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Things You Should Know Before Investing in Ethereum

13 January 2023 09:10, UTC

Ethereum remains the second most popular cryptocurrency and the second largest in terms of volume. However, unlike Bitcoin, using Ethereum may warrant a larger learning curve, especially for new investors. 

Ethereum (or rather, its native coin — Ether) has two functions. You can use it as a payment method, or you can also have it as a store of value. 

However, we must not forget that Ethereum also serves as a highway for the decentralised finance world. The network functions more like a software platform that is running on a blockchain instead of just serving as digital gold like Bitcoin. 

The Ethereum platform enables interaction between users, who may also choose to buy ether. Many opt to hold ETH as their store of value. What’s more, Ethereum is very popular with developers due to its large potential for enabling DeFi and dApps. 

Who Created Ethereum and Why?

Who invented Ethereum? It was Vitalik Buterin, who did it in 2015. He invented Ethereum after realising that Bitcoin works much like a calculator that is programmed to do only one thing. Although Bitcoin is also known to do a great job at it, it is not capable of doing anything else. This is why Buterin decided to create a cryptocurrency called Ether (ETH) that has a lot of potential to do far greater things than what Bitcoin is capable of. 

Although you can use Ethereum for trading and for buying purposes, another wonderful thing that Ethereum is capable of is that it also functions as a software platform that developers may use for creating new decentralised applications. 

Things You Can Do with Ethereum

The applications that can be created on the Ethereum blockchain are mostly crypto-adjacent. Developers can also use Ethereum to ensure that using, selling and buying cryptocurrencies becomes a faster and smoother process. 

Today, you can find lots of applications developed to run on Ethereum. From mobile apps to payment platforms – all these can be created with the help of this blockchain network. 

For example, imagine that Ethereum was a smartphone. Developers are able to build apps using smartphones, much like how they can also create apps using Ethereum. But while the apps developed for use in smartphones could have a universal use, the applications developed in Ethereum are more geared towards cryptocurrency-related use. 

For instance, there are many different lending apps that crypto users can use to give or take out crypto loans. These dApps are powered by smart contracts that came with the development of Ethereum. Smart contracts are programmes that can run smoothly and autonomously within the Ethereum blockchain. They can carry out several functions that usually were being performed by third-party apps. 

Making Peer-to-Peer Lending Possible

The truth is, peer-to-peer lending is becoming popular on Ethereum these days. Many people are starting to recognize the convenience of being able to lend money to one another without the need to visit a physical bank or ask for its involvement in the process. 

Everything is thanks to Ethereum’s support for smart contracts. In reality, smart contracts are made up of algorithms that are programmed to perform a certain function once all the conditions have been met.  For example, when peer-to-peer lending takes place, the actual lending process only occurs after the collateral is passed into the correct account or wallet. 

What are the benefits of using a smart contract besides zero involvement of physical banks? Some of the advantages include the speed of execution, the absence of human bias, and the ability to process the lending transaction for a lower fee. 

What does Ethereum have in common with other cryptocurrencies? Ethereum was developed with decentralised finance in mind. This is because all the services and products within the Ethereum network can be bought or used without intermediaries for as long as one has access to the Internet. 

Ethereum Smart Contracts

The concept of “smart contracts” allows developers to create decentralised applications with many functions that can be used for different purposes. In fact, Ethereum’s capabilities are an excellent representation of the fact that the cryptocurrency world “offers an easy way to earn huge profits from trading without having to go through the hassle of traditional investment” (as the Bitcoin Up app puts it). The network is extremely flexible and unlocked many more uses for blockchain technology than its predecessor, Bitcoin.

Examples of dApps built using “smart contracts” include data services, cryptocurrency exchanges, and decentralised lending platforms. There are also apps developed that make buying and selling gaming apps, developer technology and digital artwork (NFTs) possible.

The open-source concept presented by Ethereum enables developers to create new cryptocurrencies or tokens such as XRP and Chainlink. Another remarkable thing about Ethereum is its capability of creating non-fungible tokens. Ethereum powers these digital tokens and uses them to allow the representation of ownership for these unique items. 

Ethereum’s Gas Fees

But how are these developers able to create apps or tokens inside the Ethereum network? They have to pay for usage of the network with Ether, which is Ethereum’s native currency. This payment or fee is also referred to as “gas.”

Gas is the mode of payment for using Ethereum’s system. Think of it as a subway fare that you pay for so you can get on the train. Ether serves as cash that you use for purchasing a metrocard. A developer has to use Ether to pay for every action that they need to do or when they want to trade via the Ethereum network. Performing different actions would mean paying different amounts of Ether. The fees become higher as the number of people who join the network also increases.

These so-called “gas” fees, the number of developers flocking to the network, the many dApps they develop, and the huge amount of Ether they use to pay for everything are some of the reasons why Ethereum’s value keeps increasing over the years. 

While gas fees are helping things happen in the crypto market, many experts also see them as a barrier to Ethereum’s growth. On that note, Ethereum 2.0 is addressing this issue. Anyway, if you are really determined about investing in Ethereum, then consider buying Ether. Just like how you would invest in Bitcoin, making investments in Ethereum would mean buying or holding the ether as you wait for it to grow after a period of time.  

Still, keep in mind that trading and investing in cryptocurrencies is never without risks and consequences. You should be willing to lose as much as you are willing to gain, or else you may not be ready for cryptocurrency trading.