What Is Ethereum (ETH) And How Does It Work?

Ethereum, also commonly known as Ether, is the world’s second largest cryptocurrency behind Bitcoin, and like any digital currency, it has experienced its fair share of ups and downs over its relatively short lifetime.

The price of Ethereum rose to a record $US4800 in late 2021, which signified a rise of more than 900% over the previous 12 months and sparked speculation that Ether would overtake Bitcoin in value.

However, Ether was not immune from the crypto routing of May 2022 and tumbled in value alongside many other cryptocurrencies. Most recently, crypto investors are closely watching Ethereum’s movements as it undergoes a merge of its two recording mechanisms. As a result of the merge, the Ethereum 2.0 network will use Proof of Stake as its only consensus mechanism, instead of Proof of Work.

Ether dipped briefly in the 24 hours after the first stage of the merge on September 6 to trade at $US1423. As of September 8, it was worth $1627.14

What are cryptocurrencies?

In the truest sense, cryptocurrencies are a digital means of exchange which use cryptography as a form of security. However, in more recent times, the term ‘cryptocurrency’ has evolved to encompass a decentralised financial system (DeFi), a highly volatile asset class that can nose-dive or surge on the back of a Tweet, a space for bad actors to steal vulnerable investors’ identities and money, a mode of asset diversification, and a form of digital payment.

Ethereum once had an effective market capitalisation of around $250 billion, however, has recently lost more than $100 billion in value due to the crypto slide of May 2022 and is now sitting at around $198 billion in market cap (September 8, 2022).

If you’re familiar with Bitcoin but less au fait with its closest rival, here’s what you need to know about Ethereum including why, one day, it could still become the dominant player on the cryptocurrency stage.

First, a crypto wealth warning

You don’t need to follow the financial world that closely to know that cryptocurrencies have become one of its biggest stories in recent years. 

Nowadays, they pre-occupy the thoughts of governments and major financial institutions alike and divide opinion as to whether they are essentially Ponzi schemes that need to be severely regulated, or are simply volatile asset classes for investors who enjoy a high-stakes gamble.

If your financial plans revolve around capital preservation – hanging onto what you’ve got – then the volatile behaviour of cryptocurrencies is most definitely not for you. 

In June, Jerome Powell, the chairman of the US Federal Reserve, described crypto-assets as no better than “vehicles for speculation”. And at its May AGM, the…