Ethereum is an open-source, decentralized blockchain network, often considered a second-generation blockchain built upon Bitcoin's foundation. It introduces significant differences and improvements. It supports digital payments using its native currency, Ether (ETH), and serves as a software platform for creating and deploying decentralized applications (DApps) and smart contracts.
As the second-largest cryptocurrency by market capitalization, Ethereum has revolutionized the industry by introducing smart contract functionality. This innovation allows users and developers to explore new frontiers like decentralized finance (DeFi).
Understanding Ethereum's Core Features
Ethereum is designed as a global computer accessible to anyone. It empowers users to have full control over their digital assets and access tools and services traditionally managed by centralized entities.
For example, on the Ethereum blockchain, anyone can provide cryptocurrency as collateral and receive instant loans. In traditional finance, this process would be managed by a centralized institution. With Ethereum, every aspect of this functionality is handled entirely by smart contracts on the blockchain, eliminating the need for third-party platforms.
The Ethereum blockchain also enables any program to be censorship-resistant, robust, and less prone to fraud by operating on a distributed network of public nodes spread worldwide.
Decentralized Governance and Community Impact
In the spirit of decentralized ownership, anyone can submit governance proposals they believe will improve Ethereum for the collective benefit. After submission, holders of Ethereum tokens can vote on the outcome. This process ensures the Ethereum community remains responsible for its ongoing development.
Thanks to the seemingly limitless possibilities of blockchain technology and smart contracts, Ethereum has spawned several multi-billion dollar industries. These include DeFi, play-to-earn blockchain games, and the widely acclaimed NFT space. Today, the Ethereum blockchain hosts over 2,900 different projects and has processed over $11 trillion in value.
The native token of the Ethereum blockchain is called ETH. Ether is required to pay transaction fees (GAS) on the network. It also serves as the monetary exchange for crypto assets stored on the blockchain, like NFTs. Following the Ethereum Merge, ETH is used to secure the network and produce new blocks.
How Does Ethereum Operate?
When the Ethereum blockchain launched in 2015, it used a Proof-of-Work (PoW) consensus mechanism. In this model, new ETH tokens were created and distributed to miners as rewards for producing new blocks and maintaining the blockchain.
This meant high-performance computing hardware units, known as mining rigs, competed to solve complex equations during the mining process. The first miner to solve the equation earned the right to lead the production of a new block on the network and received newly minted tokens as a reward. This is the same model used by the Bitcoin blockchain.
Account-Based Architecture and Smart Contracts
Ethereum also features an account-based architecture. An Ethereum account is essentially an entity that holds an Ethereum (ETH) balance and can initiate transactions on the blockchain. There are two types of Ethereum accounts.
The first is an "Externally Owned Account," controlled and managed by users through their private keys. The second is a "Contract Account," also known as a smart contract, managed by their respective code. Both account types can hold, receive, and send ETH and other Ethereum-supported tokens and interact with smart contracts deployed on the blockchain.
External accounts can initiate transactions with other external accounts and smart contracts. However, smart contracts only become active when interacting with an external account or another smart contract. They can only respond by triggering code (involving multiple operations), transferring cryptocurrency, or even creating new smart contracts.
The Role of the Ethereum Virtual Machine (EVM)
The Ethereum Virtual Machine (EVM) is the core of the Ethereum blockchain. The EVM is the environment where all Ethereum accounts and smart contracts reside. It is a computational engine, or virtual machine, that functions like a distributed computer, hosting millions of executable projects.
In other words, the EVM forms the cornerstone of Ethereum's entire operational structure. As a single entity, the EVM is maintained simultaneously by thousands of interconnected computers (nodes) running Ethereum clients.
Unlike Bitcoin, which uses a distributed ledger, Ethereum uses a distributed "state machine." The "state" of Ethereum at any given point is a large data structure containing accounts, balances, and the current "machine state."
It also includes the capability to host and execute many low-level machine codes. This "state" changes constantly between different blocks, and the EVM defines the rules for changing it.
Use Cases of the Ethereum Network
The Ethereum network has numerous use cases, with the ability to create and deploy smart contracts at the heart of all of them. This functionality allows developers to build various decentralized applications on the platform, including crypto wallets, decentralized exchanges, DeFi protocols, NFT marketplaces, blockchain games, and more.
Its token standards, such as ERC-20 and ERC-721, are widely used to create fungible and non-fungible tokens, facilitating various multi-billion dollar projects. In particular, NFT tokens based on the ERC-721 standard pioneered the NFT sector, an industry expected to exceed $13.6 billion by 2027.
On the other hand, Ethereum's native cryptocurrency, ETH, also has multiple use cases. Its primary use is as a means to pay transaction fees on the Ethereum network.
Any time a user transfers ETH or Ethereum-based tokens or interacts with any application hosted on the platform, they must pay ETH as a gas fee. In the future, ETH will also be actively used for validation purposes on the new Proof-of-Stake Ethereum blockchain, where active validators need to stake 32 ETH to qualify for this role.
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The Ethereum Merge: A Significant Upgrade
As Ethereum's demand grew, the network's core architecture began showing signs of congestion, with the average fee per transaction rising significantly. Consequently, one of the biggest challenges the Ethereum blockchain faced was the excessively high fees (GAS) during periods of high network congestion. For instance, in May 2021, the average cost of a basic transaction on the network was about $71.
Known as the Ethereum Merge or ETH 2.0, this multi-year plan aims to gradually transition the Ethereum blockchain from its PoW to a Proof-of-Stake (PoS) consensus mechanism. While this shift does not immediately solve the high GAS fee issue, it makes Ethereum a more environmentally friendly and efficient blockchain network.
In a PoW system, Ethereum miners compete against each other, using expensive computational resources to add new blocks to the chain and receive ETH rewards in return. However, in the PoS model, they will no longer need to mine blocks.
Instead, when selected, they will create and add new blocks, and when not needed, they will validate other blocks. To earn the right to become a validator, they must stake 32 ETH in the blockchain. Furthermore, since there is no competition among validators, they will no longer require expensive and advanced hardware like mining equipment.
Although the Ethereum team has been planning this transition since 2016, it only launched the PoS Beacon Chain on December 1, 2020.
This marked Phase 0 of Ethereum's 3-phase transition from a single PoW chain to a multi-chain PoS network. Listed below are these three phases and how they intend to transform Ethereum:
Phase 0 (The Beacon Chain)
As mentioned, this involved the launch of the Beacon Chain, a Proof-of-Stake blockchain that runs parallel to the original PoW Ethereum mainnet. Furthermore, it laid the groundwork for Ethereum's future upgrades. As of now, over 410,000 validators on the Beacon Chain have staked a total of more than 13 million ETH.
Phase 1 (The Merge)
The Merge, planned for Q3/Q4 2022, involved merging the Beacon Chain with the existing Ethereum blockchain, completely replacing the latter's PoW model with the former's PoS system. Post-Merge, the original Ethereum blockchain became the new network's "execution" layer, while the Beacon Chain became its "consensus" layer.
Phase 2 (Sharding)
Sharding, expected to launch in 2023-2024, will expand Ethereum's capabilities by dispersing the network load across 64 new shard chains. The current PoW Ethereum chain will become one of these 64 shards. At this point, running a mining node will become much easier, as the data to be stored will be far less than on a single PoW Ethereum blockchain.
By transitioning to a PoS consensus mechanism, the Ethereum network will become more energy-efficient and secure than before. Furthermore, the consensus model will allow for greater scalability when the Ethereum blockchain implements a transaction sharding mechanism, significantly increasing transaction throughput and improving network speed.
ETH Price and Economic Model
In July 2014, the Ethereum Foundation launched an Initial Coin Offering (ICO) for ETH. During this public sale, approximately 60 million ETH were distributed to investors at an initial exchange rate of 2,000 ETH for 1 BTC.
At the time, this placed the ETH price at around $0.31. Ether was distributed to investors in the genesis block of the Ethereum network.
When the Ethereum mainnet launched, the initial ETH token supply was approximately 72 million. While most tokens were distributed to early investors, 16.73% of the supply was allocated to the Ethereum Foundation.
As of now, the circulating supply of Ethereum tokens is approximately 122 million. Since the genesis block of the Ethereum mainnet, about 48 million ETH have been added to the supply through token generation.
New ETH tokens are generated through block rewards and distributed to miners, making Ethereum an inflationary cryptocurrency. Although the Ethereum Improvement Proposal (EIP) 1559 London hard fork update introduced some deflationary mechanisms, these do not currently fully offset Ethereum's inflation.
The issuance of Ethereum block rewards has been steadily decreasing. When the network first launched, new Ether was generated at a rate of 5 ETH per block. These rewards were given to miners as an incentive to secure the network and validate transactions. In October 2017, as part of proposal EIP 649, this issuance was reduced to 3 ETH per block.
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The Founding Team Behind Ethereum
The idea for Ethereum was initially described in a whitepaper by Vitalik Buterin in late 2013. Buterin was only 19 years old when he wrote this whitepaper.
Before conceptualizing Ethereum, Vitalik Buterin was an experienced programmer and developer who had previously created the Bitcoin Magazine news website.
Buterin believed that blockchain technology could be leveraged to build decentralized protocols and applications not controlled by centralized institutions. He was an avid player of the popular online game World of Warcraft. After its creators removed his favorite spell from the game, Buterin decided that no single entity should have complete control over an application, thus forming the concept of the Ethereum blockchain.
Ethereum was officially announced in January 2014 at the North American Bitcoin Conference in Miami. The project was co-founded by eight individuals.
Russian-Canadian Vitalik Buterin is the most significant contributor to the Ethereum blockchain and has remained so. Gavin Wood, the founder of Polkadot (DOT), was the first Chief Technology Officer of the Ethereum Foundation. He coded the first technical implementation of Ethereum in the C++ programming language and created Solidity, the de facto programming language for creating Ethereum smart contracts.
Today, Solidity is considered the fundamental programming language for Ethereum applications and is widely used on other blockchains that run the EVM. Furthermore, Wood went on to found his own alternative blockchain network, Polkadot, aimed at correcting some of Ethereum's issues.
Another notable founder is Charles Hoskinson, who gained a reputation for building other Layer-1 blockchains. Due to disagreements over the project's direction, Hoskinson eventually left the Ethereum project. However, alongside another early Ethereum colleague, Jeremy Wood, he founded IOHK and continued to develop the Cardano blockchain.
Frequently Asked Questions
What is the best place to buy Ethereum?
Purchasing Ethereum is straightforward on major cryptocurrency platforms. You can create an account, select the amount you wish to buy, and confirm your purchase. You will receive a competitive price for ETH, and the tokens will be transferred to your account wallet. New users often qualify for registration bonuses.
How does Ethereum work technically?
Ethereum is a decentralized blockchain network. The platform allows developers to deploy smart contracts and autonomous applications. Like Bitcoin, Ethereum does not rely on a central authority to process transactions or issue additional ETH. This means anyone can use Ethereum to deploy permissionless, smart contract-based DApps, such as those seen in the DeFi sector.
Is there a maximum supply of ETH?
Unlike Bitcoin, Ethereum does not have a hard cap on its total supply. New Ether enters circulation through a block reward structure similar to BTC. However, Ethereum's block rewards do not halve over time. The circulating supply is dynamic and changes based on network activity and protocol updates.
How can I start trading Ethereum?
Buying and selling Ethereum is simple and secure on established exchanges. For those new to cryptocurrency, user-friendly interfaces allow you to purchase ETH quickly via a range of popular payment methods at competitive prices.
What is the primary use of ETH?
ETH is the native token of the Ethereum network. It is commonly used as the fuel for the network. Users must pay fees, known as gas, to conduct transactions between wallets, deploy smart contracts, or interact with decentralized applications. This utility creates demand, which can influence the price of ETH.
What was the Ethereum Merge?
The Ethereum Merge was a major network upgrade that transitioned the consensus mechanism from Proof-of-Work (PoW) to Proof-of-Stake (PoS). This change aims to make the network more scalable, secure, and energy-efficient. It does not directly lower transaction fees but sets the stage for future scalability solutions like sharding.