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Simply Explained: What is Ethereum (ETH)?

What in the Metaverse is Ethereum? 

Ethereum is a decentralised, open-source platform powered by blockchain technology with smart contract functionality. In layman’s terms, a global computer.

You’ve probably seen people use the terms “Ethereum” and “ETH” interchangeably, but they’re not the same thing. Ethereum is the platform and Ether (ETH) is the utility token used to transact on the blockchain. 

Any action on the Ethereum blockchain will cost Ether. You can think of Ether as the token that powers the network rather than a cryptocurrency used to send money.

So, what is Ethereum used for? 

In short, Ethereum enables users to build their own decentralised applications on top of the Ethereum blockchain and issue their own tokens. It’s a base layer on which other projects can be built. It also offers smart contract functionality, which we’ll discuss later.

There’s no easier way to explain something than with a good old-fashioned analogy. So let’s try one out.

Picture a piece of land. Over time, people from all over the world come together and build a city on this land. They start by building housing and skyscrapers. Then, they launch businesses and trade with one another. Soon, more people come, more buildings are built, more money enters the space, and a bustling city emerges. 

Picture New York.

In this analogy, Ethereum is the land, the users are the people, decentralised Apps are the businesses, and Ether is the currency that powers every engagement in the city. 

Ethereum

So what would happen if more people moved into the city? In theory, more businesses would be built, more commerce would take place, and the price of things would go up. 

The same will happen on Ethereum.

More people will enter the crypto space. Defi will become mainstream. Developers will build more applications on the blockchain, and demand for Ether will go up If current projections are correct, and Ethereum continues on its current trajectory, investing in ETH today is akin to investing in Manhattan land back in the 1800s.

Now we know what Ethereum is, and we have a decent real-world analogy to help us start to make sense of it. Let’s quickly look at smart contracts.  

Smart contracts

A smart contract is like a regular contract but elevated for Web 3.0. We deal with contracts every day, from when we order an uber to when we buy a house. 

Let’s look at an example: you want to sell your home. This process requires a lot of intermediaries. You sign a contract with a real estate agent to put it on the market, the potential buyer signs a contract for a mortgage with a bank. This process takes a lot of time and involves a lot of middlemen, which can be pricey.  

A smart contract takes the bs out. Selling your house on a smart contract is simple. Instead of following a lengthy process with many middlemen, the buyer and seller simply sign a ‘smart contract’. Once all details are finalised, the contract is locked until both sides have measurably completed their prerequisites.

It’s all about making stuff quicker and easier. That’s what Ethereum’s smart contract integration is all about—bringing this functionality into blockchain technology. 

A short note before we finish. One of the biggest weaknesses mentioned when discussing Ethereum is the outrageously high gas fees. Ethereum is aiming to address these issues in 2022. You can expect a piece later this month that will discuss gas fees and Ethereum 2.0. 

 

Congratulations. You now understand the basics of Ethereum. For more information on Ethereum, Ether, and smart contracts, check out our Cryptocurrency Ratings Guide where we give you our personal take, an analysis of the risks and an objective review of the project. 

 

Disclaimer: THIS IS NOT FINANCIAL OR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.

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