What is Ethereum (ETH)?

About Ethereum

Ethereum is a decentralized open-source blockchain system conceived in 2013 by Vitalik Buterin. It uses Ether (ETH) for transaction fees. This open-source system allows the creation and management of decentralized applications (dApps) and facilitates the issuance of new cryptocurrencies, termed Ethereum tokens, enhancing the landscape of digital finance and blockchain technology.

Ethereum (ETH) was launched through an Initial Coin Offering (ICO). The Ethereum ICO took place between July 22 and September 2, 2014. During this period, participants could purchase Ether (ETH) using Bitcoin (BTC) at a rate of 2000 ETH per BTC, approximately $0.31 per ETH at the time. The ICO was a tremendous success, raising over $18 million and marking one of the most successful crowdfunding projects in the cryptocurrency space.

What Is Ethereum (ETH)?

Ethereum (ETH) is a decentralized, open-source blockchain platform, developed by Russian-Canadian programmer Vitalik Buterin and officially launched on July 30, 2015. It stands as the second-largest blockchain ecosystem , just behind Bitcoin in market capitalization. Unlike Bitcoin, Ethereum offers broader utility beyond being a digital currency.

Ethereum's Infrastructure

● Ethereum Blockchain: This foundation of the network records the entire history of transactions and data.

● Ethereum Virtual Machine (EVM): The EVM is the engine that enables the execution of smart contracts and dApps, playing a crucial role in the Ethereum ecosystem.

● Ether (ETH): As the native cryptocurrency, Ether fuels transactions and incentivizes network participation.

Ethereum's blockchain is structured to include blocks that contain collections of transactions and data. The network operates on twelve-second intervals called “slots,” where a single validator is selected to propose a block, ensuring efficient and secure transaction processing.

Network Updates

Since its launch, Ethereum has undergone several significant updates to improve functionality and efficiency. Notable updates include:

1. Frontier: The initial release of the Ethereum network in July 2015.

2. Homestead: The first major upgrade in March 2016, which included several protocol changes and network improvements.

3. DAO Fork: A controversial hard fork in July 2016 to address the DAO hack, resulting in the split into Ethereum (ETH) and Ethereum Classic (ETC).

4. Metropolis - Byzantium: Released in October 2017, this upgrade introduced several improvements, including enhanced security and privacy features.

5. Metropolis - Constantinople: Implemented in February 2019, it brought multiple optimizations to the network, including reduced transaction costs.

6. Istanbul: Deployed in December 2019, this update improved Ethereum’s performance and security.

7. Muir Glacier: Activated in January 2020, it delayed the difficulty bomb to keep the network running smoothly.

8. Berlin: Launched in April 2021, it introduced several optimizations for gas efficiency.

9. London: Implemented in August 2021, this significant update included EIP-1559, which changed the fee structure and introduced a deflationary mechanism.

10. The Merge: A major upgrade that transitioned Ethereum from Proof of Work (PoW) to Proof of Stake (PoS), significantly reducing its energy consumption.

11. Shanghai: Released in March 2023, this upgrade included enhancements to the Ethereum network, making it more efficient and secure.

12. Dencun: Went live on March 13, 2024, consisting of nine Ethereum Improvement Proposals (EIPs). EIP-4844, or proto-danksharding, is the headline upgrade aimed at lowering gas fees on Layer 2 solutions, while EIP-4788 and EIP-6780 are also highlighted for their significance.

The Vision of Ethereum

Ethereum aims to serve as a global platform for decentralized applications, offering a censorship-resistant, downtime-resistant, and fraud-resistant environment. This vision positions Ethereum not just as a cryptocurrency platform, but as a comprehensive ecosystem for decentralized digital innovation and applications.

History of Ethereum

The history of Ethereum began in 2013 with a proposal by 19-year-old programmer Vitalik Buterin, who was also a co-founder of Bitcoin Magazine. Buterin envisioned a blockchain platform far more flexible than Bitcoin, capable of supporting a diverse array of transactions. This idea took shape in a whitepaper that laid the groundwork for Ethereum. Alongside other co-founders, including Gavin Wood, Buterin garnered significant support for this project, raising $18 million through a pre-launch token sale in 2014. This funding was crucial for bringing Ethereum from concept to reality.

Key Milestones

1. Launch of Ethereum (2015): July 2015 marked a significant milestone with the launch of Ethereum’s first public version, known as Frontier. This release introduced smart contract functionality, allowing for automated and complex transactions on the blockchain. This feature set Ethereum apart and opened up new possibilities for decentralized applications (dApps).

2. The DAO Incident and Hard Fork (2016): In 2016, the DAO, a decentralized autonomous organization built on Ethereum, was hacked, leading to a significant loss of funds. To mitigate the damage, the Ethereum community decided to implement a hard fork, resulting in the creation of two separate blockchains: Ethereum (ETH) and Ethereum Classic (ETC).

3. Metropolis Upgrades (2017-2019): Ethereum underwent several major upgrades under the Metropolis phase:

● Byzantium (October 2017): Introduced multiple improvements, including enhanced security and privacy features.

● Constantinople (February 2019): Brought optimizations to improve efficiency and reduce transaction costs.

%1. Transition to Proof-of-Stake (PoS) - The Merge (2022): One of the most significant updates occurred in 2022 when Ethereum transitioned from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism, known as The Merge. This change represented a shift towards a more energy-efficient and secure blockchain. It reduced the platform's energy consumption and increased its transaction handling capacity.

%1. Ethereum 2.0 and Scalability Improvements (2023): Following The Merge, Ethereum continued its development towards Ethereum 2.0, focusing on scalability and energy efficiency. This included improvements like sharding, which divides the network into smaller parts to increase transaction throughput.

%1. Dencun Upgrade (2024): The latest significant update, known as the Dencun upgrade, is scheduled for March 13, 2024. This upgrade includes nine Ethereum Improvement Proposals (EIPs), with EIP-4844 (proto-danksharding) aimed at lowering gas fees on Layer 2 solutions. It also highlights EIP-4788 and EIP-6780 for further enhancing the network's capabilities.

How Does Ethereum Work?

Ethereum's Architecture

The Ethereum blockchain consists of numerous nodes, each storing a copy of the entire blockchain. A node is essentially a computer that participates in the Ethereum network by maintaining an up-to-date record of all transactions. Each block in this chain contains a list of transactions, a complex mathematical puzzle, and the solution to the preceding block's puzzle, culminating in an interconnected chain known as blockchain.

Smart Contracts

Central to Ethereum's innovative capabilities are smart contracts—self-executing lines of code that trigger once specific predefined conditions are met. Serving as the cornerstone of decentralized applications (dApps), smart contracts eliminate the need for intermediaries. Imagine a smart contract as an automated vending machine; insert the right amount of money, make your selection, and the item is dispensed without any human intervention.

Ethereum Virtual Machine (EVM)

The Ethereum Virtual Machine (EVM) is another pivotal component of the Ethereum ecosystem. Functioning as a decentralized, global computer, the EVM executes smart contracts penned in Solidity, Ethereum's native programming language. Every node in the network runs its own instance of the EVM, collectively executing smart contracts upon being initiated by a transaction. The EVM executes these smart contracts in an isolated environment, ensuring robust security measures.

Gas and Ether

Every operation on Ethereum, whether it’s executing a transaction or a smart contract, consumes computational resources. To fairly distribute these resources across the network, Ethereum employs the concept of "gas"—a unit that quantifies the computational effort needed for different operations. Gas is paid for in Ether, Ethereum’s native cryptocurrency. Users initiate transactions by specifying both a gas limit and a gas price—the maximum amount of gas they're willing to use and the Ether they’re willing to pay per unit of gas, respectively. The total transaction fee in Ether is calculated as the product of the gas consumed and the gas price. This serves to remunerate miners for validating transactions and safeguards the network against spam.

The Versatility of Ethereum Transactions

Ethereum supports diverse applications beyond simple financial transactions, including decentralized finance (DeFi), decentralized autonomous organizations (DAOs), and virtual marketplaces. The backbone of these applications is Ethereum's smart contracts. These autonomous programs reside on the blockchain and execute automatically when predefined conditions are met, eliminating the need for intermediaries. Smart contracts are immutable once deployed, ensuring reliability and trust in transactions.

Scalability Challenges and Solutions

As Ethereum's popularity soars, it encounters scalability challenges, evident in slower transaction speeds and higher fees during peak times. The CryptoKitties phenomenon in 2017 is a prime example, where a surge in activity led to network congestion. To tackle these issues, Ethereum developers are focusing on solutions like sharding and rollups.

Sharding: A Solution for Scalability

Sharding is a technique that divides the network's database into smaller segments, or shards. Each shard represents a fraction of the entire database, and is stored on a different server. This approach significantly reduces the data storage burden on individual nodes, making it feasible for more people to participate as node operators. Sharding not only enhances transaction speeds but also bolsters the overall security of the network.

Rollups: Making Transactions Efficient

Rollups are another innovative solution, where numerous transactions are bundled together and processed as a single transaction. This method effectively reduces the gas fee per transaction, making it more economical for users.

Proof-of-Stake (PoS)

Ethereum transitioned from the Proof-of-Work (PoW) consensus mechanism to the Proof-of-Stake (PoS) model during "The Merge " on September 15, 2022. This upgrade is a crucial part of Ethereum 2.0, aiming to enhance the network's speed, security, and energy efficiency.

How PoS Works

In the PoS model, validators are selected to create new blocks based on the amount of Ether (ETH) they hold and are willing to "stake" as collateral. This is in contrast to the PoW model, where miners solve complex mathematical problems to validate transactions and create new blocks.

1. Becoming a Validator: To become a validator, a participant must stake 32 ETH in Ethereum's official deposit contract.

2. Staking Process: After staking their ETH, participants become validators and are responsible for proposing new blocks and validating transactions.

3. Block Proposal and Validation: The protocol randomly selects a validator to propose a new block. The proposed block is then checked by other validators. If the majority of validators agree on the block's validity, it is added to the blockchain.

4. Incentives and Penalties: Validators are incentivized to act honestly through rewards in the form of additional ETH. These rewards come from the network's inflation and transaction fees from the blocks they validate. Validators who act maliciously or fail to maintain their node may face penalties, such as slashing, where a portion or all of their staked ETH is confiscated.

Benefits of PoS

● Energy Efficiency: PoS significantly reduces the energy consumption compared to PoW, making the network more environmentally friendly.

● Scalability: The PoS model enhances the network’s scalability by allowing more transactions per second.

● Security: By requiring validators to stake their ETH, PoS creates a financial disincentive for malicious behavior, enhancing network security.

What Are Potential Use Cases for Ethereum?

Ethereum, as a pioneering blockchain platform, opens up a multitude of possibilities extending well beyond simple monetary transactions. Its robust architecture supports the creation of decentralized applications (dApps) on its secure and transparent blockchain network. These dApps utilize Ethereum's capabilities to provide diverse services, solidifying its position as a versatile platform in the blockchain and cryptocurrency sectors.

Decentralized Finance (DeFi) and Financial Instruments

One of the most prominent use cases of Ethereum is in the field of Decentralized Finance (DeFi). DeFi uses smart contracts, which are self-executing contracts with the terms of the agreement directly written into code, to create complex financial instruments without the need for traditional financial intermediaries. This includes services like lending platforms, yield farming, and decentralized exchanges (DEXs) that enable users to trade assets without relying on central authorities. By leveraging Ethereum's smart contracts, DeFi platforms offer a more open, accessible, and transparent financial system.

DeFi platforms, like MakerDAO, utilize Ethereum's smart contracts to offer services such as decentralized lending and borrowing. Users can lend their Ethereum tokens and earn interest or borrow against their holdings

Digital Identity and Secure Transactions

Ethereum also plays a crucial role in developing digital identity solutions. By creating a decentralized identity, users can have more control over their personal information. This application is particularly valuable in online transactions and services where identity verification is essential. Ethereum's blockchain ensures that personal data remains secure and tamper-proof, enhancing privacy and security in the digital space.

Supply Chain Management

In the realm of supply chain management, Ethereum's blockchain offers an unprecedented level of transparency and traceability. By recording each step of a product’s journey on the blockchain, it becomes possible to track the origin and handling of goods, from manufacturing to final delivery. This application is particularly beneficial in industries where authenticity and ethical sourcing are critical, such as in the food and pharmaceutical sectors.

Non-Fungible Tokens (NFTs)

The creation and trading of Non-Fungible Tokens (NFTs) have become a significant use case for Ethereum. NFTs are unique digital assets that can represent ownership and authenticity of a wide variety of items, including artwork, music, and collectables. Ethereum's blockchain ensures that each NFT is one-of-a-kind and cannot be replicated, providing a new way for creators and collectors to interact in the digital world.

CryptoKitties, one of the first NFT projects, allows users to buy, collect, and breed unique digital cats, with each cat represented as an NFT on the Ethereum blockchain. Similarly, platforms like OpenSea have emerged as marketplaces for trading a variety of NFTs, from digital art to virtual real estate, all based on Ethereum's technology.

What Is Ether Token (ETH)?

Ether (ETH) is the main cryptocurrency of the Ethereum blockchain, often compared to digital fuel for the network. It's used for various tasks within Ethereum, like running smart contracts and decentralized apps (DApps), storing value, and making peer-to-peer payments. Ether is widely traded on many cryptocurrency exchanges, including Bitget.

The Ethereum network requires computational resources for its operations. Whenever someone makes a transaction or activates a smart contract, they have to pay a fee in Ether, known as "gas." This gas fee compensates for the computing power used by the network's nodes. It ensures the network runs smoothly and prevents misuse or spam. This system makes Ether a vital part of Ethereum's functionality and security.

What Is Ethereum 2.0?

Ethereum 2.0 represents a major evolution of the original Ethereum blockchain, designed to significantly improve the network in three key areas: scalability, security, and energy efficiency. This upgrade, initiated in phases starting from December 1, 2020, with the launch of the Beacon Chain, marks a pivotal transformation for Ethereum.

One of the most notable changes in Ethereum 2.0 is its shift from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism. This switch is crucial because it drastically reduces the network's energy usage, making it more environmentally friendly, and enhances its security against various types of cyber attacks.

A core element of Ethereum 2.0 is the introduction of "sharding." Sharding involves breaking the Ethereum blockchain into several smaller pieces, called "shards." Each shard can independently handle transactions and smart contracts. This is a significant departure from the original Ethereum setup, where every transaction requires validation across the entire network. Sharding allows for much faster processing of transactions, boosting the network's speed and efficiency.

Additionally, Ethereum 2.0 plans to introduce eWASM (Ethereum WebAssembly), which is set to replace the Ethereum Virtual Machine (EVM). eWASM enables more efficient and rapid execution of code, optimizing the network's performance. The upgrade also integrates crosslinks, which are instrumental in effectively managing these shard chains.

What Makes Ethereum Valuable?

Ethereum stands out in the vast world of cryptocurrencies due to its unique and powerful features. At its core, Ethereum is designed to be more than just a digital currency. Its primary aim, as stated in its whitepaper, is to establish a new protocol for building decentralized applications (dApps). These applications are not controlled by any single entity, offering a high level of security and the potential for scalability.

One of the key elements that make Ethereum special is the use of smart contracts. Smart contracts are self-executing contracts with the terms of the agreement directly written into code. They automate and enforce the contract's terms, minimizing the risk of fraud or third-party interference. This technology opens up a world of possibilities for developers, allowing them to create a wide range of decentralized applications that have real-world applications.

Another significant aspect of Ethereum is the ease of creating digital currencies, known as "tokens," on its network without extensive blockchain knowledge. Many well-known tokens like ChainLink (LINK), Basic Attention Token (BAT), and VeChain (VET) started on Ethereum before moving to their own blockchains . Ethereum's ERC-20 and ERC-721 standards make it easy for developers to create fungible and non-fungible tokens, respectively, fostering innovation in various sectors.

Moreover, Ethereum's value is enhanced by its large and active community of developers, which drives continuous innovation and improvement. The platform's interoperability facilitates seamless integration with other blockchains and decentralized services, making it a cornerstone of the decentralized finance (DeFi) movement. Ethereum supports various financial products like lending platforms, stablecoins, and decentralized exchanges, further solidifying its position as a vital component of the decentralized internet.

Related Articles about Ethereum

What is Ethereum? Why is it the second biggest Blockchain after the Bitcoin Network?

Ethereum Value and Price (Part 1)

Ethereum Value and Price (Part 2)

Different Token Standards on the Ethereum Blockchain

The Crypto Burrito (Volume I): Ethereum Merge