Ethereum is a community-built technology that allows for secure crypto transactions, smart contract execution, and the development of dApps. It's one of the world's largest cryptocurrencies, second only to Bitcoin.
If you're considering investing in Ethereum, interested in purchasing ether (Ethereum's coin), or simply want to understand more about this innovative blockchain platform, we can help. We'll walk you through what Ethereum is, why it's so incredible, and how to purchase it using iDEAL on Knaken.
What Is Ethereum?
Ethereum is a technology that allows users to send cryptocurrency, just like Bitcoin does, but it's also much more than that. Ethereum powers many community-built applications, including games, apps, and financial services.
Everything on Ethereum is completely decentralized. There are no third parties that can steal data or censor content. And users can exchange coins without having to trust one another. The platform ensures there's no chance of fraud by creating an immutable transaction ledger that no one can change.
Ether, or ETH, is Ethereum's coin, and it's what the Ethereum platform runs on. But Ethereum is more than just a cryptocurrency. Thanks to the vision of its founder, Ethereum pushes the boundaries of blockchain technology.
Founded in 2015, Ethereum's story actually begins two years earlier in 2013 when founder Vitalik Buterin had an idea for a decentralized, open-source blockchain platform.
He mentioned his idea to co-founders Charles Hoskinson, Anthony Dilorio, Joseph Lubin, and Gavin Wood at a 2014 North American Bitcoin Conference in Miami, Florida. In a rented beach house along Miami's shores, the group worked out the concept that became Ethereum.
After further development and some crowdfunding, Ethereum became a reality in 2015.
The platform aims to build on Bitcoin technology by enabling more than cryptocurrency transactions. With Ethereum, users can also deploy smart contracts and launch decentralized apps (dApps).
Thanks to the technology's proof-of-work (PoW) consensus mechanism, Ethereum eliminates downtime, fraud, control, and any interference from third parties. Bitcoin uses PoW as well, and though there are some issues with it, the benefits have been fruitful.
Proof-of-work achieves consensus while preventing any sort of abuse. It creates an unalterable ledger of transactions that's authentic and traceable.
With a proof-of-work consensus mechanism, you would need 51% of the network's computing power to defraud the chain. That's a lot of equipment and energy! The investment to defraud is so huge that it's not worth the attempt, which ensures the network stays safe from attacks.
However, the computing power necessary to make a PoW consensus mechanism work is its biggest flaw. Another consensus mechanism, called proof-of-stake, is far more efficient, and since the beginning, Ethereum has planned to move towards it.
In January 2022, Buterin projected that Ethereum would reach a “Merge” stage in May or June 2022. This stage will merge the Beacon Chain into the main net, finalizing the transition to a proof-of-stake consensus mechanism.
All of this is part of Buterin's original vision. He hopes to create a completely decentralized platform that doesn't rely on the decisions of its founders. Instead, it will be dependent on the community as a whole. This idealistic decentralization is what gives Ethereum and ether so much potential.
How Ethereum Works
Currently, Ethereum works on a proof-of-work consensus mechanism. This means miners around the world compete to create new blocks of processed transactions. The winning computer is the one that solves a math problem the fastest. This produces a cryptographic link between the current and prior block, creating a blockchain.
When a miner's computer wins, they receive freshly minted ETH. Solving the math problem is the “work” in the proof-of-work consensus mechanism.
Each transaction on Ethereum requires computations on the network, and every computation incurs a fee. The fee is paid in “gas”.
So, gas powers the Ethereum network. The gas price is equivalent to the amount of ether a user is willing to spend on each gas unit. Gas is measured in gwei, and one gwei is equal to .000000000000000001 ETH. So, each gwei is very small.
Gas fees used to be fairly straightforward. They went to the miners to incentivize them to run the transactions. However, gas fee volatility became a problem.
So, in 2021, Ethereum launched the London Upgrade, which aimed to make gas fees more predictable for users. Since the upgrade, gas fees have worked like this:
- Every block has a base fee. The base fee is calculated by the network and is based on the current demand for block space.
- The base fee is “burnt” or destroyed, removing a small amount of ETH from circulation.
- Each user includes a tip for each transaction instead.
- The tip or priority fee incentivizes miners to prioritize the computation the transaction requires. Over time, crypto wallets will likely incorporate a market-based tip automatically.
To put it in plain terms, if you wanted to send ether or wanted to initiate a smart contract, you have to incentivize a miner to run the transaction. You are, after all, using their computing power. The gas fee is the incentive.
So, if you wanted to send someone 1 ETH, it would actually cost you the 1 ETH plus the base fee, plus a tip. The person on the receiving end will receive 1 ETH, the base fee is burned, and the miner facilitating the transaction gets the tip.
Ethereum needs gas fees to compensate for one of its few weaknesses. Ethereum is a Turing complete language, which makes it susceptible to the halting problem. The halting problem means that no one can determine whether a program will run infinitely.
That means a bad actor could disrupt the network by executing an infinite loop. Fees prevent that possibility by charging a small amount for each transaction computation.
One of the reasons Ethereum is so appealing is because of its ability to run smart contracts. Smart contracts allow for anonymous, disparate parties to complete trusted transactions without the need for a central authority or third-party enforcer. That means you don't need a bank, lawyer, or government body to ensure follow-through.
A smart contract is a program that runs on Ethereum's blockchain. It's also a type of account, which means it's an entity that can send transactions through Ethereum.
Users have accounts, which is how they send ETH to other users, but not all accounts are user-based. A smart contract account is network-run, meaning the network deploys it, and then the contract runs as programmed. Third parties and bad actors cannot alter it.
A user account can, however, interact with a smart contract account if they submit a transaction that executes a smart contract's defined function.
The best metaphor for a smart contract might be a vending machine, as iterated by Nick Szabo. When given specific inputs, certain outputs are guaranteed, just like pressing a button for a bag of chips in a vending machine. That means smart contracts have the potential to replace intermediaries in many industries.
Smart contracts have major potential in decentralized finance (DeFi), healthcare, gaming, and real estate. They're used in the sale of NFTs, are showing up in the legal world, and can facilitate complex computational tasks vital for machine learning.
Bitcoin and other cryptocurrencies don't include smart contract capabilities. Ethereum stands out in this area, and that gives it immense possibilities.
Why Invest in Ethereum
Ethereum has massive potential for further innovation. With smart contracts and decentralized apps, there are massive opportunities for future development. Plus, Ethereum currently boasts backing from several Fortune 500 companies, and multiple financial institutions already use this cryptocurrency.
Ethereum's dApps are censorless, which has become a major plus as of late. With concerns about larger social media applications censoring some information, much of the public is looking for news that's censor-free.
Ethereum also allows for all sorts of community-led innovation. Current projects include work on microgrids, crypto-collectibles, and new ways of storing health records.
Moreover, purchasing Ethereum can help you diversify your portfolio. If you're already invested in Bitcoin, Ethereum adds a new range to your cryptocurrency investments. Unlike Bitcoin, Ethereum is uncapped and has more to offer thanks to smart contracts and dApps.
Given the potential for growth and the considerable trust shown by large institutions, many investors choose to add Ethereum to their portfolios. There are Ethereum stocks that you can purchase, but the most direct way to invest is to buy Ethereum.
You can purchase ETH through several cryptocurrency exchanges. Below, we'll discuss how to purchase ETH through Knaken in detail, so you can begin your Ethereum investment journey on the right foot.
How To Store Ethereum
Once you purchase ETH, you'll need a place to store it. It's not a good idea to leave your coins on the exchange unless you plan to invest or trade them right away. So, a wallet is the way to go.
There are several types of wallets to choose from, including:
- mobile wallets
- desktop wallets
- web interfaces
- browser extensions
- hardware wallets
These wallets fall into two categories: hot wallets and cold wallets. A hot wallet is any wallet that connects to the internet. That would include desktop, web, browser, and mobile wallets. Hot wallets tend to be user-friendly and are ideal if you plan to invest or trade your ETH in the near future. However, they can't provide the security that a cold wallet can.
Cold wallets aren't connected to the internet, making them impossible for hackers to attack. Most cold wallets are hardware wallets, though you could technically have a paper wallet. That's simply a piece of paper with the private key to your funds printed on it.
Cold wallets aren't as easy to use and are best for long-term ether storage. Accessing the coins on them is a little more complicated, and you wouldn't want to use them for everyday purposes.
Most ether users choose to have both a hot and cold wallet available. The hot wallet holds the coins they plan to spend in the short term, similar to the cash you might keep in your regular wallet. The cold wallet holds the coins they plan to save, just like a bank account probably holds your long-term savings.
Buy Ethereum with iDEAL
Buying Ethereum with iDEAL on Knaken is simple. Start by selecting ETH as your desired cryptocurrency. Then, select “iDEAL” as the payment method using the drop-down list.
There are several other payment methods available, including bank transfers and credit cards, but using iDEAL is one of the easiest options. With iDEAL, the transaction goes directly from your bank account and is completely secure.
After clicking “Buy,” your transaction will process quickly, and your ETH will arrive in your Knaken account. You'll be able to easily view it from your dashboard.
From there, you can do what you'd like with your ether. Move it to a cold wallet or store it on Knaken for easy spending.
If you hope to hold ether as a long-term investment, we recommend you set a reminder to return on a weekly or monthly basis. That way, you can increase your position in ETH through dollar-cost averaging.