Ethereum (ETH) is an open-source, decentralized blockchain network that builds on Bitcoin's blockchain innovation, with some significant differences and improvements. Its native coin Ether, can be used for digital payments and functions as a software platform for creating and deploying immutable decentralized applications (dApps) or smart contracts.
Ethereum is the second largest cryptocurrency by market capitalization, second only to Bitcoin. Ethereum changed the cryptocurrency industry by introducing smart contract functionality to blockchain networks. Smart contracts allow users and developers to access emerging industries like decentralized finance (DeFi).
Because of the seemingly limitless possibilities of blockchain technology and smart contract functionality, Ethereum has produced several multi-billion dollar industries. These include DeFi, play-to-earn crypto gaming, and the wildly popular NFT industry. Today, the Ethereum blockchain is home to over 2,900 different projects and processed over $11 trillion in value.
The native token of the Ethereum blockchain is called Ether. Like stablecoins, including Tether (USDT) and USD Coin (USDC), Ether is used to pay transaction fees when completing transactions on the network. It is also a currency exchange for digital assets stored on the blockchain, like NFTs. Following the Ethereum Merge, ETH will be used to secure the network and produce new blocks.
What sets Ethereum apart
The Ethereum network is designed to serve as a global computer that anyone can use. It aims to give users complete control of their digital assets and allow them to access tools and services traditionally controlled by centralized entities.
For example, on the Ethereum blockchain, anyone can provide digital assets as collateral and take out an instant loan. In the traditional finance world, this process would be governed by the jurisdiction of a centralized company. With Ethereum, every aspect of this function is handled entirely by smart contracts on the blockchain. This removes the requirement for partial intermediaries.
The blockchain can also make any program censorship-resistant, robust, and less vulnerable to fraud by running and offering it on a distributed network of worldwide public nodes.
In the spirit of decentralized ownership, anyone can submit governance proposals that they believe can improve Ethereum for the collective good of the project. After a proposal is submitted, holders of the Ethereum token can vote on its outcome. In this way, the Ethereum community is responsible for outcomes in its ongoing development.
How does ETH work
When the Ethereum blockchain was initially launched in 2015, it employed a Proof of Work (PoW) consensus algorithm. In this model, new ETH tokens were created and distributed to miners as rewards for producing new blocks and securing the network.
This means that high-powered computational hardware installations, called mining rigs, compete against each other to solve complex equations in the mining process. The first miner to solve the equation earns the right to lead the production of new blocks on the network and is rewarded with new tokens as an incentive. This is also the same model employed by the Bitcoin network.
The Ethereum blockchain also has an account-based architecture. An Ethereum account is essentially an entity that holds an Ether balance and can initiate transactions on the Ethereum blockchain. There are two types of Ethereum accounts.
The first is "external accounts," which users control and manage through their private keys. The second is "contract accounts," known as smart contracts, governed by their codes. Both these accounts can hold, receive and send ETH and other Ethereum tokens and interact with smart contracts deployed on the blockchain.
External accounts can initiate transactions with other external accounts and smart contracts. But smart contracts kick in only when interacting with external accounts or other smart contracts. They can only respond by triggering codes (involving multiple actions), transferring tokens, or even creating new smart contracts.
Ethereum's technology
Unlike Bitcoin, which uses a distributed ledger, Ethereum employs a distributed "state machine." Ethereum's "state" at any given point is a large data structure incorporating accounts and balances and the "machine's state" at that time.
It also encompasses the ability to host and execute many low-level machine codes. This "state" keeps changing from block to block, and the Ethereum Virtual Machine (EVM) defines the rules for changing it.
The Ethereum network has a host of use cases, with the ability to create and deploy smart contracts being central to all of them. This functionality allows developers to develop various decentralized applications on the platform, including crypto wallets, decentralized exchanges (DEX), DeFi protocols, NFT marketplaces, play-to-earn games, and more.
Ethereum token standards
Ethereum’s token standards, like ERC-20 and ERC-721, have been extensively used to create fungible and non-fungible tokens, thus contributing to various multi-billion-dollar projects. The ERC-721 standard-based NFTs, in particular, pioneered the NFT industry, which stands at $3 billion in 2022 and is projected to surpass $13.6 billion by 2027.
ERC-1155 is a token standard on the Ethereum blockchain that allows for the creation of fungible (identical) and non-fungible (unique) tokens within the same contract. This makes it a more efficient and flexible solution for developers to create and manage multiple types of tokens simultaneously.
Any time users transfer ETH or Ethereum-based tokens or interact with any application hosted on the platform, they must pay ETH as gas fees. In the future, ETH will also be used for validation purposes on the new Proof of Stake (PoS) Ethereum blockchain, with active validators required to stake 32 ETH to qualify for the job.
What is the Ethereum Virtual Machine (EVM)
The Ethereum Virtual Machine (EVM) is the Ethereum blockchain's heart. EVM is the environment where all the Ethereum accounts and smart contracts reside. It is a computation engine or a virtual machine that functions like a decentralized computer housing millions of executable projects.
In other words, EVM makes up the bedrock of Ethereum's complete operating structure. As a single entity, EVM is simultaneously maintained by thousands of interconnected computers (nodes) running an Ethereum client.
The Ethereum Merge
As Ethereum's demand grew, the network's core architecture also started showing signs of congestion, and the average gas fee per transaction rose significantly. Hence, one of Ethereum Blockchain's biggest challenges is its exorbitant gas fees at times of high network congestion. For example, in May 2021, the average cost for a basic transaction on the network was around $71.
Formerly known as Ethereum 2.0, the Ethereum Merge is a multi-year event that gradually moves the Ethereum blockchain from its PoW to the PoS consensus mechanism. While the transition will not instantly solve the high gas fees problem, it will make Ethereum a more environmentally friendly and efficient blockchain network.
In the PoW system, Ethereum miners compete with each other, using expensive computational resources, to add new blocks to the chain and earn ETH rewards in return. In the PoS model, however, they will no longer need to mine the blocks.
Instead, they will create and add new blocks when chosen to do so and validate others' blocks when not. To earn the right to become a validator, they must stake 32 ETH with the network. Furthermore, since there will be no competition between validators, they'll no longer require expensive and advanced hardware like mining rigs for the job.
Although the Ethereum team has been planning this transition since 2016, it initiated the process with its PoS Beacon Chain launch on Dec 1, 2020.
This marked Phase 0 of a 3-phase process that will see Ethereum transitioning from a singular PoW chain to a multi-chain PoS network. Below listed are these three phases and how they intend to transform Ethereum.
Phase 0 (Beacon Chain)
This involved the launch of Beacon Chain, a PoS blockchain running parallel to the original PoW Ethereum mainnet. In addition, it laid the groundwork for future upgrades to Ethereum. As of writing, over 410,000 validators on Beacon Chain have staked over 13 million.
Phase 1 (The Merge)
Scheduled for Q3/Q4 of 2022, The Merge involves merging the Beacon Chain with the existing Ethereum blockchain, entirely replacing the latter's PoW model with the former's PoS system. Post Merge, the original Ethereum blockchain will become the new network's "Execution" layer, while the Beacon Chain will become its "Consensus" layer.
Phase 2 (Sharding)
Sharding, estimated to be effective in 2023-2024, will expand Ethereum's capability by spreading the network's load across 64 new shard chains. The current PoW Ethereum chain will become one of these 64 shards. It will become much easier to run a mining node at this point as there will be far less data to be stored than in a single PoW Ethereum blockchain.
By transitioning to a PoS consensus mechanism, the Ethereum network will be far more energy efficient and secure than previously.
Further, the consensus model will allow for greater scalability when the Ethereum blockchain implements a transaction sharding mechanic that significantly improves transaction throughput and increases network speed.
ETH price and tokenomics
In July 2014, the Ethereum Foundation launched the ETH initial coin offering (ICO). During this public sale event, roughly 60 million ETH was distributed to buyers at an initial exchange rate of 2000 ETH to 1 BTC. At the time, the Ethereum price was at approximately $0.31. Ether tokens were distributed to buyers at the genesis block of the Ethereum network.
When the Ethereum mainnet was launched, the initial supply of ETH tokens was approximately 72 million. While most of these tokens were allocated to early supporters, 16.73 percent of the supply was distributed to the Ethereum Foundation.
Since the genesis block of the Ethereum mainnet, roughly 48 million ETH has been added to the supply via token generation. New ETH tokens are generated and distributed to miners via block rewards, making Ethereum an inflationary cryptocurrency. While the Ethereum Improvement Proposal (EIP) 1559 London Hard Fork update introduced some deflationary mechanics, these currently do not entirely offset the Ethereum inflation.
Emissions of Ethereum block rewards have been steadily declining over time. When the network was launched, new Ether was produced at 5 ETH per block. These rewards were given to miners as an incentive for securing the network and validating transactions. In October 2017, as part of the EIP 649 proposal, this emission rate was reduced to 3 ETH per block.
About the founders
The idea of Ethereum was initially described through a whitepaper by Vitalik Buterin in late 2013. Buterin was just nineteen years old when he wrote the whitepaper. Before conceptualizing Ethereum, Buterin was an experienced programmer and developer who had previously founded the Bitcoin Magazine news site.
Buterin believed that blockchain technology could be leveraged to build decentralized protocols and applications free from the control of central bodies. Buterin was an avid player of World of Warcraft, a popular online game. After its creators removed his favorite spell from the game, Vitalik decided that no single entity should have complete control over an application, thus forming the conception of the Ethereum blockchain.
Ethereum was officially announced in Miami, in January 2014, at the North American Bitcoin Conference. A group of eight individuals co-founded the project.
Russian-Canadian Vitalik Buterin was the most significant contributor and remained so. Gavin Wood of Polkadot (DOT) was the first Chief Technology Officer of the Ethereum Foundation. He coded Ethereum's first technical implementation in C++ programming language and created Solidity, the de facto programming language for creating Ethereum smart contracts.
Today, Solidity is considered the essential programming language for Ethereum applications and enjoys widespread usage on other blockchains that operate an EVM. In addition, Wood found his own alternative blockchain network Polkadot, which aims to remedy some of Ethereum's issues.
Another notable co-founder who is known for building other Layer 1 blockchains is Charles Hoskinson. Hoskinson eventually left the Ethereum project due to differences of opinion on the project's direction. However, he founded IOHK with Jeremy Wood, another early Ethereum colleague, and went on to develop the Cardano (ADA) blockchain.
