Understanding Ethereum: A Comprehensive Overview
Prominent companies like Samsung, Amazon, and Microsoft have embraced Ethereum, but what sets this cryptocurrency apart and makes it so appealing to investors, entrepreneurs, artists, and corporations?
As the second-largest cryptocurrency following Bitcoin, Ethereum is often referred to as the “mother of decentralized applications.”
In this article, we will explore the fundamentals of Ethereum, its distinctions from Bitcoin, the significance of smart contracts and its diverse applications, along with a guide on how to venture into this innovative and promising technology.
What is Ethereum?
Ethereum is a decentralized blockchain technology that operates independently, without ownership or regulation by any third party, such as a government or central bank.
It serves as the foundation for building decentralized applications (dApps), facilitating cryptocurrency transactions and management of digital assets, as well as the creation of new cryptocurrencies.
The native cryptocurrency of Ethereum, known as ether (ETH), acts as the fuel that powers the entire Ethereum ecosystem, with Ethereum itself functioning as the engine driving this innovative platform.
How does Ethereum work?
Comparing the Ethereum network to a massive, potent, and decentralized computer is fitting.
With the help of computer code, it can accomplish virtually any task, provided it has sufficient time, processing capability, and instructions.
As a result, a wide array of applications can be constructed on its blockchain, effectively turning Ethereum into the infrastructure upon which numerous blockchain-based projects operate.
How do Ethereum and Bitcoin compare?
Bitcoin and Ethereum share fundamental similarities:
- They operate without ownership or regulation by any third party, including central banks.
- Both utilize blockchain technology to record and store transaction information securely.
- They each have their respective digital currencies (BTC and ETH) that can be stored in cryptocurrency wallets.
The primary differences between Bitcoin and Ethereum are as follows:
- Use case: Ethereum was designed as a platform to support smart contracts and decentralized applications (dApps), whereas Bitcoin was intended as an alternative currency.
- Supply: Ethereum does not have a predefined limit on its total supply and relies on its supply and demand economics to determine scarcity. In contrast, Bitcoin has a fixed total supply of 21 million coins.
- Consensus algorithm: Ethereum employs a proof-of-stake consensus algorithm, allowing users to earn rewards by holding and staking ETH in their wallets to validate transactions. On the other hand, Bitcoin operates on a proof-of-work consensus algorithm, where participants use computing power (known as mining) to validate transactions.
Who created Ethereum?
Ethereum was originally conceptualized and proposed by Vitalik Buterin, a Russian-Canadian programmer.
In 2013, Buterin published a whitepaper outlining a blockchain network that allowed developers to create their own decentralized applications (dApps).
As a co-founder of Bitcoin Magazine, Buterin was already an active member of the crypto community, and Ethereum was envisioned to surpass the capabilities of the Bitcoin network.
His vision attracted other co-founders, including Gavin Wood and Charles Hoskinson, who joined the project.
Today, Ethereum is supported by a vast community of developers worldwide and continues to evolve.
One recent milestone in its evolution is the “Ethereum Merge,” which transitioned Ethereum from a proof-of-work to a proof-of-stake consensus mechanism.
This transition to proof of stake significantly reduces Ethereum’s energy consumption, by approximately 99.95%, as it no longer relies on high levels of computer processing power.
What can you do with Ethereum?
In addition to using ETH as a form of currency or a store of value, the vast majority of applications built on Ethereum are decentralized applications, or dApps.
A dApp operates on a decentralized peer-to-peer network, in contrast to traditional apps that run on centralized servers (e.g., Uber or Twitter).
The permissionless nature of dApps allows developers to experiment freely without the need for approval from a central authority.
Here are a few examples of what can be created using dApps on Ethereum:
1. DeFi (Decentralized finance)
Decentralized finance, often referred to as DeFi, encompasses a wide range of financial services and products, including lending, borrowing, and earning interest. These services are accessible on public blockchains without the need for permission from traditional financial institutions like banks.
2. NFTs (Non-fungible token)
An NFT (Non-Fungible Token) is a distinctive digital asset stored on a blockchain, possessing unique characteristics that cannot be duplicated.
Though other blockchains have introduced their own versions of NFTs, the very first NFT was created on the Ethereum blockchain.
NFTs have the ability to represent a diverse array of items, ranging from digital art and in-game assets to real-world assets such as land or houses.
DAOs, or decentralized autonomous organizations, function differently from traditional organizations. Rather than having a CEO or centralized leadership, DAOs are collectively owned and governed by their community.
The operations and financial transactions of a DAO are encoded into the Ethereum blockchain using smart contracts. These smart contracts outline the rules and processes for decision-making, fund allocation, and other essential functions, ensuring a transparent and decentralized operation.
4. Other cryptocurrencies
On the Ethereum blockchain, you have the capability to create your own cryptocurrencies that can be acquired using ETH.
To ensure compatibility with online exchanges like the Blockchain.com Exchange, there are specific guidelines or standards that must be followed when creating a token on Ethereum.
The most widely used standard is ERC-20, which has gained popularity due to its widespread adoption.
Some prominent examples of cryptocurrencies built on Ethereum are Tether and USDC, both being among the largest stablecoins in the crypto market.
Transacting on the Ethereum network
When someone wants to send Ether using blockchain technology, the process unfolds as follows:
- The Ethereum transaction, together with the sender’s public key, is recorded on the public ledger known as the blockchain. Each transaction incurs a ‘gas fee’ that the sender pays.
- Ethereum transactions are confirmed and validated through a mechanism called “proof of stake.” In this process, individuals willing to add new blocks to the chain must stake a minimum of 32 ETH and utilize specialized validator software.
- Participants are randomly selected to add blocks to the blockchain, and they receive the gas fee as compensation for their efforts. The complete public ledger is then disseminated to all computers connected to the Ethereum network, ensuring transparency and decentralization.
- Recap: What are gas fees?
Gas fees in Ethereum refer to the charges applied for performing a transaction or executing a smart contract on the Ethereum blockchain.
These “gas fees” are denominated in fractions of ETH and fluctuate based on the network’s supply and demand during the transaction.
- Recap: What is proof of stake?
The recent Ethereum Merge entails developers transitioning Ethereum’s consensus mechanism from proof of work to proof of stake, ensuring the validity of every transaction and newly added block on the network.
How can you build on Ethereum?
Each node (computer participating in the Ethereum network) contains a copy of the Ethereum Virtual Machine (EVM).
The EVM serves as a decentralized “computer,” functioning as a software capable of executing numerous projects using “smart contracts.” These smart contracts enable the execution of complex operations and transactions on the Ethereum network, offering a wide range of decentralized applications and functionalities.
What is a smart contract?
A smart contract is an automated and self-executing agreement, where the terms between multiple parties are expressed as lines of code and recorded on the blockchain.
In contrast, traditional contracts are typically slower, relying on trust and physical record-keeping.
Smart contracts leverage the public ledger nature of the blockchain, ensuring their distribution across the network, making it impossible for the terms of the agreement to be tampered with or altered.
Smart contracts can be likened to digital “if-then” statements that have the ability to integrate with external databases. When a condition specified within the contract is fulfilled, the agreement is automatically approved and executed.
What industries use Ethereum smart contracts?
AXA Insurance has leveraged smart contracts to streamline the process of paying out flight delay insurance claims. By integrating smart contracts with air traffic databases, the system automatically detects flight delays and promptly disburses compensation to eligible customers.
- Supply chain:
Leading grocery chains like Walmart have adopted smart contracts to track the entire journey of products within the supply chain. This implementation enhances transparency by providing comprehensive information on product sources and facilitates the quick identification of missing items.
- Real estate:
SMARTRealty, a company based in Seattle, has introduced smart contracts to the real estate sector. These contracts record crucial information, such as monthly payment amounts, contract duration, and auto-renewal details, into the blockchain, streamlining real estate transactions and ensuring data integrity.
What’s the future of Ethereum?
In 1989, British scientist Tim Berners-Lee revolutionized the internet by creating the open-source and free-to-use World Wide Web (WWW), enabling its rapid evolution. Ethereum’s founder, Vitalik Buterin, embraced a similar ethos when drafting the Ethereum whitepaper.
In a symbolic transfer, Berners-Lee sold the original source code for the WWW as an NFT on the Ethereum blockchain in 2021, passing the baton of innovation.
Ethereum not only offers a new revenue stream for creators and lays the technical groundwork for aspiring developers but also plays a pivotal role in creating a user-centric internet where ownership is returned to the individual.
Having demonstrated its resilience through a successful Ethereum Merge, the network embarks on a new chapter in its history.
If you share the excitement about Ethereum, you can acquire ETH today through the Blockchain.com Wallet on Blockchain.com.