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Ethereum (ETH) – A Guide To The Leading Smart Contract Blockchain

What is Ethereum (ETH)? A Comprehensive Guide
What is Ethereum (ETH)? A Comprehensive Guide

What is Ethereum (ETH)? A Comprehensive Guide

Ethereum is a decentralized blockchain network powered by the ether (ETH) token . Ether offers a wide range of functionalities beyond just being a cryptocurrency. Unlike Bitcoin, Ethereum is not solely a digital currency, but rather a platform for building decentralized applications (DApps) and smart contracts.

Ethereum enables users to make transactions, earn interest on their holdings through staking, use and store non-fungible tokens (NFTs), trade cryptocurrencies, play games, use social media, and much more. Ethereum is posited to herald the next iteration of the internet1; one that is centered around value and ownership. Many experts refer to this next iteration as Web3, a decentralized, user-powered network.

The Ethereum network is powered by a decentralized global network of computers that run the Ethereum software. As such, the network cannot be brought under the control of any single entity or government. This decentralized architecture makes Ethereum more secure and resistant to censorship than traditional centralized platforms.

One of the most significant advantages of Ethereum is its ability to run smart contracts, enabling the blockchain to support complex programs without intermediaries. One such application of smart contract technology is decentralized finance (DeFi), which allows users to access financial services independently of the traditional banking sector. 

Ethereum also enables the creation and trading of non-fungible tokens (NFTs), unique digital assets that represent ownership of a particular asset or item.

Overall, Ethereum is a versatile platform with a wide range of use cases, making it a popular choice for developers and users alike.

History of Ethereum

Vitalik Buterin published the Ethereum whitepaper in 20132 as response and solution to Bitcoin’s computational limitations. Buterin’s vision was to develop a platform that would unify the way decentralized applications (dApps) run and interact. The Ethereum whitepaper introduced smart contracts – automated immutable “if-then” statements that enable DApp development.

In 2015, Ethereum 1.0 was launched as a decentralized platform that allows developers to build dApps3. A ruleset is hardcoded into the network and enforced autonomously, with developers then able to enforce their own rules within dApps. Unlike Apple’s App Store, there isn’t a central party that changes and enforces regulations. Instead, the power is distributed across the community.

To fund Ethereum’s development, Buterin and his co-founders had held a token presale the previous year, selling over $50 million ETH within a two week sale window4. They also founded the Ethereum Foundation in Switzerland to maintain and develop the network5. However, some co-founders left when Buterin announced that the foundation would run as a nonprofit6.

Over time, developers came to Ethereum with their own decentralized ideas. In 2016, a group of users founded The DAO7, a democratic organization that voted on network changes and proposals. Like dApps, the organization itself ran on a smart contract, thereby circumventing the need for a CEO to oversee Ethereum. Instead, the community would decide upon Ethereum’s future democratically by submitting proposals and voting upon them.

However, The DAO was hacked in 2016, resulting in the theft of over 3.6 million ETH. To reverse the theft, The DAO voted to “hard fork” Ethereum, diverging from the old network and upgrading to a new protocol. This new fork retained the name Ethereum, while the original network exists as Ethereum Classic8.

Today, Ethereum is the second-largest blockchain project in the world, with a market capitalization that represents approximately 16.2% of the total cryptocurrency market9 as of December 15th 2023. Its success can be attributed to its ability to provide a platform for decentralized applications and smart contracts, which has opened up new possibilities for developers and businesses alike.

How Does Ethereum Work?

Ethereum is a decentralized global software platform powered by blockchain technology. It is most commonly known for its cryptocurrency, ether (ETH), but it also enables developers to build and deploy decentralized applications (dApps) on the Ethereum blockchain.

Like Bitcoin, Ethereum is a decentralized network that exists on thousands of computers worldwide, thanks to users participating as “nodes,” rather than a centralized server. Such architecture makes the network highly immune to attacks. If one computer goes down, thousands of others continue holding the network up, thereby making the network resilient.

Ethereum is a single decentralized system that runs a computer called the Ethereum Virtual Machine (EVM). Each node holds a copy of that computer, meaning that any interactions must be verified before everyone can update their copy.

Network interactions are otherwise considered ‘transactions’ and are stored within blocks on the Ethereum blockchain. 

Under Ethereum’s Proof of Stake (PoS) consensus mechanism, each block is validated through the pseudo-random selection of a validator who has staked the minimum 32 ETH to secure the network. Staking is incentivized through rewards for validating blocks10.

All Ethereum transactions are entirely public, just like Bitcoin. Validators broadcast completed blocks to the rest of the network, confirming the change and adding the blocks to everyone’s copy of the ledger. 

Confirmed blocks are ‘immutable’, meaning that they cannot be tampered with. This immutable ledger serves as a perfect history of all network transactions.

Each transaction implies a fee, referred to as “gas,” which is paid by the user. That fee, measured in ‘gwei’, is paid to the staker who validates the transaction, incentivizing staking and ensuring network security. Gas essentially serves as a limit, restricting the number of actions a user can make per transaction. It also functions to prevent network spam.

Because ETH is more of a utility token than a token of value, it has no supply cap. Although new ether consistently enters circulation in the form of validator rewards, Ethereum Improvement Protocol (EIP) 3675 – popularly known as ‘the merge’ – created deflationary pressure on ether. In the switch from Ethereum’s original Proof of Work (PoW) algorithm to a PoS consensus mechanism, the rewards associated with validating each block were signficantly reduced.

Additionally, EIP 1559 introduced a burn mechanism which is triggered when gas exceeds 17 gwei11, at the time of writing. As a result of these changes to the network, the net annual issuance of ether has reduced by 88.7%12.

As has always been the case, Ethereum gas fees are tied to network activity. Each block can only hold so much gas which varies based on transaction types and amounts. As a result, validators will choose transactions with the highest gas fees, meaning users are competing to validate transactions first13

This competition pushes fees higher and higher, congesting the network during busy times.

Interacting with Ethereum requires cryptocurrency, which is stored in a wallet. That wallet connects to dApps, acting as a passport for the Ethereum ecosystem14. From there, anyone can purchase items, play games, lend money and do all sorts of activities just as they do on the traditional internet.

Only, the traditional web is ‘free’ to users, as they’re giving away personal information. Centralized platforms then sell that data to make money. In the centralized internet of Web2, ‘you are the product’.

By contrast in Web3, ‘the product is yours’. Cryptocurrency takes the place of data, meaning users are free to browse and interact anonymously. This shift also means dApps are permissionless, or, in other words, non-discriminatory. For example, no lending or banking dApp can reject someone based on their race or financial status. There is no intermediary to block what could be considered a “suspicious transaction.” Users control what they do and how they do it, which is why many view Ethereum as the initiating Web 3.0 — the future of web interaction.

What Ethereum Does

Ethereum is a decentralized global software platform powered by blockchain technology. Its biggest achievement is arguably the development of smart contract functionality.

Described as the “fundamental building blocks of Ethereum’s application layer15“, the trustless, composable programmability of smart contracts paves the way for a host of use cases – many of which are yet to be developed.

Alongside DeFi, one of the most popular use cases on the Ethereum network is the creation and sale of non-fungible tokens (NFTs). Artists have made millions of dollars by bringing their work to the blockchain via NFTs16

Uncensorable social media apps have also been developed on the Ethereum network, allowing users to tip one another for content. 

Decentralized gaming allow users to invest in assets, play to grow them, and then sell them for a profit, accruing actual value from their game time. Additionally, there are prediction platforms that reward correct forecasts and freelance platforms that don’t take a huge cut of each payment.

All of these dApps are managed autonomously through blockchain and smart contracts, with DeFi putting users more in control of their funds than ever before. Ethereum has become the go-to platform for DeFi applications, with successful DApps bringing new users to the platform over the years.

What is Ethereum Staking?

Ethereum staking is a process in which individuals hold and lock up a certain amount of Ether (ETH) in a cryptocurrency wallet to participate in the Ethereum network’s proof-of-stake (PoS) consensus mechanism.

In a PoS system, validators are chosen to create new blocks and validate transactions based on the amount of cryptocurrency they hold and are willing to “stake” as collateral. Currently, participants needs to stake 32 ETH in order to set up and run a node17. That said, platforms such as Lido, Rocketpool and Obol make securing the network and benefitting from staking rewards more accessible through the pooling of assets which are in turn delegated to validators, or distributed.

This mechanism is meant to encourage network security and discourage malicious behavior, as validators have a financial incentive to act honestly.

Ethereum staking offers participants the opportunity to earn additional Ether as a reward for helping secure the network. However, there are also risks involved, such as the potential for losing a portion of the staked funds as a penalty for malicious or negligent behavior.

Ethereum vs. Bitcoin: What Are The Key Differences?

While Ethereum and Bitcoin are both blockchain-based cryptocurrencies, they have different goals and use cases. Bitcoin is primarily intended as digital money, while Ethereum aims to revolutionize the current internet infrastructure by automating processes that require intermediaries.

Certainly! Here’s a table comparing Ethereum and Bitcoin with the specified fields:

FeatureEthereumBitcoin
Year Launched20152009
Creator(s)Vitalik Buterin, et al.Satoshi Nakamoto
Native TokenEther (ETH)Bitcoin (BTC)
Consensus MechanismProof of StakeProof of Work
Block Time~12-14 seconds~10 minutes
Sources: Various

Bitcoin uses a Proof-of-Work (PoW) network, which limits transaction times. In contrast, Ethereum uses a Proof-of-Stake (PoS) network, which lays the foundation for scalability.

Additionally, Bitcoin has a hard cap of 21 million coins, while Ethereum has no such limit, making it more suitable for long-term use.

One of the key differences between Ethereum and Bitcoin is their approach to building decentralized applications (dApps). Developers can build on Ethereum, using different token standards for different types of smart contract capabilities and use cases18

As such, all Ethereum-based tokens are technically interoperable, while Bitcoin’s network is limited to Bitcoin.

While Bitcoin is primarily used as a medium of exchange or a store of value, Ethereum is used more as a way to interact with the network than as a way to transfer money. Ethereum’s versatility and ability to automate processes have made it a popular choice for developers looking to build decentralized applications.

Advantages of Ethereum

Ethereum offers several advantages beyond decentralization and anonymity. One of the most significant benefits is the lack of censorship. 

On Ethereum-based social media platforms, users with different viewpoints can discuss as they see fit, and the community can decide what should and shouldn’t be said. 

Unlike traditional platforms like Facebook, where content is moderated, Ethereum-based platforms require a community vote to remove content.

On the other hand, Ethereum’s smart contracts automate many of the steps taken by central authorities on the traditional web. For example, on platforms like Upwork, freelancers must use the platform to find clients and set up payment contracts. Upwork takes a percentage of each contract to pay its employees, server costs, etc. 

On Web3, a client can simply write a smart contract that states, “If the work is turned in at X time, the funds will be released.” The rules are hard-coded into the contract and cannot be tampered with by either party once written.

Finally, it’s easier than ever before to acquire Ether. Companies like PayPal and its Venmo subsidiary support purchasing crypto with fiat currency directly within the application, making it more accessible to millions of customers.

Overall, Ethereum offers several advantages that make it a popular choice for developers and users alike. Its lack of censorship, community requirements, and smart contracts all contribute to a more secure and decentralized web.

Disadvantages of Ethereum

Despite its many advantages, Ethereum has a few key issues that need to be addressed in order for it to be fully adopted as a mainstream platform.

Scalability

The cost of prioritizing security and decentralization for Ethereum has been in its limited scalability. While the transition from PoW to PoS signifies an important step on the journey towards mass adoption, Ethereum’s roadmap identifies rollup Layer 2 blockchains as the main solution to the network’s scalability issues.

These solutions involve off-chain processes to reduce the burden on the main Ethereum blockchain. Examples include Optimism, Arbitrum and Zora.

Accessibility

Another issue with Ethereum is accessibility. As of now, the platform is expensive to develop on and challenging to interact with for users unfamiliar with its technology. Some platforms require specific wallets, which means that users must move ETH from their current wallet to the required wallet, making it inconvenient for users ingrained in our current financial ecosystem.

User Experience (UX)

Although Ethereum has well-written documentation, actually using the platform needs streamlining. Learning about blockchain is very different from using it. The platform needs to be more user-friendly, especially for beginners who are not familiar with the technology.

In summary, Ethereum’s scalability, accessibility, and usability need improvement to achieve mass adoption.

How to Buy Ethereum

To purchase Ethereum, one must use a cryptocurrency trading platform. There are various cryptocurrency exchanges available, each with different pricing, security measures, and other features. It is important to research and compare platforms before signing up.

Opening an account with a centralized crypto exchange requires verifying your identity through ‘Know Your Customer’ (KYC) verification processes. Once verified, the account can be funded by connecting a bank account or debit card. Fees vary depending on the option chosen.

Funding the account does not mean that Ethereum has been acquired. Ethereum must be purchased to invest, and this can be done by trading United States dollars for Ethereum. The dollar amount to be exchanged for Ethereum is entered, and depending on Ethereum’s pricing and the amount to be bought, shares of a single Ethereum currency will most likely be purchased. The purchase will be displayed as a fractionalized amount of a total ether coin.

For ease, smaller crypto investments can be left in an exchange account. However, for larger investments, a digital wallet can provide extra security. There are various types of digital wallets, such as paper wallets or mobile wallets, each with varying levels of protection.

It is important to note that purchasing Ethereum involves risk, and investors should be cautious and informed before investing.

Should You Buy Ethereum?

Ethereum has emerged as the second most valuable cryptocurrency after Bitcoin, and it is often referred to as the silver to Bitcoin’s gold. As with any investment, there are risks associated with investing in Ethereum, but it may also offer the potential for significant rewards.

Investors who have not yet explored the world of cryptocurrencies may want to consider Ethereum as an aggressive growth option in a diversified portfolio. However, it is important to note that the crypto market is volatile and uncertain, and investors should do their own research before investing a significant amount of their retirement funds in Ethereum or any other cryptocurrency.

Overall, Ethereum’s potential for growth and its position in the cryptocurrency market make it a compelling option for investors who are comfortable with the risks associated with this asset class. As with any investment, investors should never invest more than they can afford to lose.

What is the Future of Ethereum?

The Ethereum roadmap is, itself, a work in progress. The community has identified the following areas as priorities to focus on into the future:

  • Cheaper transactions
  • Extra security
  • Better user experience
  • Future proofing.

The network has certainly faced challenges over the years. However, Ethereum’s long-term significance is undeniable, and it is expected to continue to grow as the crypto world expands. 

In summary, Ethereum’s future is uncertain, but it is expected to continue to grow and evolve as the crypto world expands. Its unique features and growing network effect make it a promising platform for developers and investors alike.

Frequently Asked Questions

How does Ethereum enable smart contracts?

Ethereum enables smart contracts through its programmable blockchain. Smart contracts are self-executing contracts with the terms of the agreement between buyer and seller being directly written into lines of code.

These smart contracts are stored on the Ethereum blockchain, which ensures their immutability and transparency. Smart contracts can be used for a variety of applications, including supply chain management, digital identity, and decentralized finance.

What is the role of gas in Ethereum transactions?

Gas is the fee that is paid by users to execute transactions on the Ethereum network. Gas is paid in ether, the native cryptocurrency of the Ethereum network.

The amount of gas required for a transaction depends on the complexity of the transaction and the current demand for network resources. Validators on the Ethereum network receive fees as a reward for processing transactions.

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