Ethereum right now is for pure speculative purposes.

The ICO conundrum for U.S. investors

Initial Coin Offering (ICO’s) are a new way for startups to raise money outside of the venture world. In an ICO, a startup raises money from early adopters and enthusiasts, in exchange for discounted tokens (or for future delivery of discounted tokens if the application has not been fully developed). In 2017 alone, over $3B was raised in ICO’s.

However, since some ICOs are generally considered “securities offerings”, U.S. citizens must be accredited investors in order to participate legally in many ICO’s. Globally, with the rise of ICO’s, regulatory bodies are paying more attention to token launches and how they affect Main street investors, given the overly volatile and speculative nature of cryptocurrency investing.

None of statements that I’ve made in this article are meant to be interpreted as investment advice. Please use your judgement when purchasing cryptocurrency and never invest more than what you’re willing to lose.

In the meantime, I’ll be eagerly watching the rest of Season 1 (or some may argue Season 2) unfold in the Game of Ethereum.

About me: I attend several crypto conferences, and meetups, and have a few of my toes dipped into the cryptocurrency & blockchain world as a product marketing consultant, and while the industry changes at lightning speed, my hope is that those new to the space will be able to start their journey in the world of blockchain technology.

If you liked what you read, you can follow me on Medium.

An Introduction to Ethereum was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.