Elon Musk supporting Ethereum? What is Ethereum?

Tesla billionaire Elon Musk, after helping the bitcoin price reach never-before-seen highs this year with a $1.5 billion bet on bitcoin, appears to have abandoned the cryptocurrency for ethereum and the meme-based dogecoin.

“I pretty much agree with Vitalik,” Musk posted to Twitter, replying to a wide-ranging YouTube interview with the ethereum cofounder Vitalik Buterin by AI researcher and podcaster Lex Fridman.

In the interview with ethereum’s de facto leader, Fridman asked whether it would be possible to upgrade dogecoin to “beat bitcoin hands down,” as Musk has previously suggested—with Buterin saying: “If doge wants to somehow bridge to ethereum and then people can trade doge thousands of times a second … that would be amazing.”

“There’s a power behind someone like Elon Musk pushing the development of a cryptocurrency,” said Fridman, asking: “is there a way to leverage that power and momentum to improve ethereum?”

“I think if we can have a secure doge-to-ethereum bridge that would be amazing and then when ethereum gets any scalability that works for ethereum assets you would be able to trade wrapped doge with very low transaction fees and very high speed as well,” said Buterin.

Ethereum is considered by many to be the second most popular cryptocurrency, surpassed at the moment only by Bitcoin. The Enterprise Ethereum Alliance (EEA) has some big-name founding members too, including Microsoft, Intel, and JPMorgan Chase, according to The Motley Fool. “The adoption of Ethereum by the corporate world,” says CNBC, “means it could eventually be bigger than its early stage rival.” That means it’s time to get to know the Ethereum platform, including its features and applications, and what makes Ethereum different from Bitcoin. 

In today’s articles, we will introduce the basics of Ethereum and how it works.

Ethereum is a digital platform which adopts the blockchain technology established by bitcoin, and expands its use to accommodate a wide variety of other applications. It is not to be confused with ether – the cryptocurrency underpinning the network – which is often referred to as ethereum.

The Ethereum platform was created in 2015 by Toronto-based programmer Vitalik Buterin, with a view to create a vehicle for decentralised, collaborative applications. Ether (ETH) is a token that can be used in transactions utilising this software. Like bitcoin, ether exists as part of a self-contained peer-to-peer financial system, free from government oversight and intervention. And like bitcoin, ether has seen its value rocket in a short space of time.

In January 2016, ether was trading at around $1 only and has now reached an all-time high of $4,360 on 12 May 2021. Though this value has proved volatile, with frequent intraday swings. So while ether is just one of hundreds of cryptocurrencies, it is also one of only a few with a significant market cap, including its two biggest rivals, bitcoin and bitcoin cash.

Like all cryptocurrencies, Ethereum works on the basis of a blockchain network. A blockchain is a decentralized, distributed public ledger where all transactions are verified and recorded.

It’s distributed in the sense that everyone participating in the Ethereum network holds an identical copy of this ledger, letting them see all past transactions. It’s decentralized in that the network isn’t operated or managed by any centralized entity. Instead, it’s managed by all of the distributed ledger holders.

Blockchain transactions use cryptography to keep the network secure and verify transactions. People use computers to “mine,” or solve complex mathematical equations that confirm each transaction on the network and add new blocks to the blockchain that is at the heart of the system. Participants are rewarded with cryptocurrency tokens. For the Ethereum system, these tokens are called Ether (ETH).

Ether can be used to buy and sell goods and services, like Bitcoin. It’s also seen rapid gains in price over recent years, making it a de-facto speculative investment. But what’s unique about Ethereum is that users can build applications that “run” on the blockchain like software “runs” on a computer. These applications can store and transfer personal data or handle complex financial transactions.

“Ethereum is different from Bitcoin in that the network can perform computations as part of the mining process,” says Ken Fromm, director of education and development at the Enterprise Ethereum Alliance. “This basic computational capability turns a store of value and medium of exchange into a decentralized global computing engine and openly verifiable data store.”

Ether, like other cryptocurrencies, uses a shared digital ledger where all ether transactions are recorded. It is publically accessible, fully transparent and very difficult to alter retroactively.

This is known as the blockchain, and it is created through the process of mining. Miners are responsible for verifying clusters of ether transactions to form ‘blocks’, and securing them cryptographically by solving complex algorithms. These algorithms can in turn be made more or less difficult, as a way of keeping the processing time of blocks roughly constant – around one per 12 seconds.

New blocks are then linked to the chain of previous blocks, and the miner in question earns themselves a ‘block reward’ – that is, a set number of ether tokens. This currently stands at 3 ether units, though that figure may be reduced as the cryptocurrency continues to scale.

The benefits of Ethereum are a tried-and-true network that has been tested through years of operation and billions of value trading hands. It has a large and committed global community and the largest ecosystem in blockchain and cryptocurrency.

Besides being used as a digital currency, Ethereum can also be used to process other types of financial transactions, execute smart contracts and store data for third-party applications.

A large community of Ethereum developers is constantly looking for new ways to improve the network and develop new applications. Because of Ethereum’s popularity, it tends to be the preferred blockchain network for new and exciting (and sometimes risky) decentralized applications.

Ethereum’s decentralized network promises to let users leave behind third-party intermediaries, like lawyers who write and interpret contracts, banks that are intermediaries in financial transactions or third-party web hosting services.

Ethereum’s growing popularity has led to higher transaction costs. Ethereum transaction fees, also known as “gas,” hit a record $70 per transaction in May 2021, which is great if you’re earning money as a miner but less so if you’re trying to use the network. This is because unlike Bitcoin, where the network itself rewards transaction verifiers, Ethereum requires those participating in the transaction to cover the fee.

While Ethereum has an annual limit of releasing 18 million Ether per year, there’s no lifetime limit on the potential number of coins. This could mean that as an investment, Ethereum might function more like dollars and may not appreciate as much as Bitcoin, which has a strict lifetime limit on the number of coins.

Ethereum can be difficult for developers to pick up as they migrate from centralized processing to decentralized networks.

Ethereum continues to evolve and improve, and the ongoing development of Ethereum 2.0 holds out the promise of new functions and greater efficiency. This major update to the network, however, is creating uncertainty for apps and deals currently in use. Many new validators will be required for Ethereum 2.0 to function and there are a lot of new elements that have to fall into place. Many asked “Will the migration work?”

It’s a common misconception to people who are new to the Ethereum network. You don’t buy Ethereum itself—that’s the network. Instead, you buy Ether and then use it on the Ethereum network.

You might consider investing in the Ethereum network for a few reasons. First, it has value and use as a virtual currency; Second, the Ethereum blockchain could become more attractive when it migrates to the new protocol; and third, as more people utilize Ethereum distributed apps, demand for ETH may increase.

Besides buying Ether directly, you could also try investing in companies that are building applications using the Ethereum network. Before making any significant investment in Ether or other cryptocurrencies, consider speaking with a financial advisor first about the potential risks. Given the high risk and volatility in this market, make sure it’s money you can afford to lose, even if you believe in Ethereum’s potential.