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What is Ethereum (ETH)?
Luis Clark
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Luis Clark
What is Ethereum? Definition:
Ethereum is a decentralized global software platform powered by blockchain technology. Anyone can design any secure digital technology using Ethereum. It has a token (ETH) created for the blockchain network, but users can also use it to pay for work on the blockchain.
Ethereum (ETH) is the 2nd most popular crypto by market capitalization after Bitcoin and was the first to give the market access to smart contract functionality.
The Ethereum platform was started in 2015 by Vitalik Buterin and Joe Lubin, and Ethereum now accounts for more than 17% of the $1.2 trillion (as of July 2022) global cryptocurrency market.
Ethereum has its native cryptocurrency known as Ether (ETH). Ether is used to pay for some services on the Ethereum network. Ethereum blockchain enables users to make transactions, earn interest on their holdings through staking, trade cryptocurrencies, use and store non-fungible tokens (NFTs), buy digital art, use social media, play games, and so much more.
Ethereum’s design is programmable, scalable, decentralized, and secure. It is the blockchain of choice for enterprises and developers who create technology based upon it to transform how several industries operate and how people go about their daily lives.
Ethereum manages and tracks the currency on a decentralized computer network, often known as a distributed ledger or blockchain. A blockchain is a continuous record of all cryptocurrency transactions that have ever occurred. The network’s computers verify the transactions and guarantee the accuracy of the data.
Ethereum is a decentralized network where smart contracts run—code that operates on a peer-to-peer network and is validated by Ethereum’s blockchain—in contrast to Bitcoin, which is a digital currency and a store of value. Blockchain technology and smart contracts are used in decentralized finance (DeFi) and other applications.
The primary application of the Ethereum blockchain today is for value exchange, frequently using Ether, the blockchain’s native token. But because of the cryptocurrency’s long-term potential and the ambitious goal of its creators to use Ethereum to offer consumers more control over their wallets and online data, many developers are working on it.
Ethereum is a platform that enables the creation of decentralized apps and businesses and asset holding, trading, and communication without being controlled by a central authority. You have control over your data and what is shared, so using Ethereum doesn’t need you to give up all of your personal information.
Ethereum is known as a global computer; however, it has had its share of critics who think it is unlikely to succeed. However, if this experiment goes as planned, it would provide applications substantially different from those created by Facebook and Google, which users may or may not consciously trust with their data.
The objective of Bitcoin’s creation was to disrupt online banking and day-to-day transactions; Ethereum’s creators intend to use the same technology to substitute for Internet 3rd parties – those storing data and tracking complex financial instruments and transferring mortgages.
Ethereum's History
Ethereum was not always the 2nd largest blockchain project worldwide. The project was co-founded by Vitalik Buterin as a response to Bitcoin’s shortcomings. DApp creation was already possible in the blockchain industry, but the platforms were incompatible. Buterin wanted to unite them with Ethereum. He believed the only way to continue acceptance was to standardize how DApps run and interact.
So, Ethereum 1.0 was created. Imagine it as Apple’s App Store: a single location where tens of thousands of different applications that adhere to the same standards may be found. Developers can impose their own rules within DApps, but only that ruleset is hardcoded into the network and enforced autonomously. There isn’t a single entity changing and enforcing rules like there is with Apple. However, the people who act as a community are the ones who actually hold power.
Later, the founders established the Ethereum Foundation in Switzerland to preserve and expand the network. Soon after, Buterin made the decision to operate the foundation as a non-profit, which led to the departure of other co-founders.
Over time, developers came to Ethereum with their own decentralized ideas. In 2016, these users founded The DAO, a democratic group that voted on network changes and proposals. The organization was supported by a smart contract and circumvented the need for a CEO heralding power over Ethereum. Instead, a majority needed to vote on changes for them to be implemented.
However, this all went south when an unknown hacker stole $40 million in funds from The DAO’s holdings due to a security exploit. To reverse the theft, The DAO voted to “hard fork” Ethereum, diverging from the old network and upgrading to a new protocol, essentially undergoing a major software update. This new fork retained the name Ethereum, while the original network exists as Ethereum Classic.
Ether (ETH)
Developers need the cryptocurrency Ether to build and execute applications that support the Ethereum network. Users can pay transaction fees and computational services using Ether.
Developers can create smart contracts that accept, hold, and send Ether, and users can send Ether to other users. Validation of transactions to create Ether used to takes place through a process known as mining. But now confirmation of transactions to generate Ether now takes place through a process known as staking. Validators perform these confirmations.
Validators who successfully endorse a group of transactions receive Ether. Validators adhere to cryptographic rules to keep the Ethereum network secure, safe, and stable.
Key Features of Ethereum
- Ether: This is the Ethereum blockchain’s native token.
- The Ethereum platform supports the creation and implementation of smart contracts. A smart contract is a simple computer program that makes exchanging any valuable item easier for two parties. People may desire to trade money, stocks, real estate, or digital assets.
- Ethereum Virtual Machine: Ethereum offers the underlying technology, architecture, and software that allows people to engage with smart contracts and understand them.
- Ethereum enables the creation of unified DApps. A DApp is a short form of decentralized application, also written as DAPP, App, or DApp. Due to its prominence, Ethereum is the blockchain network for innovative and risky decentralized applications.
- Users can construct decentralized autonomous organizations (DAOs) using Ethereum network to facilitate democratic decision-making. DAOs lack a single leader and conduct all of their business in complete transparency without outside interference.
- Ethereum has many advantages besides decentralization and privacy, like freedom from censorship. For instance, Twitter can remove offensive tweets and penalize the offending user. However, on an Ethereum-based social media site, that is only possible if the Ethereum community approves of it. It allows users with different viewpoints to converse as they see suitable in this way, and the public can decide what they should and shouldn’t speak about.
- Additionally, Ethereum community standards prevent undesirable actors from seizing control. To make a change, someone with bad intentions would need to have 51% of the network’s voting power, which is typically quite challenging. It is significantly safer than a simple server, and hacking is impossible.
- Ethereum’s technology is decentralized finance (DeFi), which opens all areas of banking services to all users with an Internet connection. They can use Ether as collateral to seek loans or provide liquidity to earn interest on their funds.
- Since there are no restrictions on what Ethereum can achieve, the Ethereum network can support significant innovation. A substantial group of Ethereum developers is constantly looking for new ways to improve the network and develop new applications. Because of its popularity, Ethereum frequently serves as the foundation for innovative and risky decentralized applications.
- Ethereum draws inspiration from Bitcoin. Both of them are digital currencies. Ethereum employs the same blockchain technology as Bitcoin, which decentralizes the network by preventing it from being controlled by a central authority or a single through a shared, decentralized public ledger.
Weaknesses of Ethereum
- The rising demand for Ethereum has increased transaction fees. Transaction costs on Ethereum, sometimes referred to as “gas fees” can vary and be highly expensive. Ethereum forces participants to pay the fee, unlike Bitcoin, where the network rewards transaction verifiers. With Ethereum’s move to ETH 2.0, transaction costs are lowered but are still today considerably higher than on other blockchains.
- Although Ethereum has a yearly cap of 18 million Ether released, there is no cap on creating new tokens. Because Bitcoin has a fixed lifetime restriction on the number of coins, this could mean that Ethereum functions more like cash and may not value as much as Bitcoin as an investment.
- The transition from a centralized to decentralized platform can make it challenging for developers to learn Ethereum.
- Ethereum is not currently scalable, which makes the concept of a “global computer” that competes with Google, Facebook, and other centralized platforms impossible. This issue was and is tackled with ETH 2.0 as well, but it has to be seen if scalability can increase over time with the upgrade.
- Ethereum is expensive and difficult for non-technical users to interact with. Specific platforms demand particular wallets. Thus, one must transfer ETH from their existing wallet to the required wallet. For consumers used to the present financial ecosystem, that step is needless and in no way beginner-friendly.
How Does Ethereum Work?
Ethereum operates by leveraging computational resources to power its network. This network, akin to Bitcoin, runs on countless computers worldwide, with participants functioning as “nodes” instead of relying on a centralized server. As a result, the network is decentralized, mitigating susceptibility to attacks, and resilient to failure. The malfunction of one device in the network is barely noticeable, with the network capable of functioning even with the absence of thousands of others.
Ethereum is essentially a single decentralized platform that fuels the Ethereum Virtual Machine (EVM). This machine is replicated on every node, hence it is crucial to verify all interactions before implementing updates on anyone’s copy.
Network interactions, or “transactions,” are documented as blocks on the Ethereum blockchain. In the past, miners validated these blocks before adding them to the network, serving as a digital ledger or transaction history. This process of validating transactions was known as a proof-of-work (PoW) consensus mechanism, with each block identified by a unique 64-digit code. Miners devoted their computational resources to find that code, affirming its uniqueness. For their efforts, miners were rewarded in ETH, using their computational power as “proof” of their work.
However, in mid-September 2022, Ethereum transitioned from the PoW model to the proof-of-stake (PoS) model, resulting in improvements in energy efficiency, scalability, and transaction times. Validators, not miners, now undertake the validation process. To become a validator, individuals stake their Ether, locking it away to demonstrate their commitment to the network’s security and stability. Validators are randomly chosen by network protocols to validate transactions and open new blocks.
Moreover, all Ethereum transactions remain entirely public, similar to Bitcoin. Validators broadcast the validated blocks to the rest of the network to confirm the changes and add the completed blocks to everyone’s ledger copy. As these blocks cannot be tampered with, they serve as a flawless record of all network transactions.
Users initiating transactions are required to pay for the “gas” associated with Ethereum transactions. The validator validating the transaction receives this fee, fostering continued network validation and ensuring network security. Gas effectively serves as a limit, curbing the number of operations a user can perform in a single transaction and deterring network spam.
Ether, Ethereum’s native currency, is more of a utility token than a value token, with an unlimited supply. Ether continues to enter circulation as rewards for staking and, theoretically, there should always be a market for Ether, preventing it from becoming worthless due to inflation.
Despite its advantages, Ethereum gas fees can be high depending on network traffic. Each block has a limited amount of gas, fluctuating based on the types and quantities of transactions. As validators favor transactions with higher gas fees, users compete to validate their transactions first, escalating fees and congesting the network during peak times.
Ethereum, similar to Bitcoin, is stored in a wallet, serving as a passport to the Ethereum ecosystem and its DApps. Users can carry out a range of actions, similar to traditional internet activities, such as making purchases, playing games, lending money, and more. Unlike traditional web usage where users pay with their personal data, Ethereum replaces data with cryptocurrency, enabling users to explore and interact privately. Consequently, DApp usage is non-discriminatory. For example, no banking or lending DApp can deny a user based on their ethnicity or financial situation. Ethereum’s empowerment of users over their actions and data has led many to view it as Web 3.0, the future of web interaction.
To use Ethereum DApps, users must learn how to purchase, store, and use Ether. While the costs associated with Ethereum can be somewhat high due the high level of interaction with the platform, these costs are expected to decrease over time as Ethereum continues to improve its scalability. As of May 2023, the network is handling about 29 transactions per second, but developers are confident that it will eventually handle 100,000 transactions per second.
Ethereum is still a work in progress. The recent transition to Ethereum 2.0 was a major leap forward in addressing its core scalability issues, but more work and further upgrades are required to fully realize its potential. Even though Ethereum DApps might not be as user-friendly as conventional apps, anyone with a computer or smartphone and Ether can use them. These DApps offer users more control over their online data, providing alternatives to traditional tech giants like Facebook and Google, giving users more control over their digital information.
In essence, Ethereum operates on a “pay as you go” model. Every operation on an Ethereum DApp costs a bit of Ether, even for simple actions like sending a message on a microblogging site. Users can access various platform apps at the cost of Ether. These costs, while currently somewhat high due to the extensive interaction with Ethereum, are expected to decrease over time with continued development and scalability improvements.
With its major upgrade completed and ongoing improvements in the pipeline, Ethereum continues to evolve, enhancing the power and potential of decentralized platforms. Despite its ongoing development, Ethereum’s commitment to a more open, equitable, and privacy-centric web remains unchanged, reinforcing its position as a leading force in the blockchain world.
Ethereum Mining
The original Ethereum protocol was a PoW protocol, relying on a process called mining. Mining is the process of building a new block of transactions to be added to the original Ethereum blockchain. Since Ethereum switched to a PoS mechanism in September 2022 it incorporated a method with higher scalability and which is more ecologically friendly. With a PoS consensus, staking validators confirm transactions on the blockchain instead of miners and get paid in ETH for it.
The machines that used to run the Ethereum software are known as miners, and they use their time and processing power to execute transactions and build blocks. In decentralized systems like Ethereum, network participants must ensure that everyone agrees regarding the order of transactions. This is made possible by miners, who create blocks by resolving difficult computational puzzles and defending the network from intruders
Which blockchain does Ethereum use?
Ethereum has its own decentralized blockchain platform, creating a peer-to-peer network for safely executing and validating smart contract application code. Participants can transact with one another using smart contracts without the need for a reliable central authority.
How to Buy Ethereum?
People who are unfamiliar with the Ethereum network hold this false belief: Ethereum is a network; you don’t purchase Ethereum itself. You get Ether and use it on the Ethereum network as a transaction or payment token for financial transactions. Due to Ethereum’s popularity, purchasing Ether is fairly simple:
- Select a cryptocurrency exchange: The buying and selling of various cryptocurrencies take place on trading platforms and cryptocurrency exchanges. You may also use online brokerage services like Robinhood and SoFi if all you want to do is buy the most popular coins, including Ether and Bitcoin. Most of the time, you must pay trading or processing fees.
- Deposit fiat money: You can add dollars to your trading platform, link a debit card or bank account, or pay for Ether purchases.
- Buy Ether: After funding your account, you can use the funds to buy other assets and Ether at the current Ethereum price. You can retain the coins after they are in your account, sell them, or exchange them for other cryptocurrencies in the future. Remember that you might have to pay taxes when you sell/trade cryptocurrencies.
- Use a wallet: While you might keep the Ether in the default digital wallet of your trading platform, doing so can be risky in terms of security. If the exchange is hacked, it would be simple for someone to take your coins. Another choice is to move your coins into a cold wallet or another digital wallet that isn’t online if you don’t intend to sell or trade them anytime soon.
How to store Ethereum?
An Ethereum compatible cold wallet is the best cryptocurrency wallet to keep control of your account. There are several ways to store digital assets, cryptocurrencies, NFTs, coins and tokens. Both desktop and mobile apps are often available for these types of wallets, as well as cold storage devices.
Future of Ethereum
The Ethereum blockchain has become increasingly well-known as a result of the development of numerous NFTs and decentralized finance projects. Advocates claim that the advent of new applications like these, which are among the first to operate on a public blockchain, has already resulted in a significant network effect, as greater activity draws more and more developers to Ethereum.
Ethereum has also successfully moved on to use the proof of stake consensus mechanism in September 2022 when Ethereum 2.0 was launched. With this move, the Ethereum network has improved its scalability, speed and has become more cost-efficient when it comes to transaction fees.
Closing Thoughts
According to market capitalization, Ethereum is the second-most valued cryptocurrency and is often viewed as the silver to Bitcoin’s gold. Like any investment, there’s a chance that Ethereum’s higher risk will also result in higher rewards. Ethereum has advanced past the proof-of-concept stage, and now is the perfect time for investors to start looking into this asset class.
Given the uncertainty and volatility of the cryptocurrency market, before making any financial decisions like investing in Ethereum or any other cryptocurrency, do your own research. However, it may be worthwhile to consider to own cryptocurrency as an aggressive growth choice in a diversified portfolio. Naturally, never risk more money than you can afford to lose.
Our extensive analysis of the different Cryptocurrencies doesn’t stop here. You can also check out our “What is Bitcoin” guide to know more about the first Cryptocurrency created.
FAQ
Most frequent questions and answers
Smart contracts are computer programs on the Ethereum blockchain, for example. They only operate when a transaction from a user (or another contract) triggers them. They set Ethereum apart from many other cryptocurrencies and provide it with a great deal of flexibility. These applications are now referred to as dApps.
Proof-of-Stake (PoS) is a crypto consensus mechanism used to validate transactions via randomly selected validators. In September 2022, Ethereum has moved to a proof-of-stake protocol.
Ethereum now employs the owners of sizable stakes to verify transactions rather than the miners. These validators “stake” their money and receive Ether as payment for confirming transactions. However, if they approve transactions that don’t follow Ethereum’s regulations, stakers risk losing their money. By pledging their coins under guarantee with a validator, even novice investors can participate in the staking system and benefit from incentives.
Considering the recent increase in Ethereum, individuals who made the investment years ago have done well. But it’s crucial to know what you’re investing in rather than focusing on yesterday’s price changes and being afraid of missing out. And therefore, individuals who purchase Ether are doing so in the knowledge that it is an unbacked from of digital money in terms of both hard assets and cash flow.
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