What is Ethereum?

Ethereum is a blockchain network that allows users to build applications, and store and exchange value, without the need of an overseeing central authority. Ether (ETH), the Ethereum network’s native token, is the second most traded cryptocurrency in the world.

As Ethereum continues to grow and evolve, it is clear that it will no doubt be a significant part of the internet and will set the legacy for how decentralized apps will be built in the future, so it’s important that you understand how it works. In the rest of this piece, we’ll discuss the Ethereum network, how it’s different from other cryptocurrencies, its use cases, and much more!

 

Key Highlights

  • Launched in 2015, Ethereum is powered by blockchain technology like  Bitcoin but has different focuses.
  • Dapps can be built using the Ethereum blockchain which lets developers create useful blockchain-based apps.
  • Ethereum is more like a marketplace of financial services, social networks, games, and other apps.
  • Ethereum is the blockchain network while Ether (ETH) is the native token. However, both are often used interchangeably.
  • The Ethereum coin is the second largest in the world by market share.

 

What is Ethereum?

Ethereum is the most popular and most widely used blockchain network in the world, after Bitcoin – the first blockchain.

Ethereum was first conceived in 2013 by its founder, Russian-Canadian programmer Vitalik Buterin and was later developed and eventually launched in 2015 by co-founders Gavin Wood, Charles Hoskinson, Anthony Di Iorio, and Joseph Lubin.

Vitalik had always been fascinated with the idea of decentralization that Bitcoin brought and wanted to create a new network that exploited the possibilities of blockchain to the fullest. Ethereum was born and has grown into a network on which most dApps are built.

Ethereum Stats

  • The Ethereum network’s revenue in Q1 2022 was 834,874 ETH or around 1.679 billion dollars.
  • A total of 728,729 ETH or around 1.671 billion dollars was burned in Q1 2022.
  • A total of 404,657 ETH or around 928 million dollars were mined in Q1 2022.
  • ‍Around 77.2% of all Ethereum transactions in Q1 2022 were EIP-1559 transactions (Type 2 transactions) compared to Type 0 transactions which use the original gas fee structure.
  • The Ethereum coin price has fluctuated wildly hitting an all-time high of $4891 in November 2021. At the time of this writing, 1 ETH = $1641

 

How Does Ethereum Work?

Powered by blockchain

Ethereum is built on blockchain technology, like with every other decentralized network.

  • A blockchain is a system where records of transactions or data is stored across a network of participating computers called nodes.
  • In simple terms, a blockchain allows transactions to be made online very safely without the need for a central governing authority.
  • On a blockchain network, data is stored in consecutive ‘blocks’ linked in a ‘chain’ where each successive block is connected to the block before it in a way that’s almost impossible to tamper with.
  • Before a new block is added to the chain, there must be a consensus across a majority of the participating nodes.

The use of cryptography, the need for a consensus, and the absence of a central governing authority (decentralization) are some of the appeals of blockchain networks but Ethereum takes it a step further.

Ether – Ethereum’s native token

Most blockchains, cryptocurrency projects, and even exchanges have their own native tokens that are used to pay for contributions made to the network. The native token of the Ethereum blockchain is Ether. (Ether and Ethereum are often used interchangeably to describe the cryptocurrency.)

Ethereum (the cryptocurrency) is often represented on exchanges as ETH. ETH is now the second largest cryptocurrency by market share only after Bitcoin thanks to its increased adoption and scalability.

Why has Ethereum become so popular?

There are many blockchain networks in the ecosystem today but Ethereum in particular is easily the most popular

  • It is scalable
  • It can be used for far more than just financial transactions.
  • Ethereum was made with built-in support for smart contracts – basically self-executing programs that run once particular conditions are met.

As the world embraces decentralization, decentralized apps need to be created and smart contracts are a key component of these dApps. Ethereum has also continued to increase in popularity because many other cryptocurrencies (called ERC-20 tokens) use the Ethereum network as their core.

The Merge – PoS mechanism

September 15, 2022 – the Ethereum main blockchain was merged with a separate proof-of-stake blockchain called the Beacon Chain. This effectively cut down the overall energy consumption on the Ethereum blockchain by 99.95%.

One of the main concerns and a major point of criticism against cryptocurrencies and blockchain networks are how much energy crypto mining consumes.

How crypto mining works

In crypto mining, members of the network compete to solve a complex math problem (called a hashing problem) the quickest. However, as hundreds of thousands and even millions of computers compete, the energy consumed can be cosmic. For example, mining a popular cryptocurrency like Bitcoin consumes enough electricity to power a small city.

Ethereum’s merge cut down energy consumption

To solve this problem, Ethereum shifted to a proof-of-stake mechanism where validators stake a specified amount of ETH and the winner is chosen at random with reputable validators having a higher chance of being picked.

Validators no longer compete and participating computers consume far less power than when solving these hash problems.

Wallets

With the rise of Ethereum and the ecosystem of dApps, many wallets especially optimized for Ethereum-based products have been created. Some wallets allow users to exchange only Ethereum, while most others allow users to also store other tokens, and even create smart contracts.

Wallets are how you access your Ethereum account and manage your funds. Wallets can be hardware wallets, software wallets, browser extension wallets, etc. Many dApps today with built-in payment functionality have a heavy focus on ETH and these ETH wallets are exactly how you access your funds.

Historic split

In 2016, just one year after its launch, as Ethereum continued to grow in popularity a new project termed DAO (Decentralized Autonomous Organization) was created.

  • The DAO was basically supposed to work like a venture capital fund, only without a central governing body or manager over it.
  • The project garnered a lot of interest and raised over $150 million.
  • Due to a flaw in the DAO, a hacker was able to steal $50 million in ETH from the fund.
  • The project was set up in a way that users couldn’t pull out funds from the pool until after 28 days. Then came decision time.

Split or not?

To prevent the funds from leaving the pool, some of the Ethereum community suggested creating a hard fork from the main Ethereum chain. On the other hand, some suggested that the hack be left as it was as tampering with the main chain raised concerns about the true decentralization of Ethereum.

Eventually, after a vote, it was decided that a hard fork would be created. Creating a hard fork basically means tweaking the blockchain’s original code and then a new chain splits (forks) from the original one. From then on and up till today, the older Ethereum chain is called Ethereum Classic (ETC), and the new, forked chain, Ethereum (ETH).

 

Bitcoin vs. Ethereum

Differences between Bitcoin and Ethereum

Bitcoin and Ethereum are the two most popular blockchain networks on the market today and have a number of key differences. Let’s take a look at some of them.

Consensus mechanism

Both Bitcoin and Ethereum initially ran on a Proof of Work mechanism for validating and adding blocks to the chain (crypto mining). However, in 2022, with the Ethereum Merge, the Ethereum chain now works on a Proof of Stake mechanism which consumes far less power.

The Bitcoin chain still runs on the Proof of Work mechanism and its huge community of miners is happy it’s staying that way. While this continues to be a point of criticism, Bitcoin has a limited supply of 21 million BTC and in 2140, the last BTC will be mined.

Functionality

Bitcoin was primarily created to enable decentralized transactions and exchange value without the need for a governing body, and has a heavy focus on ‘digital money’.

Ethereum, on the other hand, was created with its compatibility with smart contracts.

On the Ethereum chain, the possibilities are endless, and not only can Ether be used as money, but developers can also build smart contracts, decentralized apps, NFTs, and other technological products.

Transaction time

On the Bitcoin chain, it takes about 10 minutes for every new block containing about 2000 transactions to be added to the chain.

On the Ethereum chain, however, a new block is added about every 12 seconds, meaning quicker transaction and confirmation times.

Future

The Ethereum blockchain has seen a lot of upgrades in its lifetime and promises even more functionality and improved speed.

One of the most significant adoptions on the chain in the future is ‘sharding’. Sharding is basically splitting the Ethereum network’s database among more nodes, increasing decentralization and distribution of power. Sharding will also increase transaction speeds and allow and minimize network congestion.

A trio of possible future upgrades mentioned by Buterin includes The Verge, The Purge, and The Splurge.

Similarities

While Bitcoin and Ethereum have their key differences, they are still blockchains with a lot of similarities. Let’s take a look at some of them:

Both Blockchain powered

Both Ethereum and Bitcoin are built on blockchain technology creating a network that’s permissionless and trustless. Data exchange on both networks doesn’t require an intervening central body and is done directly between users and validated via a peer-to-peer network of nodes.

Used for financial transactions

Both Bitcoin and Ethereum’s native tokens Ethers (ETH) and Bitcoins (BTC) are used to store and exchange value between users of the networks. The value of both cryptocurrencies depends heavily on the market’s sentiment. Other factors that affect the prices of both coins include inflation, interest, demand and supply, etc.

Similar market movement

Both Bitcoin and Ethereum i.e: the cryptocurrencies, experience very similar price movements. In fact, the prices of both coins are used as a rough estimate of the market conditions. As the price of Bitcoin rises, so does Ethereum. And when the Bitcoin market starts a bear run, the Ethereum market is usually not far behind.

Both open-source

Both Bitcoin and Ethereum run on open-source code that has been modified and distributed by their developer communities. Open source software is software that allows users to tweak, contribute and redistribute the source code.

 

Features of Ethereum

Ethereum is a special blockchain with a number of key features that set the pace for many modern cryptocurrency projects. Some of the key features of the Ethereum network include:

Ether: The cryptocurrency

As stated earlier, the native token of Ethereum is Ether (ETH) and is used to pay for contributions and transactions made on the network. While Ethereum still ran on a Proof of Work mechanism, miners were paid in Ethers for their work validating the chain.

To successfully deploy a smart contract or build a decentralized app on the network, you’ll also need ‘gas’ which is paid for by Ethers.

The EVM

The Ethereum network also features the Ethereum Virtual Machine – EVM for short, that compiles and executes smart contracts deployed on the chain. The EVM reads the programming language used to create smart contracts and also provides a testing environment allowing you to demo the contract before now fully deploying it on the chain.

The EVM is also able to read other programming languages but the most popular used for creating smart contracts is Solidity.

Decentralized apps

One of the most important essences of the Ethereum network is its support for decentralized applications frequently shortened as dApps.

The most important difference between a dApp and a traditional application is the former deploys code from a decentralized network while the latter deploys from a centralized environment.

A good example to help you understand – on your current traditional Instagram account, the platform can suspend your account at any time and restrict your access. A dApp Instagram will be permissionless – you are free to log in and use the platform and no single central authority can block your access.

DAOs

Decentralized Autonomous Organizations – shortened as DAOs – is an organizational model where authority and decision-making are not in the hands of a single entity. Instead, all members of the organization are involved in decision-making, executed by smart contracts.

Here’s how it works. The participating members add money to the DAO pool and receive tokens (ETH or the DAOs native token) which give them voting power (which may depend on your token share) to contribute to the decision processes.

Smart contracts

At the core of the Ethereum network is its support for smart contracts. Smart contracts are self-executing contracts that perform the set action once the set conditions have been met. Unlike a traditional contract, a smart contract cannot be changed once it’s executed, making it very secure.

The nodes in the Ethereum network are responsible for verifying that the conditions of the smart contract have been met before it self-executes. Smart contracts power many of the core functions of decentralized apps so they can run without an intervening central body.

 

Use Cases of Ethereum

NFTs

The first NFT, Quantum, was minted in 2014 even before the Ethereum network was officially launched. However, it was not until recently that they gained serious traction and thanks to Ethereum’s flexibility, most NFTs that were created were and are still hosted on the network. In 2021, interest in NFTs skyrocketed as digital collectibles and NFTs were also used to represent deeds of real-life assets.

  • Jack Dorsey (Twitter founder) minted his first tweet and sold it for $2.9 million.
  • Renowned digital artist, Beeple, minted a 5000 digital art collection (Everydays; The First 5000 Days) and sold it for $69 million.

Decentralized Finance – DeFi

One of the most essential functions of the Ethereum network (and any blockchain project with a native token) is to enable decentralized finance, shortened as DeFi. Traditional finance is many times not truly borderless and transactions are often delayed thanks to the screening processes. Decentralized finance eliminates that.

  • The network’s native token, Ethers (ETH), can be sent between members of the network without the need for a middleman financial platform like in traditional finance.
  • Anyone can access the network as long as they have a wallet and can make cross-border transactions to any wallet anywhere in the world in minutes.

DAOs

DAOs are the answer to making organizations and businesses that are truly decentralized and controlled by every participating member/investor. In a traditional organization, the decision-making is often in the hands of a few ‘elite’ and many times, the decisions they make may not be in the best interests of everyone.

In a DAO, members invest in an organization and are offered tokens (think shares of the company) that give them the ability to vote on major decisions. Before any decision is made, members have to vote and a majority consensus is reached.

Stablecoins

Stablecoins are basically the crypto equivalents of the U.S. dollar. These cryptocurrencies are pegged against the dollar so that at any point in time 1 stablecoin = $1. The prices of stablecoins don’t fluctuate like other cryptocurrencies hence why they are ‘stable’. Stablecoins are especially important in today’s crypto market because they offer investors a ‘safety net’ from price fluctuations.

Now the most popular stablecoins are actually built on the Ethereum network including Tether (USDT), USD Coin (USDC), DAI, and Binance USD (BUSD).

ICOs

Initial Coin Offerings (ICOs) are the crypto universe’s version of IPOs - ‘going public’ and raising funds. When new blockchain projects launch and are seeking investment, they organize funding rounds where they sell their native generated tokens to investors in exchange for a well-established coin or real cash.

Ethereum is the most widely used and traded established coin used in ICOs by investors who want a stake in a new project or just for speculative purposes.

 

History of Ethereum

Vitalik Buterin, a Russian-Canadian programmer is the original founder of Ethereum and created the original white paper describing the network. Before then, Buterin had fallen in love with the idea of decentralization that Bitcoin – the premier cryptocurrency and blockchain was bringing and even founded Bitcoin magazine where he wrote articles on topics in the industry.

Vitalik, however, had bigger ideas and believed that blockchain technology could be used for so much more than just decentralized finance. His work eventually led him to publish a white paper describing a novel network that will support smart contracts and decentralized apps in 2013.

Ethereum is announced and deployed

In 2014, the founding team which now included Buterin as well as Anothony Di Iorio, Charles Hoskinson, Mihai Alisie, Amir Chetrit, Joseph Lubin, Gavin Wood & Jeffrey Wilcke who contributed to its launch and financing, announced Ethereum at the North American Bitcoin Convention held in Miami.

Ethereum was then deployed later that year after Gavin Wood described the paper for the Ethereum Virtual Machine and how it will run smart contracts. To launch, the project later formed the Ethereum Foundation and raised funds in Bitcoin, and sold Ethers to investors.

How Ethereum has evolved

Since then, Ethereum has continued to grow and evolve and it’s safe to say creating a new blockchain that supported building apps on it was a good idea. The Ethereum network has survived its fair share of storms and hacks with the DAO event being the most prominent.

However, the network has also seen remarkable success as it’s the platform of choice for nearly every major innovation the world has seen to give more utility to blockchain technology.

 

Pros and Cons of Ethereum

Pros

  • Exceptional utility
  • Huge market share
  • Widely accepted
  • High potential for growth
  • Enables rapid deployment

Exceptional utility

The main essence of Ethereum was to create a network that tapped into the full functionality of blockchain technology and not just create another decentralized digital currency. That’s the main benefit of Ethereum over Bitcoin and other finance-oriented networks.

Huge market share

Both the blockchain network and its native token are the top in their industries respectively. Ethereum (the cryptocurrency) is the second largest by market share. The Ethereum network is arguably the most widely used for the expanded utilities of blockchain today.

Widely accepted

As an extension of Ethereum’s large market share, Ethereum is also one of the most widely accepted cryptocurrencies after Bitcoin. Many travel agencies, airlines, online shops, clothing stores, hotels, betting platforms, food stores, etc. accept ETH as a payment option.

High potential for growth

Thanks to its varied utility, Ethereum has incredible potential for growth compared to many other networks. Many companies in different industries are experimenting with web3 versions of their apps, closing contracts, and trying decentralized finance… and most of these new adoptions are done on the Ethereum network since it has become trusted by so many people.

Enables rapid deployment

The Ethereum network allows businesses to deploy new applications and tech solutions on the blockchain rapidly. There is already a wealth of deployment solutions that allow even people with limited technical knowledge to build apps and interact with the network quickly. This is especially why the network has seen an explosion in the number of apps hosted on it.

Cons

  • Not the fastest network
  • Expensive gas fees

Not the fastest network

One of the main criticisms of the Ethereum network is its slow transaction speeds. Yes, it is faster than Bitcoin but is still not the fastest blockchain network. Add traffic congestions that happen sometimes and that makes everything worse. There are already new blockchain networks like Solana (called the ETH killer) and Aptos that promise much faster transaction speeds.

But Ethereum doesn’t seem like it wants to stay that way for long though. With new updates promised, the network should be able to get faster still.

Expensive gas fees

Another major problem with the Ethereum network is its gas fees can get really expensive. Gas fees are simply charges users have to pay to make transactions on the network. Ethereum’s gas fees have been notorious to spike from as little as $0.05 to as high as $70 due to two main reasons: high traffic on the network and rapid spikes in the price of ETH.

 

Conclusion

The Ethereum network is the most widely used blockchain in the world and its native token, Ether (ETH) is the second largest by market share after Bitcoin. Vitalik Buterin founded the Ethereum network to exploit the full potential of blockchain technology and not only as a way to power decentralized finance.

The Ethereum network allows users to create smart contracts, build and deploy decentralized apps (dApps), create decentralized organizations (DAOs), and even create new blockchain projects on it and this utility is the main reason why it has become so popular.

While the concepts around decentralization and a future where control is in the hands of the users are still in their infancy, there is no doubt that Ethereum is setting the pace for what’s possible using the blockchain model.

 

Further reading – Useful Resources

Frequently Asked Questions

What is Ethereum and How Does it work?

Ethereum is a blockchain network that supports the creation of smart contracts and the deployment of decentralized applications. The blockchain’s native token is Ether (ETH).

What is Ethereum used for?

Ethereum is used to create smart contracts, enable cross-border permissionless payments, create decentralized autonomous organizations (DAOs), host decentralized applications, and host non-fungible tokens (NFTs).

Is Ethereum better than Bitcoin?

Ethereum is better than Bitcoin in terms of utility. Bitcoin is used mainly as a means to store and exchange value – think ‘digital gold’. Ethereum, on the other hand, allows new levels of functionality on the blockchain. Many people compare Bitcoin and Ethereum like gold and electricity. Both are valuable, however, gold (Bitcoin) is mainly used as a store of value, and electricity (Ethereum) has boundless potential.

Will Ethereum reach the price of Bitcoin?

The short answer – only time will tell. Ethereum’s utility is the main reason it has exploded recently. However, Bitcoin has the first-in-the-game advantage and many investors are still more confident in the maiden coin. However, Ethereum is doing well and if the native blockchain continues to evolve and the coin overtakes Bitcoin in market share, it may get close.

Do note that another main difference between the two is that Bitcoin has a limited supply (21 million) while Ethereum can be created infinitely. Hence, the chances of ETH overtaking BTC are low.

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