With a current market cap (as of the afternoon of April 17) of $360 billion, Ethereum (CRYPTO: ETH) is the world’s second most valuable cryptocurrency. It’s behind only Bitcoin when it comes to market domination.
Just in the past five years, Ethereum‘s native token has skyrocketed nearly 1,700% in value. That would have turned an initial $1,000 investment into a jaw-dropping $18,000 balance today.
Ethereum has also been on a fantastic run since the start of 2023, benefiting from the broader crypto market’s rally. But this digital asset remains 36% off its high. Before you rush to buy the dip, here are three things you should know about Ethereum.
Aiming to boost functionality
Ethereum’s key characteristic is that it allows for the functionality of smart contracts. These are computer programs that automatically execute once separate parties in a transaction satisfy their ends of the agreement. Think about an escrow account immediately releasing funds as soon as a home buyer meets certain conditions. In theory, Ethereum could handle this without human intervention, which could lower costs.
This feature is what makes this cryptocurrency much more useful when compared to Bitcoin, according to what Ethereum bulls believe. In fact, Ethereum has a sprawling ecosystem of decentralized applications (dApps), ranging from gaming and finance protocols to non-fungible tokens and the metaverse. Smart contracts enable these types of use cases, which could disrupt traditional industry structures.
Given this background knowledge, it’s not surprising that Ethereum is often dubbed the “world’s decentralized computer.”
A sustainable future
Like Bitcoin long has, Ethereum used to operate a proof-of-work consensus mechanism. This is an energy-intensive way to process transactions and secure the blockchain. Estimates point to how Bitcoin’s network uses the same amount of energy as a small country.
Believing that this was harmful to the environment and not on a sustainable path, Ethereum’s developers successfully transitioned the network to a proof-of-stake (PoS) system in September 2022. After the so-called Merge, in this setup, token owners who lock up their holdings have the right to validate transactions. According to Ethereum’s website, the PoS consensus mechanism reduces energy usage by over 99%.
The other hope for the PoS transition is that it’ll make Ethereum a much faster and cheaper network. It can only handle 14 transactions per second. And when demand is high, fees can soar. In order for Ethereum to one day usher in multiple new use cases, as many hope it can, the throughput needs to increase. There are other planned upgrades in the pipeline to one day make this a reality.
Ongoing technical risk
Besides the Merge, Ethereum’s developers have four main updates planned in the future. Each one focuses on a specific area of improvement. The end goal is to have a fully functioning Ethereum network that is good for the environment, fast, cheap, and able to have a vast dApp ecosystem operating on top of it.
Of all the cryptocurrencies in the world, Ethereum has the most developers working on it by far. This bodes well for its future because it means there are smart people focused on solving complex problems to keep progress going. I always say that I believe the ultimate success of a cryptocurrency depends on its ability to bring about real-world utility. Ethereum is trying to do this.
The issue, though, is that no matter how smart the upgrade pipeline looks on paper, it introduces immense technical risk. We can’t forget that blockchain technology is still in the early innings. There is a lot that needs to be learned. Constantly tweaking and messing with the software means there will always be the possibility that something will break along the way.
If you are bullish on Ethereum, understanding these three key areas should help give you a better understanding before you put your money to work.
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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
3 Must-Know Facts About Ethereum, Before You Buy the Cryptocurrency was originally published by The Motley Fool
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