What is Ethereum?
Ethereum is an open-source decentralized computing platform network. It is built on blockchain technology, a digital public ledger where financial agreements are verified and stored by software, without intervention of a third party.
Think of it as a secure database. When new blocks of data are added to this database, they are cryptographically chained to a parent block. This creates a record of previous changes that cannot be edited.
Ethereum enables users to:
Make transactions
Earn interest on their holdings through staking
Use and store nonfungible tokens (NFTs)
Trade cryptocurrencies
Play games
Use social media
And so much more….
It is currently a proof-of-work (PoW) blockchain but is making the move to proof-of-stake (PoS) with Ethereum 2.0 for scalability purposes and for a more environmentally friendly approach.
History of Ethereum
Ethereum is the second largest cryptocurrency in the world by market capitalisation. The founder of Ethereum, Vitalik Buterin created Ethereum to solve the shortcomings of Bitcoin. Buterin published the Ethereum white paper in 2013, detailing smart contracts. These smart contracts are automated, immutable “if-then” statements, which enables the development of decentralized applications. Even though DApp development already existed in the blockchain space, platforms weren’t interoperable. To maintain adoption, Buterin created Ethereum to unify the way DApps run and interact.
A decentralized application (dapp) is an application built on a decentralized network that combines a smart contract and a frontend user interface.
Note: In Ethereum, smart-contracts are accessible and transparent – like open APIs – so your dapp can even include a smart contract that someone else has written.
Timeline History of Ethereum
How Does Ethereum Work?
Ethereum uses computing power to power the network. Like Bitcoin, the Ethereum network exists on thousands of computers worldwide. Instead of a centralised server, users use computers to run specific software, or nodes. This makes the network decentralized and highly immune to attacks. If one computer goes down, many others remain to hold the network up.
Ethereum is a single, decentralized system that runs a computer called the Ethereum Virtual Machine (EVM). Each node holds a copy of that computer. Any interactions must be verified so everyone can update their copy.
Network interactions are otherwise considered “transactions” and are stored within blocks on the Ethereum blockchain. Miners validate these blocks before committing them to the network and acting as transaction history or a digital ledger. Mining to verify transactions is known as a proof-of-work consensus method. Each block has a unique 64-digit code identifying it. Miners commit their computer power to find that code, proving that it is unique. Their computer power is “proof” of that work, and miners are rewarded in ETH for their efforts.
Like Bitcoin, all Ethereum transactions are entirely public. Miners broadcast completed blocks to the rest of the network, confirming the change and adding the blocks to everyone’s copy of the ledger. Confirmed blocks serve as a perfect history of all network transactions and cannot be tampered with.
Each transaction comes with a fee, called “gas,” which is paid by the user initiating the transaction. That fee is paid to the miner who validates the transaction, incentivizing future mining and ensuring network security. Gas serves as a limit, restricting the number of actions a user can make per transaction. This helps to prevent network spam.
ETH is more of a utility token than a token of value. Its supply is infinite. Ether consistently enters circulation in the form of miner rewards. Once the network moves to proof of stake (PoS), Ether will enter circulation in the form of staking rewards. In theory, Ether will always be in demand, meaning inflation should never devalue the asset beyond use.
What’s the Problem with Ethereum?
Unfortunately, cost is a problem for Ethereum. Ethereum gas fees can run quite high based on network activity. A block can only hold so much gas. The amount of gas that a block can hold depends on transaction types and amounts. This means that miners will choose transactions with the highest gas fees, where they stand to earn the most. Users are forced to compete to validate transactions first. This competition pushes fees higher and higher, congesting the network during busy times. Ethereum 2.0 seeks to address this problem of network congestion.
Ethereum vs. Traditional Web
Interacting with Ethereum requires cryptocurrency, which is stored in a wallet. That wallet connects to dApps. The dApps connect to the Ethereum blockchain with “smart contracts”. These “smart contracts” act as a passport for the Ethereum ecosystem. We can think of them as computer programs.
From there, anyone can purchase items, play games, lend money, and do many activities just like on the traditional internet. The difference is that the traditional web is free to users, where they give away personal information. Centralized entities running websites then sell that data to make money.
Cryptocurrency replaces data here. Users are free to browse and interact anonymously, making the use of DApp nondiscriminatory. Users are in control of what they do and how they do it. This is why many consider Ethereum to be Web 3.0, the future of web interaction.
Ethereum’s Achievements
Ethereum’s DeFi scene is already the biggest and still growing. There are many successful DApps to attract more users to the platform.
NFTs
The rise of non-fungible tokens (NFTs) has meant that artists are making millions by bringing their work to the blockchain. Non-fungible tokens are digital art, where collectors hold proof of ownership. This proof of ownership comes from being on the blockchain. Being on the blockchain also serves as a secure form of storage.
Social Media
Users can use Ethereum to tip their favourite content creators on various social media platforms.
Games
Gamers can use Ethereum to invest in assets, grow them through playing the game, and sell them on for a profit. Examples include play-to-earn games like Axie Infinity, where Ethereum is used to purchase in-game characters.
Forks of Ethereum
A fork occurs when there is a change or upgrade in blockchain technology. The two types of forks are soft forks and hard forks.
Soft forks
Minor changes that are backward compatible.
Requires only a majority of the miners upgrading to enforce the new rules.
Node operators can stay connected to the blockchain, but they can upgrade to the latest version if they want to continue earning.
Hard forks
Major upgrades that are not backward compatible
Requires all validators in an network to upgrade to a newer version.
Node operators must switch to the latest version to keep running the blockchain. Failing to do so would cause a split, resulting in two competing blockchains.
Advantages and Disadvantages of Ethereum
What is Ethereum 2.0?
The first new feature of the Ethereum 2.0 is merging the traditional Ethereum network with the Beacon Chain. The Beacon Chain adds the foundational changes necessary for future upgrades, such as shard chains. Shard chains help to solve scalability issues.
Sharding refers to spreading transactions across multiple, smaller blockchain networks. Information is only stored from a specific shard, instead of the entire network. This helps to unclog the network, making Ethereum validation more accessible.
The growing awareness of blockchain has led to high transaction fees and slower validation times, resulting in the need for Ethereum 2.0. In Ethereum 2.0, the traditional energy intensive mining is replaced by the proof-of-stake (PoS) consensus. Proof-of-stake replaces miners with validators. Validators are users who store the Ethereum blockchain and validates transactions. Validators can earn rewards (in the form of ETH) by connecting a computer to the network. To become a validator, a person must stake a minimum of 32 ETH. By staking their ETH, validators have “skin in the game” and will do whatever it takes to ensure the success of Ethereum 2.0.
Why Proof-of-Stake (PoS) over Mining?
Faster and more accessible (in theory should grow the network)
Accessibility allows more validators, which helps more blocks get validated.
Increased security through further decentralisation of Ethereum.
Does not require special hardware like in mining
Anyone with money and a device can participate.
Conclusion
Ethereum has many use cases, unlike Bitcoin which is mainly used as a store of value. Of the established cryptocurrencies, Ethereum seems to have the greatest potential upside. It’s worth noting that while the technology that powers Ethereum looks promising, it is still in its infancy and it’s anyone’s guess as to which technology will win in the long term.
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