What is Ethereum (ETH)? A Complete Guide

Introduction to Ethereum: The Basics Explained

Ethereum (ETH) is the 2nd most popular cryptocurrency by market capitalization after Bitcoin and was the first blockchain platform to introduce smart contract functionality to the market. The Ethereum platform was founded in 2015 by Vitalik Buterin and Joe Lubin, and now accounts for more than 19% of the global cryptocurrency market.

What is Ethereum at its core? It’s a decentralized global software platform powered by blockchain technology. Anyone can design secure digital applications using Ethereum. It has a native token created for the blockchain network, but users can also use it to pay for work done on the blockchain.

Ethereum’s native cryptocurrency is known as Ether (ETH). Ether is used to pay for services on the Ethereum network. The 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
• Access decentralized social media
• Play games
• And much more

Ethereum’s design is programmable, scalable, decentralized, and secure. It has become the blockchain of choice for enterprises and developers who create technology based upon it to transform how various industries operate and how people go about their daily lives.

What is Ethereum’s Purpose?

Ethereum explained simply: it manages and tracks its 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.

In contrast to Bitcoin, which is primarily a digital currency and store of value, 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. Blockchain technology and smart contracts are used in decentralized finance (DeFi) and numerous 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 Ethereum’s long-term potential and the ambitious goal of its creators to use Ethereum to give consumers more control over their wallets and online data, many developers continue working on expanding its capabilities.

What is Ethereum’s value proposition? It’s a platform that enables the creation of decentralized apps and businesses, as well as asset holding, trading, and communication without being controlled by a central authority. Using Ethereum doesn’t require you to give up all your personal information—you maintain control over your data and what is shared.

Ethereum is often referred to as a “global computer.” While it has had critics who doubt its chances of success, if the Ethereum experiment proceeds as planned, it would provide applications substantially different from those created by tech giants like Facebook and Google, which users may or may not consciously trust with their data.

While Bitcoin’s creation aimed to disrupt online banking and day-to-day transactions, Ethereum’s creators intend to use the same technology to replace Internet third parties—those storing data, tracking complex financial instruments, and transferring mortgages.

What is Ethereum’s History?

Ethereum was not always the second-largest blockchain project worldwide. The project was co-founded by Vitalik Buterin as a response to Bitcoin’s limitations. DApp (decentralized application) creation was already possible in the blockchain industry, but the platforms were incompatible. Buterin wanted to unite them with Ethereum. He believed standardizing how DApps run and interact was essential for wider adoption.

So, Ethereum 1.0 was created. Think of it as similar to Apple’s App Store: a single location where thousands of different applications that adhere to the same standards can be found. Developers can impose their own rules within DApps, but those rules are hardcoded into the network and enforced autonomously. Unlike Apple, there isn’t a single entity changing and enforcing rules. Instead, the community collectively holds power.

Later, the founders established the Ethereum Foundation in Switzerland to preserve and expand the network. Soon after, Buterin decided 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 eliminated the need for a CEO wielding power over Ethereum. Instead, a majority needed to vote on changes for implementation.

However, this went south when an unknown hacker stole $40 million 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 continues as Ethereum Classic.

Understanding Ethereum’s Native Currency

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.

What is Ethereum’s currency used for? 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 takes place through a process that has evolved over time. Initially, this was done through mining, with miners carrying out these validations. However, with Ethereum’s transition to proof-of-stake in 2022 (known as “The Merge”), validators now secure the network by staking their ETH.

Validators who successfully verify a set of transactions receive Ether as rewards. They adhere to cryptographic rules to maintain the Ethereum network’s security, safety, and stability.

Key Features of Ethereum: What Makes It Unique?

What is Ethereum’s appeal? Several key features distinguish it:

Ether: The Native Token

This is the Ethereum blockchain’s native cryptocurrency, which powers the entire ecosystem.

Smart Contracts

The Ethereum platform supports the creation and implementation of smart contracts. A smart contract is a simple computer program that facilitates the exchange of any valuable item between two parties. People may want to trade money, stocks, real estate, or digital assets, and smart contracts make this possible without intermediaries.

Ethereum Virtual Machine (EVM)

Ethereum offers the underlying technology, architecture, and software that allows people to engage with smart contracts and understand them. The EVM is a crucial component that executes smart contract bytecode.

Decentralized Applications (DApps)

What is Ethereum’s most popular use case? Ethereum enables the creation of unified DApps. A DApp (decentralized application) runs on a blockchain network rather than being controlled by a single entity. Due to its prominence, Ethereum has become the blockchain network of choice for innovative and experimental decentralized applications.

Decentralized Autonomous Organizations (DAOs)

Users can construct DAOs using the Ethereum network to facilitate democratic decision-making. DAOs lack a single leader and conduct all of their business with complete transparency without outside interference.

Freedom from Censorship

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’s only possible if the Ethereum community approves of it. This allows users with different viewpoints to converse as they see fit, with the public deciding what should and shouldn’t be discussed.

Community Governance

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 very challenging. This makes it significantly safer than a simple server, and virtually impossible to hack.

DeFi Integration

Ethereum’s technology powers decentralized finance (DeFi), which opens all areas of banking services to users with an Internet connection. They can use Ether as collateral to seek loans or provide liquidity to earn interest on their funds through cryptocurrency exchanges.

Innovation Platform

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 experimental decentralized applications.

Blockchain Foundation

What is Ethereum’s relationship to Bitcoin? Ethereum draws inspiration from Bitcoin. Both 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 through a shared, decentralized public ledger.

Limitations of Ethereum: Understanding the Challenges

While understanding what Ethereum is reveals its strengths, it’s important to acknowledge its weaknesses:

• High Transaction Fees: The rising demand for Ethereum has increased transaction fees. These costs, sometimes referred to as “gas,” can vary and be highly expensive. That’s great if you’re earning rewards as a validator, but not as advantageous if you’re trying to use the network. Ethereum requires participants to pay the fee, unlike Bitcoin, where the network rewards transaction verifiers.
• No Fixed Supply Cap: Although Ethereum has a relatively low annual issuance rate, there is no cap on creating tokens. Because Bitcoin has a fixed lifetime restriction on the number of coins, this could mean that Ethereum functions more like a currency and may not appreciate as much as Bitcoin as an investment.
• Learning Curve: The transition from a centralized to decentralized platform can make it challenging for developers to learn Ethereum.
• Scalability Issues: Despite ongoing improvements, Ethereum continues to face scalability challenges, which makes the concept of a “global computer” that competes with Google, Facebook, and other centralized platforms challenging.
• User Experience: Ethereum can be 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 current financial ecosystem, that step can be unnecessary and not beginner-friendly.

How Does Ethereum Work? The Technical Foundation

Ethereum explained technologically: it works by utilizing computing power to power the network. The Ethereum network, like Bitcoin, runs on thousands of computers globally because users act as “nodes” rather than relying on a single central server. As a result, the network is decentralized, resistant to attacks, and impervious to failure. The failure of one machine on the network has little impact, and it can function without thousands of others.

Ethereum is a single decentralized platform powered by the Ethereum Virtual Machine (EVM). This computer is replicated on every node. Therefore, before making any updates to anyone’s copy, confirmation of all interactions is required.

Network interactions, termed “transactions,” are recorded as blocks on the Ethereum blockchain. Before adding them to the network and using them as a digital ledger or transaction history, validators verify these blocks. Originally, Ethereum used a proof-of-work (PoW) consensus mechanism, but in September 2022, it transitioned to proof-of-stake (PoS) with “The Merge” upgrade, significantly reducing its energy consumption.

Additionally, all Ethereum transactions are completely public, just like Bitcoin. To confirm modifications and add completed blocks to everyone’s copy of the ledger, validators broadcast the blocks to the rest of the network. Confirmed blocks provide a perfect record of all network transactions because they cannot be tampered with.

The user initiating the transaction is responsible for paying the “gas” associated with Ethereum transactions. The validator that processes the transaction receives that fee, which encourages future validation and maintains network security. Gas effectively acts as a cap, limiting how many activities a user may perform in a single transaction. It also prevents network spam.

ETH has an indefinite supply since it is more of a utility token than a value token. Ether regularly enters circulation as validator rewards. Since there would theoretically always be a market for Ether, inflation shouldn’t ever make the currency worthless.

Unfortunately, Ethereum gas fees can be expensive, depending on network traffic. Each block has a limited amount of gas, which varies according to the types and amounts of transactions. Users compete to validate transactions first because validators will select transactions with the highest gas fees. This competition increases fees and can congest the network during peak hours.

What is Ethereum’s Role in Web3?

Ethereum requires cryptocurrencies, which are kept in a wallet. That wallet serves as the Ethereum ecosystem’s passport by connecting to DApps. From there, anyone can carry out a variety of actions, exactly like they can on a traditional internet, including making purchases, playing games, lending money, and so on. On the traditional web, users typically pay by disclosing personal information. Centralized organizations that operate websites then sell that data to generate revenue.

In the Ethereum ecosystem, cryptocurrency replaces data, allowing users to explore and communicate privately. DApp usage is hence non-discriminatory. For instance, no banking or lending DApp can reject a user based on ethnicity or financial situation. What an intermediary deems to be a “suspicious transaction” cannot be blocked. Because users have power over what they do and how they do it, many people believe that Ethereum represents Web3, the future of web interaction.

What is Ethereum’s advantage for users? Ethereum apps offer users more control over their online data. Learning how to purchase, store, and use Ether, the platform’s native token, is necessary to use these apps. The Ethereum protocol or the “global computer” may offer alternatives to tech giants like Facebook and Google. These options would typically provide people with more control over their digital information.

The cost for this control is Ether. Every operation on an Ethereum app costs a bit of Ether, even something as simple as sending a quick message on a microblogging site. Users can access several platform apps for ether costs.

Because the processing capabilities of the Ethereum platform are constrained, these apps, sometimes referred to as decentralized apps (DApps), are not free. The fees increase as more people use the platform. The costs can be somewhat high due to the large number of services that interact with Ethereum.

Ethereum is still evolving in this area. Network upgrades following “The Merge” aim to address Ethereum’s core scalability issues. Theoretically, these upgrades will reduce fees while enhancing network security. Even though Ethereum apps may not be as user-friendly as those we are accustomed to, anyone with a computer or smartphone and Ether can use them.

What is Ethereum Validation?

What is Ethereum’s consensus mechanism? Validation is the process of building a new block of transactions to be added to the Ethereum blockchain. In September 2022, Ethereum completed “The Merge,” transitioning from a proof-of-work (PoW) blockchain to a proof-of-stake (PoS) system for improved scalability and a more environmentally friendly approach.

Before “The Merge,” machines that ran the Ethereum software were known as miners, and they used their time and processing power to execute transactions and build blocks. In the current PoS system, validators have replaced miners. These validators stake a minimum of 32 ETH to participate in block validation.

In decentralized systems like Ethereum, network participants must ensure that everyone agrees on the order of transactions. This is made possible by validators, who create blocks by solving computational challenges and defending the network from intruders. The shift to proof-of-stake has reduced Ethereum’s energy consumption by approximately 99.95%, according to the Ethereum Foundation.

How to Buy Ethereum: A Step-by-Step Guide

People who are unfamiliar with the Ethereum network sometimes hold a misconception: Ethereum is a network; you don’t purchase Ethereum itself. You get Ether (ETH) and use it on the Ethereum network as a transaction or payment token for financial operations. Due to Ethereum’s popularity, purchasing Ether is fairly simple:

1. 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 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.
2. Deposit fiat money: You can add dollars to your trading platform, link a debit card or bank account, or pay for Ether purchases directly.
3. Buy Ether: After funding your account, you can use the funds to buy Ether at the current market 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 or trade cryptocurrencies.
4. Use a wallet: While you might keep the Ether in the default digital wallet of your trading platform, doing so can present security risks. If the exchange is hacked, your coins could be vulnerable. Another option is to transfer 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.

The Future of Ethereum

The Ethereum blockchain has become increasingly well-known due to 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 attracts more and more developers to Ethereum.

Since “The Merge” in 2022, Ethereum has continued to evolve with additional upgrades planned in its roadmap. These include:

• Sharding: A scaling solution that will divide the Ethereum network into smaller parts to increase transaction throughput
• Layer 2 Solutions: Various technologies built on top of Ethereum that help it process more transactions
• EIP-4844: Also known as “Proto-Danksharding,” an interim step toward full sharding that introduces a new transaction type to reduce fees on Layer 2 solutions

Despite these advances, questions remain about whether Ethereum will be able to compete with more dynamic market players and if a consensus on its long-term role will emerge as the cryptocurrency industry expands.

Closing Thoughts

Should you buy Ethereum? 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 possibility that Ethereum’s higher risk could result in higher rewards. Ethereum has advanced far beyond the proof-of-concept stage, and now may be an appropriate time for investors to explore 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 owning cryptocurrency as an aggressive growth choice in a diversified portfolio. Naturally, never risk more money than you can afford to lose.

FAQs About Ethereum