19 Jun, 2023

What is Ethereum? The Powerhouse of Smart Contracts

what is ethereum?

TLDR

Ethereum is a decentralized blockchain platform that allows the secure implementation and verification of smart contracts. It uses Ether (ETH) as its native cryptocurrency. Ethereum allows participants to transact without a central authority, with transaction records stored immutably across its network.

Ethereum is a versatile network for building decentralized applications (DApps) and peer-to-peer transactions. It features a peer-to-peer network that executes and verifies application code.

Its flexibility and computational power have made it an excellent choice for real-world uses, like traditional finance, storing data, and voting. It has gained traction in various industries like gaming, finance, and voting.

What is Ethereum?

Ethereum is a decentralized global software platform powered by blockchain technology. This platform is widely recognized for its native Ether (ETH) cryptocurrency.

Anyone can use Ethereum to create secure digital technology. Additionally, Ethereum has a token designed explicitly to support blockchain work. It can also be used as payment for real goods and services, given they accept it.

Ethereum platform is well-known for its scalability, programmability, security, and decentralized nature. It is the preferred blockchain for developers and enterprises seeking to transform various industries and everyday lives.

An integral feature of Ethereum is its native support for smart contracts, which serve as crucial tools behind decentralized applications. These smart contracts are widely employed in decentralized finance (DeFi) and other applications that depend on blockchain technology.

What is ETH?
What is ETH?

History of Ethereum

Ethereum emerged as a solution to address Bitcoin’s limitations. Co-created by Vitalik Buterin in 2013, Ethereum introduced smart contracts, enabling decentralized applications (DApps) development.

Its goal was to unify existing DApps by establishing a shared ruleset similar to Apple’s App Store. However, unlike Apple’s centralized control, Ethereum operates autonomously, with rules enforced by the network and developers able to set rules within DApps.

To fund the development of Ethereum, Buterin and his co-founders conducted a token presale, raising $18,439,086 in Ether. They established the Ethereum Foundation as a nonprofit organization in Switzerland to oversee the network’s maintenance and growth.

The Ethereum community expanded as developers brought their decentralized ideas to the platform. The DAO, a democratic organization governed entirely by smart contract code, was established to vote on changes within the network.

Unfortunately, a security exploit led to a significant theft, prompting a “hard fork” in Ethereum. The network split into Ethereum (the upgraded version) and Ethereum Classic (the original chain).

Despite challenges, Ethereum has continued to evolve, becoming a prominent blockchain platform that revolutionizes various industries and promotes decentralized innovation.

The history
The History.

What does Ethereum do?

The creators of Ethereum had a broader vision for blockchain technology beyond secure digital payments. Let’s explore how it works and affects the decentralized world.

Blockchain Technology

Ethereum operates on blockchain technology, similar to other cryptocurrencies. Visualize a long chain of interconnected blocks where each block contains data. Every new block created incorporates this data, resulting in a replicated copy of the blockchain distributed throughout the network.

Automated programs within the network actively validate the blockchain by achieving collective agreement on transaction information accuracy. This is the key to maintaining blockchain security, as it prevents any changes from being made unless all nodes and network participants reach a consensus.

To achieve consensus, Ethereum operates on the proof-of-stake algorithm. This involves a network of participants known as validators who collaborate to create new blocks and verify their content. These blocks store information about the blockchain’s state, attestations (a validator’s signature and vote on block validity), transactions, and more.

Proof-of-Stake Mechanism

A proof-of-stake mechanism differs from proof-of-work as it eliminates the need for energy-intensive mining to validate blocks.

Instead, it combines a finalization protocol called Casper-FFG and the LMD Ghost algorithm into a consensus mechanism called Gasper. Gasper plays a vital role in overseeing consensus and deciding how to reward validators for their efforts or penalize them for dishonest conduct.

To activate their validation ability, solo validators must stake 32 ETH. However, individuals with smaller amounts of ETH can participate by joining a validation pool and sharing rewards.

The validation process involves a validator creating a new block and attesting its validity. Next, this block is transmitted to a committee of other validators. They confirm the proof of work and vote on its validity through attestation.

Under the proof-of-stake mechanism, dishonest network validators face penalties. Gasper identifies any attempts to attack the network by analyzing validators’ votes and accepting or rejecting blocks accordingly. Dishonest validators are punished by having their staked ETH burned, effectively removing it from circulation.

Wallets

Regarding Ethereum, owners rely on wallets to keep their Ether safe. These wallets serve as digital interfaces, granting access to the Ether stored on the blockchain. Like an e-mail address, your crypto wallet has an address where others can send Ether, much like an e-mail.

However, Ether itself is not physically stored in your wallet. Instead, your wallet safeguards the assets associated with a private key, with your account address and Ether. These private keys act as passwords when initiating transactions.

Each Ether you own is assigned a unique private key, which is crucial for accessing and managing your Ether. This explains why there is significant emphasis on securely storing these keys using various methods.

EVM
Ethereum Virtual Machine.

What sets the Ethereum blockchain apart from others?

Here are some key features of Ethereum:

Decentralization and censorship resistance

One significant advantage of Ethereum is its decentralized nature, which goes hand in hand with anonymity. Unlike centralized platforms, Ethereum-based social media platforms do not have the power to remove or punish users for offensive content unilaterally.

Instead, decisions are made collectively by the community through voting. This ensures that users with diverse viewpoints can engage in discussions freely while allowing people to determine acceptable speech.

Protection against bad actors

Ethereum’s community requirements act as a safeguard against malicious actors. To make any changes, an individual would need to control a majority (51%) of the network, a feat that is nearly impossible in most cases.

This security measure makes Ethereum far more resilient than traditional centralized servers, which can be vulnerable to breaches and takeovers.

Automation with Smart Contracts

Smart contracts are another notable feature of Ethereum, streamlining processes that typically rely on central authorities on the traditional web. For example, freelancers on platforms like Upwork often rely on the platform for finding clients and setting up payment contracts.

In contrast, on Web 3.0, a client can create a smart contract specifying conditions such as deadlines and payment release terms. These rules are immutably coded into all the smart contracts’ contract codes, ensuring transparency and preventing manipulation by either party once established.

Ease of Ether acquisition

Obtaining Ether, the native cryptocurrency of Ethereum, has become increasingly convenient. Prominent companies like PayPal and its subsidiary Venmo now support direct purchases of cryptocurrencies using fiat currency within their applications.

With millions of customers on these platforms, their involvement in the crypto space is expected to grow.

Smart contracts
Smart Contracts.

How to Buy Ethereum

Many newcomers to the Ethereum network mistakenly believe they can directly buy Ethereum. Still, you acquire Ether (ETH) and use it within the Ethereum network. Here’s a simple process for buying Ether:

  1. Select a cryptocurrency exchange or trading platform like eToro, Binance.US, or Bitforex. Alternatively, you can use online brokerages like Robinhood or SoFi for common coins like Ether and Bitcoin.
  2. Deposit fiat money, such as dollars, into your chosen platform by linking your bank account or debit card. This will provide the funds needed to make purchases of Ether.
  3. Purchase Ether at the current Ethereum price and consider diversifying your portfolio with other assets available on the platform. You can hold, sell, or trade your acquired coins, but be aware of potential tax implications.
  4. Safely store your Ether by using a wallet. Keeping your coins in the exchange’s default digital wallet is not recommended due to security risks. Instead, transfer your coins to a separate digital or cold wallet, which is offline and provides enhanced security against hacking attempts.
How to buy Ethereum?
How to Buy.

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Drawbacks of the Ethereum

The Ethereum community continues to address and explore to enhance the network’s performance and improve scalability and user experience. Still, it has some major drawbacks, so let’s explore these.

Lacks scalability

Despite its potential, Ethereum faces scalability issues that need to be addressed. The Proof-of-Work (PoW) consensus algorithm limits the platform’s ability to handle many simultaneous user interactions.

Block validation times and gas fees restrict the seamless experience envisioned by Vitalik Buterin. In contrast, centralized entities like Visa have perfected the transaction execution processes by managing everything.

Accessibility issues

Ethereum’s development and user interaction can be costly and complex, especially for those unfamiliar with its technology.

Certain platforms mandate the use of specific wallets, which forces users to transfer ETH from their exchange account to these wallets. This extra step can feel unnecessary for users familiar with the existing financial ecosystem.

To enhance accessibility to digital money, integration with DeFi (Decentralized Finance) and DApps (Decentralized Applications) within user-friendly platforms, such as PayPal, is crucial.

Complicated user experience

While Ethereum provides well-written documentation, the actual process of using the platform requires further streamlining.

Bridging the gap between understanding blockchain technology and effectively using Ethereum remains challenging. Simplifying the user experience will encourage wider adoption and attract more users to the platform.

High transaction costs

One of the significant drawbacks of Ethereum is the rising transaction costs. As the network becomes more congested, the fees associated with processing transactions have significantly increased. High gas fees can make it expensive for investors to engage in even basic activities on the Ethereum blockchain.

Potential for crypto inflation

Another concern is the potential for crypto inflation. Ethereum’s native cryptocurrency, ether (ETH), has a monetary policy that allows the creation of new coins through mining.

This could lead to an increase in the supply of ETH, potentially impacting its value over time. Managing inflation and maintaining a stable value for cryptocurrencies like ETH is an ongoing challenge for the Ethereum network.

Disadvantages of Ethereum: High gas fees.
High Gas.

What’s changed in Ethereum 2.0?

Ethereum is upgrading to its 2.0 version, bringing a proof-of-stake consensus algorithm. The traditional Ethereum network is merging with the Beacon Chain, the first new feature of Ethereum 2.0.

Introducing the Beacon Chain

The Beacon Chain lays the groundwork for future upgrades, including shard chains. Shard chains help solve scalability issues by spreading transactions across smaller blockchain networks. This allows for more accessible validation, and the consensus layer reduces congestion.

Benefits of Ethereum 2.0

Ethereum 2.0 brings optimism to cryptocurrency enthusiasts. NFTs are gaining popularity, and public blockchain awareness is increasing. However, high transaction fees and slower validation times highlight the need for Ethereum 2.0. DApp developers are working to improve accessibility for mainstream adoption.

Transition to Proof-of-Stake

Ethereum 2.0 introduces proof-of-stake consensus, replacing mining with validators. Validators store the Ethereum blockchain, validate transactions, and earn rewards by staking a minimum of 32 ETH. Validators ensure the network’s success and can lose their stake if they fail to participate or act maliciously.

Advantages of Proof-of-Stake

Proof-of-stake offers faster and more accessible blockchain consensus. It doesn’t require specialized hardware, allowing anyone with funds and a device to participate. More validators mean more validated blocks, increasing network growth and decentralization for enhanced security.

Ethereum 2.0
2.0

What’s the history behind the split between Ethereum and Ethereum Classic?

One meaningful event in Ethereum’s history was the hard fork that created Ethereum and Ethereum Classic. In 2016, a group of participants exploited a vulnerability in The DAO project, stealing over $50 million worth of ether.

In response, most of the Ethereum community decided to reverse the theft by invalidating the existing blockchain and creating a new one with the same hash value and modified history. However, some of the community disagreed and chose to maintain the original Ethereum blockchain.

As a result, the unaltered version of Ethereum became Ethereum Classic (ETC), a separate cryptocurrency with its blockchain. This split permanently divided the Ethereum community into two different networks.

Ethereum classic.
ETC.

Real-life use of Ethereum

  • Voting systems: Ethereum is being adopted in voting systems. Publicly available poll results ensure transparency and fairness by eliminating voting malpractices.
  • Banking systems: Ethereum’s widespread adoption stems from its decentralized nature, which makes it difficult for hackers to obtain unauthorized access. It also enables payments on an Ethereum-based network, making it a channel for banks to facilitate remittances and payments.
  • Shipping: Implementing Ethereum helps track cargo and prevent loss or counterfeiting. Ethereum provides the framework for provenance and tracking in typical supply chains.
  • Agreements: With Ethereum smart contracts, agreements can be maintained and executed without alterations. Ethereum is a technology for developing smart contracts and digitally recording agreements and transactions in industries with fragmented participants, disputes, and a need for digital contracts.
Real-world uses of Ethereum blockchain network.
Usability of Ethereum.

Ethereum’s future in Web 3 and DeFi

While the future of Web 3 and digital assets remains uncertain, one thing is clear: it will impact the world. Let’s explore how.

Use in Gaming

The gaming industry and virtual reality are adopting Ethereum for various applications. Decentraland, a virtual world, utilizes the Ethereum blockchain to secure and tokenize assets such as land, avatars, and buildings, establishing ownership within the virtual space.

Axie Infinity is another game leveraging blockchain technology, with its cryptocurrency, Smooth Love Potion (SLP), used for in-game rewards and transactions.

Non-Fungible Tokens

The rise of non-fungible tokens (NFTs) has been notable in 2021. NFTs are digital items that the Ethereum blockchain network tokenizes, thereby assigning unique ownership via encrypted data in the owner’s wallet address. You can trade or sell these NFTs, with the network verifying the transactions and facilitating the transfer of ownership.

NFTs are expanding beyond digital art, with applications in sports tokens resembling trading cards or capturing memorable moments in athletes’ careers.

The Development of DAOs

DAOs are the new buzzword in the world of collaborative networks. They are revolutionizing decision-making across distributed systems, making it more efficient and effective.

With their decentralized structure, the decentralized autonomous organizations empower people to come together and achieve common goals. It’s amazing to see how technology transforms how we work together.

For instance, imagine creating a venture capital fund through fundraising but desiring decentralized decision-making and transparent, automated distributions.

A DAO could use smart contracts and applications to collect votes from fund members in this scenario. Based on majority consensus, ventures would be invested in, and returns would be automatically distributed. All parties involved could view the transactions, eliminating the need for third-party intermediaries.

Conclusion

Ethereum is a decentralized blockchain platform facilitating the secure execution and verification of smart contracts. These contracts enable trustless transactions among participants without relying on a central authority to validate transactions.

Transaction records are tamper-proof and shared across the network, ensuring transparency. Ethereum also enables users to create accounts to send and receive transactions. To process transactions, senders sign them and spend Ether, the native cryptocurrency.

Ether serves as the network’s transaction fee. With Ethereum, users gain full ownership and visibility of their transactions, benefiting from the platform’s peer-to-peer architecture and cryptographic security.