Ethereum is one of the most rapidly growing cryptocurrencies after Bitcoin. This guide will explain everything you need to know about Ethereum, how it works and why it’s so exciting.
Ethereum is an open-sourced, public blockchain-based distributed computing platform that has the capacity to support smart contracts, decentralised apps, and other DeFi projects. Ethereum is built on blockchain technology just like Bitcoin but has many added features and uses. The Ethereum blockchain (a type of distributed ledger technology) allows for peer-to-peer transactions without the need for intermediaries such as banks or governments to verify transactions and process payments. Value can be exchanged and moved around and also represent the ownership of property. This enables developers to create markets, store registries of debts or promises, move funds in accordance with instructions given long in the past (like a will or a futures contract) and many other things that have not been invented yet, all without a middle man. In addition to being able to transfer funds between accounts, Ethereum allows anyone to build decentralised applications (dApps).
What is Ethereum?
Ethereum was proposed in late 2013 by Vitalik Buterin and launched as an open-source software platform in 2015. He is a co-founder of Bitcoin Magazine and Ethereum. Ethereum runs smart contracts which are self-executing, meaning they do not require any third parties to enforce them. The Ethereum Virtual Machine (EVM) is the runtime environment for smart contracts in Ethereum that executes scripts using an international network of public nodes. The EVM is capable of running multiple scripts at the same time and offers unlimited scalability. It can also process complex transactions quickly and securely and because of these features, Ethereum is often used as a platform for decentralised applications (dApps) allowing users to build their own applications on top. There are four main aspects of dApp technology that enable Ethereum smart contracts. They are cryptographic tokens and addresses, peer-to-peer networking, consensus algorithms, and Turing complete virtual machine.
What are smart contracts and how do they work?
A smart contract is a computer protocol intended to digitally facilitate, verify, or enforce the negotiation or performance of a contract. Smart contracts are designed to secure and automate transactions on a blockchain network. Nick Szabo, an American computer scientist, is thought to have first used the term smart contract in an article in 1994. Smart contracts are made possible by two technologies: blockchain and Ethereum. Blockchain is a decentralised ledger that records transactions. It allows multiple parties to agree on a set of facts without relying on a central authority. Ethereum is the platform that allows developers to build applications on top of the blockchain. Smart contracts can represent just about anything that can be expressed in a computer language, including real estate purchases and sales, equity trades, marriage and divorce documents, music recordings or even wagers on sporting events. The development of these smart contracts is part of what has fueled the growth of decentralised finance or DeFi, with the Ethereum platform being a leading innovator in this area.
What is Ether and how does it work?
The Ethereum platform has its own token called Ether, which acts as both fuel and currency for the Ethereum ecosystem. The token can be traded for other Ethereum-based tokens, or for fiat money and is available on many online exchanges and brokerages. Ethereum uses “gas” to pay for computation – each operation takes a certain amount of gas to run. Gas refers to the amount of computational power required for a transaction on Ethereum to execute successfully. Gas is paid for in Ether, with Ethereum users paying for every operation they make on the network, including sending tokens from one account to another or making bets on the outcome of an event. Gas prices are calculated based on the speed and complexity of an action. The more operations you want to perform, the more gas you need. If you only want to deploy one contract and don’t want to pay for extra gas, this is called “off-chain”. This means that your contract will not be on the main chain but rather on your own server/network/database. The value of Ether changes depending on market conditions and how much demand there is for transactions at any given time. Ether can be used as a digital currency, as a store of value, or as an investment.
What are the benefits and use cases of Ethereum?
There are many benefits when it comes to Ethereum such as its liquidity, the various inflation protection strategies it has in place, anonymity, decentralisation and its multiple use cases beyond being a cryptocurrency. As a result, it has quite a few different use cases too. Some of the most popular usages of Ethereum are DeFi, dApps and NFTs. People are able to buy and sell NFTs on marketplaces like OpenSea, swap tokens on platforms like Uniswap, lend or borrow tokens on platforms like Compound, or even earn income from playing games like Axie Infinity. Ethereum can be used to codify, decentralize, secure and trade just about anything: voting, domain names, financial exchanges, crowdfunding and legal contracts are just a few examples.
Ethereum makes it possible for NFTs to work for a number of reasons. The whole NFT ecosystem works because Ethereum is decentralised and secure and NFTs can be stored on a blockchain. This means that they are immutable, verifiable and permanent — they will never change or disappear. Ethereum makes it possible for NFTs to be transferred from one person to another or from one address to another. Ethereum makes it possible for NFTs to have unique attributes like name, symbol, description, etc. NFTs are a way to represent anything unique as an Ethereum-based asset; they give more power to content creators than ever before and are powered by smart contracts on the Ethereum blockchain. NFTs have gained popularity in recent years because they represent a new way to monetise digital content and physical goods. They also have applications in gaming, finance, and real estate. They are tokens that represent an asset (or multiple assets) that is unique and cannot be used as a substitute for another asset. For example, a token representing a specific collectible car or painting. Because they’re digital, NFTs can be traded quickly and easily on secondary markets which allows anyone to buy and sell them. This makes collecting things easier than ever before because you can buy them from anywhere in the world with just a few taps on your phone screen. The other major use case is decentralised finance (DeFi) is taking advantage of these new technologies to create an ecosystem of financial services that operate on the Ethereum blockchain, in which users can interact directly with each other without needing to go through a central authority. Ethereum makes it possible for decentralised finance (DeFi) to work for a number of reasons. The most important of these is that it uses a blockchain to record transactions. This means that the full history of any asset can be traced back to its creation and then used as evidence in court. The blockchain also helps make sure that the same asset is not bought more than once at the same time, as it would be impossible for two people to spend money on the same thing at once. The second reason Ethereum is so important for DeFi is that it makes it possible for asset-backed cryptocurrency tokens to exist. These crypto tokens can be sent from one person to another, but they are backed by real assets.
What are some of the challenges surrounding Ethereum?
Despite the many benefits of Ethereum, there are some drawbacks that developers and others in the ecosystem are looking to overcome. Some of the other challenges include scaling and privacy. The Ethereum network has been facing scalability issues since its inception. Ethereum is currently using Proof-of-work mechanism which has been criticised for its inefficiency, high cost and centralisation incentives, as well as for being environmentally unfriendly. Coming soon, it is planning to transition to a new consensus algorithm called proof-of-stake. Proof-of-stake is an alternative to proof of work, the widely used protocol for validating transactions on a blockchain network. This aims to significantly reduce the amount of energy used by mining and also reduce the difficulty for miners. Proof-of-stake is a type of algorithm by which a cryptocurrency blockchain network aims to achieve distributed consensus. In PoS systems users are required to “stake” their coins for a certain period before they can use them to mint blocks. The more coins you have staked the more likely you are to create the next block. This leads to an interesting economic incentive: if you want your transactions confirmed faster you should buy more coins or stake them for longer periods of time. Moreover, privacy is an important aspect of any cryptocurrency, as it allows users to transact without revealing their identity. However, Ethereum doesn’t offer private transactions by default, making it less appealing for people who want to keep their information confidential.
What are forks?
A cryptocurrency fork is a split of a blockchain into two separate chains. Forks can be temporary or permanent, soft or hard. A fork is essentially a split in the blockchain — a permanent divergence from the previous version of the blockchain that includes a transaction history from before the split. When a fork occurs, everyone holding coins on the blockchain will receive an equivalent amount of new coins at the time of the fork. There are two types of forks: hard and soft. A hard fork is when one blockchain splits into two separate blockchains with different rules; this essentially creates two unique cryptocurrencies. A hard fork requires everyone who owns coins on the old chain to upgrade their software in order for their coins to remain functional on both sides of the fork (and thus able to transact across both chains). A soft fork is when new rules are added to an existing cryptocurrency’s software. Soft forks are backwards compatible — nodes that support the soft fork can still communicate with others that do not support it. In 2016, Ethereum experienced its first hard fork that resulted in two different currencies being created: Ether (ETH) and Ethereum Classic (ETC). This happened because some members of the community wanted to return funds lost during a hack back to investors who lost money from it, while others didn’t want their tokens compromised and therefore wanted nothing to do with this plan whatsoever.
Final thoughts
In the cryptocurrency world, there is a lot of hype around Bitcoin and Blockchain technology, but Ethereum is a fast-growing cryptocurrency that has the potential to disrupt the future of the internet. The Ethereum Project is a collaborative, open-source blockchain initiative that seeks to build a decentralised computing platform. It was founded with a vision to create a decentralised web where users are in control of their own data, and no centralised third party can interrupt or censor the flow of information being shared. Some numbers to end with that are pretty impressive are that currently there are: 2970 projects built on Ethereum, 50.5 million smart contracts on the network, $11.6 trillion value moved through the Ethereum network in 2021, and that there are 71 million+ accounts (wallets) with an ETH balance. Ethereum’s applications are potentially limitless and it’s incredibly exciting, with a lot of room to grow – I can’t wait to see all the new use cases and dApps created in the future.
This space moves at the speed of lightning! Stay updated on the latest in the space by subscribing to the Web3 Wrap-Up newsletter for a weekly summary on what’s happening in Crypto & Web3. ✨