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What Is Ethereum?

Last updated 8th Aug 2022
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Ethereum is the second most popular cryptocurrency when ranked by market cap. It is seen as the big competitor to Bitcoin and an example to many of the market’s Altcoins. Ethereum is no doubt an extremely unique platform and equally a very complex system.

It is however beneficial for you to have a grounded idea of what this network is as it will ultimately have a strong relationship to Ethers price and market trends. That’s why we have created this easy-to-follow guide to explain what Ethereum actually is, how it works, and what it can be used for.

Ethereum Origins

Vitalik Buterin

Unlike Bitcoin, Ethereum has a talisman that is responsible for the original conception of the Ethereum network and is largely the leader of the whole project to this day - his significance to the project and cult status in the crypto community cannot be understated.

Originally born in Russia, Vitalik was the child of computer scientist Dmitry Buterin. His family soon moved to Canada to look for a better life and it didn’t take long for Vitalik to excel in mathematics, programming, economics, and cryptography.

By 17 he was thrust into the cryptocurrency having been told about Bitcoin by his father and then founded Bitcoin Magazine in 2011 having been writing for another publication, Bitcoin Weekly, shortly before that. Vitalik was paid 5 Bitcoin for every article (a value today of almost $200,000).

By 2013, aged 19, Vitalik Buterin was traveling around the globe sharing ideas with Bitcoin enthusiasts. He proposed changes to the Bitcoin Network that would allow the complete evolution of blockchain technology, but as often is with the Bitcoin community, it was met with hesitation. It's important to understand one of Bitcoin's core features is its rigidity. This then led to the creation of the Ethereum network as we know it today.

History

Having originally published a white paper proposing Ethereum in 2013 Vitalik began working full-time on what would be a network very different from Bitcoin’s. In 2014 the original five founders of Ethereum launched the network, were: Vitalik Buterin, Charles Hoskinson (founder of Cardano), Gavin Wood (founder of Polkadot), Anthony Di Iorio, and Joseph Lubin.

The drama that surrounds the eventual split of the co-founders is something widely fixated over by the Ethereum community. Essentially, Vitalik wished the project to develop as non-profit but other members of the team, notably Charles Hoskinson, disagreed with this and left to form what are today some of the biggest projects in the space.

Ethereum subsequently launched as a smart contract-based network that would go on to completely open the blockchain and cryptocurrency space up for innovation and cause the subsequent explosion we see today.

What Is the Ethereum Network?

The Ethereum Network is a complex system to understand, but it is possible to have a grounded knowledge of what it is at its core by reviewing these core pillars of the system:

Smart Contracts

Smart contracts are a relatively simple concept. They represent a transaction or agreement being made automatically, in a trusted fashion, and without the need for any third party. The use-cases for this are somewhat obvious - how many business deals could be streamlined and simplified when you don’t require a middle man to be a trusted party?

Ethereum was the first blockchain network to innovate and implement smart contracts. This innovated a completely new stream of use-cases for blockchain technology and led to an explosion of other blockchain networks.

Most critically, it also created a platform to be built on top of. Now activity could be undertaken on top of the Ethereum network, including building decentralized apps (dApps), decentralized finance (DeFi), initial coin offerings (ICOs), GameFi, and Non-fungible tokens (NFTs). All of these exciting new technologies started with the conception of the Ethereum Network.

Ethereum Blockchain

This is where everything from transactions to smart contract calls is stored. The Ethereum blockchain keeps a record of everything and is the main database, or ledger, that supports the ecosystem.

If this sounds like a lot of data to store to you then you would be right - the sheer size of Ethereum blocks and smart contracts is what provides the biggest challenge to the network. Big blocks mean less throughput, slower transaction speeds, and higher gas fees.

Mining, Transaction Confirmations, and Supply

Ethereum miners operate in much the same way as Bitcoin miners do. They provide the network with much-needed infrastructure by solving complex equations that in turn verify transactions and reward the miner with the platform’s native token: Ether.

The Ethereum supply is closely controlled by the Ethereum Network, but one of the main ways new Ethereum enters the supply is through mining activities.

Proof-of-Work Consensus Mechanism

The blockchain consensus mechanism for Bitcoin and Ethereum. Requires miners to solve complex mathematical problems with extensive levels of computing power to verify transactions on the network and in turn earns miners rewards.

  • Very energy consuming

  • Requires specialist hardware

  • Mining is ongoing and indefinite in order to solve problems and verify blocks

Ether

Ether is the native currency and token that is the most essential tool required to use the Ethereum Network; users must use ETH to make transactions and execute smart contracts. Ether is currently the second-largest token by market cap on the market today.

Use Cases

Ethereum has many use-cases, with new ideas being developed every day, but here are the main purposes of the network:

Development of dApps, DeFi, ICOs, and NFTs

Ethereum has opened the playing field for competing networks and the development of applications built on top of blockchain networks. Some of the resulting use cases that have come from the Ethereum Network and the dApps it offers are:

  • Financial products and services

  • Advertising

  • Supply chain management

  • Gaming

  • Gambling

Developers can now also create their own cryptocurrencies using the ERC-20 token built on Ethereum. This has led to an explosion of Altcoins, meme coins, and everything in between.

Similarly, the creation of the ERC-721 non-fungible token represents the standard for NFTs. This tool has opened the floor for developers all over the world to create, trade, and sell NFTs.

Smart Contract Use Cases

Smart contracts are developing more and more ways to revolutionize trade as time goes on. Here are some of the top features that give them such a high degree of utility:

  • Security

  • Autonomy

  • Trustless

  • Cost-effective

  • Fast

  • Error-free

And these characteristics have led to possible uses cases in:

  • International payments and trades

  • Loans and mortgages

  • Government and public procurement

  • Supply chain management

  • Voting

Decentralized Economy

At its core, Ethereum offers anyone anywhere with an internet connection the chance to connect and interface with a financial system. It offers a store of value and also access to digital money. On top of this, it offers data-friendly services to its users and a place to build and develop projects.

Ethereum is ultimately a decentralized network which means that no one individual or business is in control of it; it is instead run by the Ethereum Network Community. However, it must be said that some do criticize Ethereum for its reliance on Vitalik Buterin. Following this, the plan to upgrade the network to Ethereum 2.0 has led many to suggest it will become less secure and less decentralized than Bitcoin for example.

Ethereum 2.0

What Is Ethereum 2.0?

Ethereum 2.0 will mark a shift in the genetic makeup of the Ethereum Network. Most notably, the Proof-of-Work consensus model will change to a Proof-of-Stake model. This is dramatically different and will affect the platform in many meaningful ways, mostly mining activities.

Here are some of the key features of PoS:

  • Requires 99.95% less energy than Proof-Of-Work

  • Validators are chosen based on their token holdings

  • No specialized hardware

  • Doesn’t require ongoing and indefinite work

Ethereum 2.0 will also solve Ethereum’s biggest problem which is an overly congested network because of its popularity. It will increase throughput, reduce gas fees and cut transaction time.

Final Thoughts

Ethereum is one of the most impactful blockchain networks the cryptocurrency community has ever seen. Bitcoin undoubtedly was the first and showed that a decentralized financial ecosystem is possible, but Ethereum set the ropes for others to follow and for developers to have a home. Its ingenious use of smart contracts has also led to industry-wide excitement in terms of how this technology could improve regular life and traditional trade.

Ethereum currently works on the Proof-of-Work consensus model which rewards miners for verifying transactions by solving complex equations but requires plenty of resources. The Ethereum team has been working on evolving the system into Ethereum 2.0 for over two years now but it is proving extremely complex. This really would dramatically change what Ethereum is.

But overall, Ethereum is a network that creates, it is a token that provides finance to all and it is one of the most exciting projects in the cryptocurrency and blockchain space.

FAQs

Is Proof-Of-Work more secure than Proof-Of-Stake?
What Is Ethereum?
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Joshua Sherrard-Bewhay

Joshua Sherrard-Bewhay

Josh is a finance and Blockchain technical writer with experience in project design, consultancy and reporting. He is well-versed in white paper design, blog construction and freelance journalism. His academic credentials are in International Relations, Environmental Regulation and International Law. In his spare time he works as a sustainability analyst for a FinTech start-up Oxari and a private English tutor.