What Is Ethereum? An Introductory Guide for Beginners
Updated: Aug 12, 2022
What Is Ethereum?
Ethereum is more than a form of crypto, it’s a programmable blockchain platform with the capacity to support smart contracts, dapps (decentralized apps), and other DeFi projects. The Ethereum native token is the Ether (ETH), and it’s used to fuel operations on the blockchain.
The Ethereum platform launched in 2015, and it’s now the second largest form of crypto next to Bitcoin (BTC), with a market capitalization of about $366 billion, as of Feb. 9, 2022.
Keep reading to understand how Ethereum works, how it’s different from Bitcoin, and how to invest in ETH.
Who Created Ethereum?
The concept for the Ethereum platform was first proposed in a white paper by Vitalik Buterin in 2013. In 2014, he and a team of developers — including Joe Lubin, founder of the blockchain software company ConSensys — raised about $18 million to establish the nonprofit Ethereum Foundation and fund its development. The Ethereum platform launched in 2015.
From the beginning, the vision for Ethereum was quite different from Bitcoin or any other cryptocurrency at the time. Like Bitcoin, Ethereum is built on a blockchain, and uses blockchain technology to run a decentralized payment system for ETH.
But the larger idea for Ethereum was to create a programmable blockchain that would enable a sort of free market environment, where developers could create applications and programs without any control or interference from a third party.
How Does Ethereum Work?
What is Ethereum, exactly, and how does it work? The Ethereum blockchain operates similar to Bitcoin in some ways. It’s a distributed digital ledger that’s maintained by a global network of nodes, or computers, that verify all transactions on the blockchain. The nodes, also called miners, use a proof-of-work (PoW) consensus mechanism to validate transactions and earn Ether (ETH) or gwei, a denomination of ETH used to pay for DeFi goods and services on the network.
In proof-of-work mining, high-powered computers solve complex mathematical puzzles needed to validate blocks of data or transactions. Users can also create code used to build decentralized applications (or dApps) and smart contracts. Smart contracts help process transactions without a middleman, like a bank or regulator, once certain conditions are met. This innovation set Ethereum apart from Bitcoin, and it has inspired other crypto platforms to launch similar features.
DeFi and Smart contracts
Developers write programs (e.g. smart contracts) in the project’s main programming languages (Solidity or Vyper), and then deploy this code on the Ethereum blockchain. All nodes maintain a copy of the Ethereum Virtual Machine (EVM), which translates the smart contracts and executes their changes in transactions on the blockchain. Thus smart contracts are self-executing, and don’t need a third party to be effective.
The development of these smart contracts is part of what has fueled the growth of decentralized finance or DeFi, with the Ethereum platform being a leading innovator in this area.
ICOs on Ethereum
The flexibility of the Ethereum blockchain has also enabled it to support the development of hundreds of new forms of crypto, based on the Ethereum source code. Thus the Ethereum platform became foundational for several Initial Coin Offerings or ICOs.
Ethereum vs Bitcoin
Ethereum is similar to other crypto projects, including Bitcoin in that both use a proof-of-work consensus mechanism to validate transactions on their respective blockchains. Yet, the two differ in significant ways.
Bitcoin was designed to be an alternative to traditional fiat currencies, and as a medium of exchange and store of value. By contrast, Ethereum was created as a programmable blockchain that supports decentralized applications, smart contracts, and non-fungible tokens (NFTs).
And while the Bitcoin and Ethereum blockchains share some similarities (both are distributed networks that rely on consensus verification), there are some differences here as well. The block time for each is different: an Ether transaction is confirmed in seconds compared to minutes for Bitcoin, as well as the algorithms on which they run, SHA-256 for Bitcoin and Ethash for Ethereum.
The same amount of Ether is produced every year vs. Bitcoin, which is capped at 21 million BTC.
Advantages and Disadvantages of Ethereum
As Ethereum continues to evolve, so do its pros and cons. Let’s have a look at both.
Advantages
One aspect of Ethereum that has given it an edge over other crypto platforms is its versatility. It supports a range of DeFi projects and dapps (including NFTs), as well as ICOs. This has made Ethereum’s technology applicable in many sectors besides finance, including medicine, gaming, and more.
As the second largest crypto platform, Ethereum is also considered more secure, with thousands of users worldwide involved in transaction validation and blockchain oversight. Given that network consensus is required to make changes to the blockchain, it could be difficult for hackers to gain control of the platform.
Some investors may also consider it advantageous that the amount of ETH that can be minted is unlimited (versus the 21 million cap on BTC). That said, the annual supply of ether is finite. For now, only 18 million ether are minted each year, a strategy designed to curb inflation.
Last, as noted above, Ethereum has pledged to evolve to a PoS consensus mechanism in phases. Ethereum 2.0, as it’s being called, will increase transaction speeds, lower fees, and make the network inherently more eco-friendly (because PoS uses far less energy).
Disadvantages
Although the multifunctionality of the Ethereum platform has its upsides, the downside is that it may leave the network more vulnerable to bugs.
On a related note, there is so much user demand for Ethereum’s DeFi capabilities that transaction costs on Ethereum can be quite high, and processing speeds can be slow.
Last, although Ethereum 2.0 is generating some interest in the cryptoverse, it’s unclear how long it will take to fully execute this transition, or what hurdles Ethereum and ETH might face along the way.
|
Advantages |
Disadvantages |
|
• Ethereum continues to be a pioneer in the DeFi space and offers many digital capabilities. |
• Offering so many features may leave Ethereum more vulnerable to bugs. |
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• The amount of ETH is theoretically unlimited. |
• Transactions fees can be high, and processing speeds can be slow. |
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• Ethereum 2.0 promises to increase transactions per second and lower fees. |
• The transition to Ethereum 2.0 might be bumpy. |
What Is Ethereum 2.0?
As of Q1 2022, Ethereum has begun its phased transition from a PoW system to a proof-of-stake (PoS) system, which means that users don’t need to earn new ETH by doing billions of time- and energy-consuming computations to validate transactions. Rather validators will run staking pools according to how much ETH they have. Now investors can join staking pools themselves through certain supported exchanges.
Price of Ethereum (ETH)
Ethereum (ETH) is the second-largest crypto platform behind Bitcoin, and the second largest form of crypto by market cap. As of Feb. 9, 2022, one ETH was worth about $3,000, with a total market cap of $366.20 billion and a circulating supply of over 119 million ETH.
📈 Current price: ETH
Does Ethereum (ETH) Have Staking?
Yes. At the moment Ethereum uses a proof-of-work consensus verification model, not proof-of-stake. But as the platform begins its phased transition to Ethereum 2.0, which will someday become a full-on PoS consensus mechanism, investors are being allowed to stake ETH on some exchanges. When users join a staking pool, there is an opportunity to gain ETH rewards.
Why Use Ethereum?
For those who are interested in exploring the DeFi space, joining the Ethereum platform may offer some compelling opportunities.
In addition, the transition to a more efficient, secure, and scalable proof-of-stake model with Ethereum 2.0 could make ETH more valuable.
Why Does Ethereum (ETH) Have Value?
The main value of ETH is as the native currency on the Ethereum blockchain. Users require ETH in order to create, produce, and publish dapps, smart contracts, and more.
Similar to the way a dollar is broken down into four quarters, 100 cents, and so on, one ETH is broken down into different denominations as well — the most common being gwei. One gwei is a billionth of an Ether. Users on the Ethereum platform need gwei, also called gas, to buy and sell goods and services.
Now that Ethereum is migrating to a proof-of-stake consensus mechanism, a.k.a. Ethereum 2.0, there may be a new currency released: ETH2. But the more immediate value to investors is that the PoS system allows people to stake their ETH and earn rewards.
The Takeaway
As one of the most ambitious blockchain projects, Ethereum and its native token ether (ETH) have been growing steadily since the platform launched in 2015. Unlike Bitcoin, Ethereum is more than just a blockchain-based cryptocurrency — it’s a programmable blockchain pioneer that has fueled the creation of many dapps, helped to launch hundreds of new coins, and has become a DeFi leader.
With the Ethereum platform poised to shift from a PoW to a PoS consensus mechanism, investors may see yet more innovation.
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