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What is Ethereum and how does it work?

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What is Ethereum?

Ethereum is a decentralised blockchain platform created by Vitalik Buterin launched in 2015. Ether (or ETH) is the native cryptocurrency that facilitates transactions and smart contract executions on the Ethereum network or blockchain. ETH is also a popular cryptocurrency to grow and diversify portfolios. When people talk about “Ethereum”, they are really referring to the cryptocurrency Ether (ETH) rather than the blockchain.

Ethereum is often described as a decentralised world computer because it allows developers to create applications that run on a global network of computers.

Ethereum’s primary use cases:

  • Supports smart contracts: These self-executing contracts contain the terms of the agreement written into the code and can run off the Ethereum blockchain, hence accruing fees for the blockchain. They limit the need for intermediaries and can enable tamper-proof transactions. 
  • Supports decentralised applications (dApps): These applications can run on the Ethereum blockchain. dApps have many use cases, including decentralised finance (DeFi), gaming, supply chains, and more. Holding Ethereum allows you to participate in the growth of the dApp ecosystem. 
  • A platform for NFTs (Non-Fungible Tokens): Ethereum is the leading platform for creating and trading NFTs, unique digital assets representing ownership of art, collectibles, and more.

How does Ethereum work?

We can find two main consensus models in blockchains used to achieve agreement among network participants regarding the validity of transactions—Proof of Work (PoW) and Proof of Stake (PoS).

PoW, pioneered by Bitcoin, employs mining to achieve the goal of securing and verifying the blockchain. This is achieved by virtual miners worldwide who race to be the first to solve a math puzzle. The winner can update the blockchain with the latest verified transactions and is rewarded with a predetermined amount of Bitcoin. The Bitcoin blockchain provides a high level of security and decentralisation, making Bitcoin a valuable asset. However, some critics maintain that this consensus mechanism uses too much power and needs to be faster and cheaper. 

Ethereum works on the Proof of Stake consensus model to verify and validate its transactions. PoS, which is more energy-efficient and speedier, uses validators to create new blocks and validate transactions. Validators are chosen based on the amount of Ether (ETH) they hold and how much they are willing to “stake” as collateral. Although PoS reduces energy consumption, it is criticised by some for not being sufficiently decentralised. 

It’s important to note that the Bitcoin blockchain primarily handles incoming and outgoing Bitcoin transactions, similar to a large chequebook. The Ethereum blockchain, however, processes a much wider range of transactions, including DeFi transactions, smart contracts and NFT minting and sales.

Is Ethereum a PoW or PoS blockchain?

Ethereum used to rely on a Proof of Work (PoW) consensus model but switched to a Proof of Stake model with the Merge update in September 2022.

This means that Ethereum validators are no longer rewarded based on their computing power to solve complex math puzzles but rather on the amount of Ether (ETH) they hold.

According to Ethereum, the Merge allowed making the blockchain more secure, less energy-intensive, and better for implementing new scaling solutions compared to the previous proof-of-work architecture.

What makes Ethereum an appealing cryptocurrency?

Cryptocurrencies can make up a small or even significant portion of a well-diversified portfolio, depending on a person’s knowledge and risk tolerance*. Because Ethereum is second only to Bitcoin in terms of crypto market capitalisation, with a US Dollar value of approximately USD 217 billion, it often forms a significant part of a cryptocurrency portfolio. For insight, look at the following graph, illustrating Ethereum’s growth in value against the US Dollar since 2015. The price of Ethereum has grown substantially over the long term, though there is an expected degree of volatility when buying cryptocurrencies.

Graph of the price of Ethereum (ETH) from 015 to 2023

It’s interesting to mention that Ether (ETH) can be used beyond just a store of value as it powers different use cases on the Ethereum blockchain. With ETH, you can access dApps, tokens, and NFTs and enjoy a wide range of decentralised services.

Where can I buy Ethereum?

Today, it is relatively easy to buy Ethereum online. Many platforms offer trading services for Ethereum. One such place is Xapo Bank, the first bank to offer access to ETH trading services.

We provide our members with the opportunity to buy, hold and sell Ether (ETH). While many banks worldwide are worried about the popularity of cryptocurrencies and the chance they could usurp some of their functions and revenue streams, Xapo Bank embraces the opportunity to increase the crypto offerings it gives members access to. It is the first regulated bank in the world to give access to such a service.

To buy or sell Ethereum, open your Xapo Bank mobile app:

  • Head over to the ‘Wealth’ tab
  • Navigate to the cryptocurrencies section and select ETH
  • Click the buy or sell button
  • Choose the amount and validate the order

Join Xapo Bank today to easily access Ethereum, other cryptocurrencies and USD.

*Capital at risk. This information is not investment advice. Crypto asset values can go up as well as down and you could lose all the money you invest. This is a high‑risk investment and you are not protected if it loses all or some of its value. Past performance is not indicative of future results.

Xapo Bank is a crypto-enabled bank licensed by the Gibraltar Financial Services Commission. We give our members access to a US Dollar and Bitcoin account, successfully bridging the gap between traditional banking and crypto. USDC deposits into Xapo are immediately converted to USD on a 1:1 basis, giving instant dollar cash value with zero exchange fees.

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