If you’ve ever wondered “what is Ethereum”? and how it differs from Bitcoin, you are not alone. While Bitcoin remains the most well-known cryptocurrency, Ethereum has carved out its own significant niche in the blockchain world. As of 2024, the Ethereum ecosystem boasts over 4,000 decentralized applications (dApps), 53+ million smart contracts, and 96+ million accounts with an Ether (ETH) balance. Beyond just a cryptocurrency, Ethereum empowers developers to build and adopt blockchain applications seamlessly. In this article, we’ll explore what Ethereum is, how it works, and how it stands apart from Bitcoin.

What is Ethereum? How Does it Work?

Most people recognize Ethereum because of its cryptocurrency Ether, but Ethereum is much more than just a digital currency. At its core, Ethereum is a blockchain-based software platform that allows developers to build decentralized applications (dApps), ranging from games and marketplaces to innovative financial tools. Before Ethereum, creating blockchain applications required extensive knowledge in coding, mathematics, and cryptography, along with significant time and resources. Ethereum has democratized this process, enabling anyone to build applications that run on the blockchain, similar to how software runs on a computer.

Ethereum achieves this through its open-source programming language, Solidity, which runs on the Ethereum blockchain. This has significantly lowered the barrier to entry for creating decentralized applications, leading to an explosion in the number of dApps being built across various sectors, including decentralized finance (DeFi), non-fungible tokens (NFTs), and healthcare.

How Does Ethereum Work?

To fully understand “what is Ethereum,” it’s essential to grasp how it operates. Ethereum is built on blockchain technology, which is based on two major principles: decentralization and a distributed public ledger. Decentralization means that the coordination or management of processes in the blockchain is open to all network members, rather than being controlled by a single central authority. A distributed ledger ensures that everyone participating in the Ethereum network has an identical copy of the ledger, allowing them to see all past transactions.

Participants in the Ethereum network are referred to as nodes. Nodes are responsible for validating transactional data sets on the Ethereum network through consensus mechanisms. For a network to function effectively, there must be a protocol that keeps all participants in agreement, known as a consensus mechanism. Ethereum uses the Proof of Stake (PoS) algorithm. PoS requires validators to stake their cryptocurrency as collateral in hopes of being selected to validate a transaction. The more cryptocurrency a validator stakes and the longer they stake it, the higher their chances of being selected to validate a block of transactions. Validators are penalized for fraudulent transactions by losing some of their stakes, but they are rewarded with Ether for accurate transactions.

What is Ether?

If someone tells you they invested in Ethereum coin, they are most likely referring to Ether. People often use the terms Ethereum and Ether interchangeably, but they represent different things. While Ethereum is the entire blockchain network, Ether is the native cryptocurrency of the Ethereum network. It was created for settlement on the network. Anyone who wants to build a software application or program on the Ethereum network must pay for the computing power and space required using Ether. It is also used as a gas fee for transactions within the Ethereum blockchain.

Ethereum vs. Bitcoin: Key Differences

As the two giants of the crypto world, Ethereum and Bitcoin are often mentioned together. They both leverage decentralized ledger technology and have significant cryptocurrency relevance. However, their similarities end there. Each represents different things and serves different purposes in the blockchain world.

The Inception

Bitcoin was created by the mysterious, pseudonymous entity Satoshi Nakamoto as a system of electronic cash that people can access without needing to trust third parties like central banks. Its purpose is to provide monetary value and serve as an alternative to modern banks.

In contrast, Ethereum was proposed by then-19-year-old Vitalik Buterin. The goal for Ethereum, according to Buterin, is “a peer-to-peer network that can securely execute code provided by untrusted parties.” The initial intent of Ethereum was to create an alternative protocol for building decentralized applications. Although Ether, the cryptocurrency of Ethereum, has gained wide adoption as a monetary entity, that wasn’t its original goal. It was created as a tender for settlement on the Ethereum network.

Creation Process

One key difference between Ethereum and Bitcoin is their creation process. Originally, both Bitcoin and Ethereum could be created through mining, a process where new tokens are minted and rewarded to anyone who performs a hard computing function to verify a block of transactions. This verification process is called “Proof-of-Work” (PoW).

However, in September 2022, Ethereum transitioned to “Proof-of-Stake” (PoS). In PoS, miners are replaced by validators. New coins are created when validators stake their coins in hopes of being selected to verify transactions and get rewarded. This contrasts with PoW, where nodes use tremendous energy to compete with each other to be the first to verify blocks of data. Despite energy concerns, Bitcoin still maintains the PoW mechanism while promoting the use of sustainable energy supplies for its creation.

Quantity of Supply

Another significant difference between Bitcoin and Ethereum is the quantity of supply. Bitcoin has a fixed supply of 21 million coins that will ever be in circulation. In contrast, Ether has no predefined limit and can be created. It is estimated that 18 million Ether coins are mined every year, with over 120 million Ether coins currently in circulation. While Ether can be created, the Ethereum network deploys strong protocols to balance the Ether created and the ones burned out, ensuring security and largely preventing inflation.

Use Cases for Ethereum Blockchain

The Ethereum blockchain is at the forefront of innovations in the blockchain world and Web3 because it allows users to create blockchain-based applications and programs. Here are three well-known innovations thriving on the Ethereum network:

DeFi (Decentralized Finance)

DeFi is a financial ecosystem that allows anyone with an internet connection and a crypto wallet to access financial services like trading, borrowing, lending, and asset control without needing a central authority. A popular application of DeFi is decentralized exchanges (DEX), such as Bybit.

Non-Fungible Tokens (NFTs)

NFTs are unique identifiers that provide proof of ownership of digital assets, such as artworks, collectibles, real estate, and in-game elements. NFTs make it possible for people to have the right to ownership of their assets, allowing them to trade these assets with others.

Smart Contracts

Ethereum offers an open-source platform for creating and deploying smart contracts. Smart contracts are a promising way to automate agreed-upon actions when conditions are met, without the need for an intermediary. They are often called self-executing contracts because they execute automatically if all the terms of a transaction are met. For example, a smart contract could release funds from a buyer to a seller only if the buyer receives the goods. Smart contracts have found adoption across various sectors, including banking, supply chain, real estate, insurance, and healthcare.

DAOs (Decentralized Autonomous Organizations)

DAOs are organizations where decisions are made through smart contracts, ensuring that the rules guiding the organization cannot be changed as they are embedded in code. This decentralized approach to governance is gaining traction in various sectors.

Ethereum vs. Bitcoin: Which is Better?

Both Ethereum and Bitcoin have their strengths. Bitcoin is often considered a long-term value store due to its fixed supply of 21 million coins, making it attractive for long-term investment. Ethereum, on the other hand, excels in terms of innovation and scaling blockchain usage. With numerous developments and transactions occurring on the Ethereum blockchain, it is highly rated as an investment. If you believe in the future of the blockchain world, keeping an eye on Ethereum is wise.

Furthermore, due to the high price of Bitcoin, many investors see Ethereum as the next best alternative. If you want to invest in a token that is considerably lower in price than Bitcoin, Ether may be a good option. However, if you prefer a token with a proven track record and predictable market value, Bitcoin is a solid choice. Keep

The author does not own or have any interest in the securities discussed in the article.