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What is Ethereum (ETH)?
Ethereum is a decentralized, open-source, blockchain-based contract management that features smart contract functionality. The definition of Ethereum refers to the blockchain, while Ether (ETH) is the blockchain’s native cryptocurrency coin, which can be used in transactions on the network and traded on exchanges.
Launched in 2015 by Vitalik Buterin and a team of developers, Ethereum was the second blockchain – or distributed ledger technology (DLT) network – and associated cryptocurrency to go live after Bitcoin in 2009. Ethereum aims to provide a platform for decentralized applications (dApps) based on smart contracts, without downtime, fraud, or interference from third parties. Ether was the first alternative to Bitcoin (altcoin) and remains the largest altcoin by market capitalization.
Techopedia Explains the Meaning of Ethereum (ETH)
The Ethereum blockchain is developed and supported by the Ethereum Foundation, a Swiss nonprofit group.
The Ethereum Foundation documents different kinds of projects underway on its website. Ethereum works with programs created in languages like C++, Python and Java, making it straightforward for open-source developers to build applications on the platform.
Smart contracts are self-executing agreements with the terms of the agreement directly written into the code on Ethereum, meaning they automatically execute when predefined conditions are met and remove the need for intermediaries. Developers can use these smart contracts in dApps to facilitate peer-to-peer (P2P) on-chain transactions, craft contracts, customer loyalty systems, specific kinds of financial transactions, and crowdsource financial support.
History of Ethereum
Ethereum’s origin can be traced back to 2013 when cryptocurrency enthusiast Vitalik Buterin proposed the idea of a new blockchain platform in a whitepaper. Buterin envisioned a decentralized platform that could support more complex applications beyond simple transactions, addressing some of the limitations of Bitcoin’s blockchain.
In 2014, Buterin and a team of co-founders, including Gavin Wood (who went on to launch the Polkadot and Kusama blockchains), Charles Hoskinson (who went on to launch the Cardano blockchain), Joseph Lubin, and others, officially announced the Ethereum project. They conducted a crowdfunding campaign known as an initial coin offering (ICO), raising over $18 million by selling ETH tokens. This funding allowed them to kickstart the project’s development, and the Ethereum network officially went live on July 30, 2015, with the release of its first version, Frontier.
This marked the beginning of a new era in blockchain technology, as Ethereum introduced the concept of smart contracts. Soon after its launch, Ethereum gained significant attention from developers, entrepreneurs, and the broader cryptocurrency community. Its flexibility and programmability attracted innovators who saw the potential to build dApps across various industries, including decentralized finance (DeFI), supply chain management, gaming, and more.
Since then, Ethereum has undergone several upgrades to improve its scalability, security, and functionality. One of the most significant milestones in Ethereum’s history is the ongoing transition to Ethereum 2.0, paving the way for the next phase of Ethereum’s evolution.
How Ethereum Works
The Ethereum blockchain operates on a decentralized network of computers called nodes, which work together to maintain the network. These nodes store the entire Ethereum blockchain, validate transactions, and execute smart contracts. The Ethereum Virtual Machine (EVM) is the runtime environment for executing smart contracts.
Ethereum initially used a proof of work (PoW) consensus mechanism but made the transition to a proof of stake (PoS) mechanism as part of the Ethereum 2.0 upgrade in 2022, known as The Merge.
Staking in Ethereum 2.0 replaces the traditional mining process used in PoW. In PoS, validators are chosen to validate transactions and create new blocks on the chain based on the amount of Ether coins they stake, or lock to the blockchain, as collateral. This serves as motivation to ensure that validators behave honestly and follow the rules of the network.
When a user initiates a transaction or interacts with a smart contract on the Ethereum network, the transaction is broadcast to all nodes in the network. Validator nodes are selected to propose and verify blocks based on the size of their stake and other criteria determined by the protocol.
Once selected, these nodes validate the transaction by checking its authenticity, ensuring that the sender has sufficient funds, and confirming that the transaction adheres to the rules of the Ethereum protocol. The validator creates a new block containing a batch of transactions and broadcasts it to the network. Other validators in the network then verify the block’s validity by checking the transactions, ensuring that they adhere to the rules of the Ethereum protocol, and validating the cryptographic signatures. Validators attest to the validity of the block by including their signatures.
Once a certain threshold of validators has attested to the validity of a block, it becomes finalized, meaning that it is added to the Ethereum blockchain and cannot be reverted.
Validators earn rewards for successfully proposing and attesting to blocks, while those who act maliciously or attempt to manipulate the network risk losing a portion of their stake as penalties. Validators can exit the staking process and withdraw their stake after a certain period – typically after a specified number of blocks have been validated. Exiting the staking process allows validators to reclaim their staked Ether along with any earned rewards.
How Smart Contracts Work
Smart contracts are stored on the Ethereum blockchain and automatically execute when predefined conditions are met. Developers can write smart contracts using Solidity, Ethereum’s native programming language, or other compatible languages like Vyper.
Once deployed on the Ethereum network, smart contracts are immutable and tamper-proof, providing a trustless and transparent way to conduct business without relying on intermediaries.
What is Ethereum 2.0?
Ethereum 2.0 is a major upgrade to the Ethereum blockchain initiated in 2020 aimed at making the network more scalable, secure, and environmentally friendly, unlocking new possibilities for dApps and accelerating the adoption of blockchain technology across various industries.
The idea of moving to PoS was part of Ethereum’s development roadmap from the start, as Buterin had anticipated that the network would need to increase its scalability and energy efficiency.
The upgrade introduced several key features, including:
Ethereum Mining
With Ethereum 2.0, the blockchain made the transition from mining as a way to validate transactions and reward participants. Staking provides a more energy-efficient and environmentally friendly alternative to traditional mining, while also ensuring the blockchain’s security and integrity. Validators play a crucial role in the network by proposing and validating blocks, and their participation is essential for the smooth operation of Ethereum’s PoS consensus mechanism.
Ethereum’s Energy Consumption
Reducing the energy consumption of the nodes running the blockchain was an important driver of the transition from PoW to PoS, to make it more environmentally sustainable.
A study by the Cambridge Centre for Alternative Finance (CCAF) found that Ethereum’s greenhouse gas emissions after The Merge plummeted by around 99.97% to 2,800 tons of carbon dioxide equivalent (2.8 KtCO2e) from the pre-Merge estimate of 10.3 million tons of CO2e. That happened despite a substantial increase in the number of Ethereum beacon nodes. The CCAF also estimates that the blockchain is powered by nearly 48% sustainable energy (32% renewable energy and 16% nuclear), with wind power contributing 12%.
Ethereum vs. Bitcoin
As they were the first two cryptocurrencies, crypto observers and newcomers often look to compare them. But while both operate on blockchain technology and share some similarities, there are fundamental differences in their purposes, functionalities, and capabilities, and they serve distinct roles in the broader cryptocurrency ecosystem.
| Aspect | Ethereum | Bitcoin |
| Launch Date | July 30, 2015 | January 3, 2009 |
| Founder(s) | Vitalik Buterin, Gavin Wood, et al. | Satoshi Nakamoto (pseudonymous) |
| Purpose | A platform for dApps and smart contracts | Digital currency; store of value primarily used for financial transactions |
| Consensus Mechanism | Transitioned from proof of work to proof of stake | Proof of work |
| Block Time | ~13-15 seconds | ~10 minutes |
| Transaction Speed | Higher throughput, can handle more transactions per second | Lower throughput, limited scalability |
| Transaction Fees | Variable, influenced by network activity | Variable, influenced by network congestion |
| Supply Cap | No fixed supply, but the issuance rate decreases over time | Capped at 21 million. The rate at which new supply is created is cut in half four years (halving) |
| Monetary Policy | Flexible issuance, the potential for inflation through network upgrades | Deflationary, fixed supply |
| Smart Contracts | Supported, enabling programmable transactions and dApps | Not supported, limited scripting language capabilities |
| Use Cases | DeFi, gaming, NFTs, supply chain management | Digital gold, remittances, store of value |
| Community | Large and active developer community | Strong and established user base |
| Environmental Impact | Proof of stake transition has cut energy consumption | Criticized for proof of work’s high energy consumption |
Ethereum Pros and Cons
Pros
- Decentralized smart contract platform
- Continuous development
- Interoperability
- DeFi
- Reduced environmental impact
- Ecosystem
- Decentralized governance
- Privacy features
Cons
- Scalability challenges
- Gas fees
- Volatility
- Security risks
- Interoperability challenges
- Adoption hurdles
- Upgrade coordination
- Competitive landscape
Is Ethereum Secure?
Blockchain networks such as Ethereum operate on a decentralized network of nodes, making them resistant to single points of failure and censorship. This aims to ensure that no single entity can control the network, enhancing security and resilience against attacks. Ethereum relies on cryptographic algorithms to secure transactions, validate blocks, and protect user privacy. Once a transaction is included in a block and subsequently confirmed by additional blocks, it becomes virtually impossible to alter or reverse.
Smart contracts on Ethereum are subject to security audits and testing to identify and mitigate potential vulnerabilities, although there can be errors or bugs in the code. To combat this, the ecosystem incentivizes security research and bug hunting through bug bounty programs and grants, encouraging researchers to identify and report vulnerabilities.
Ethereum also undergoes regular network upgrades and improvements to address security vulnerabilities, enhance performance, and introduce new features.
The proof of stake consensus mechanism aims to make creating blocks prohibitively expensive for malicious attackers. Ethereum requires users to stake 32 ETH to act as validator nodes and conducts slashing – destroying some or all of their staked ETH coins – if they are found to act fraudulently.
The Future of Ethereum
The future of Ethereum looks promising, with ongoing development efforts focused on scalability, sustainability, and interoperability, which are expected to unlock new possibilities for the network and fuel further adoption of decentralized applications.
Most of the crypto projects that are new use the Ethereum blockchain, which contribute to the the future direction of the ETH price.
The Bottom Line
Ethereum is a constantly innovating blockchain platform that enables decentralized applications and smart contracts. With continuous development and community support, Ethereum is poised to play a significant role in shaping the future of finance, technology, and beyond.
