Ethereum (ETH) is the second most popular cryptocurrency after BTC, but unlike its counterpart, Ethereum aims to be more than just a simple medium of exchange or store of value.
Ethereum is an open-source blockchain-powered platform designed to create decentralized applications also known as dapps. Its innovative technology enabled the creation of smart contracts, which led to the emergence of industries such as DeFi and NFT. Smart contracts are computer programs that operate only when activated by a user's transaction or another contract.
Ether (ETH) is the native cryptocurrency of Ethereum, which is used to build and secure the network. It is an inflationary token that adheres to the ERC-20 token standard. ETH is the only form of payment accepted for transaction fees on the Ethereum network and all projects build on it.
The Ethereum network is maintained by a computer called the Ethereum Virtual Machine (EVM), which is backed by all the nodes on the network. EVM is an environment that functions similarly to a decentralized computer with millions of executable projects, which is responsible for compiling and deploying Ethereum-based smart contracts.
Initially, Ethereum was a Proof-of-Work (PoW) network, but on September 15, 2022, it migrated to Proof-of-Stake (PoS) in an event known as "The Merge," putting together the original Ethereum execution layer with the new PoS consensus layer.
Ethereum, like all other cryptocurrencies, is a highly volatile asset, and its price fluctuates in response to market events. In 2015, shortly after the debut of Ethereum, the average price of one Ether was $0.70. In January of 2018, the price reached a new all-time high of $1,418. It took the second-largest cryptocurrency by market capitalization approximately three years to retest its previous all-time high price. The price of ETH more than tripled between February and May of 2021, reaching a new all-time high of $4,379. Currently, ETH is trading at $1856.
How Does Ethereum Work?
Ethereum is a popular blockchain-based project that operates through blockchain technology, just like many other cryptocurrencies. However, unlike other cryptocurrencies, Ethereum is not just a simple digital currency. Rather, it functions as a blockchain with a computer embedded in it. This computer, known as the Ethereum Virtual Machine (EVM), serves as the foundation for building decentralized applications and organizations in a permissionless, censorship-resistant manner.
EVM is maintained by a distributed system of computers or nodes. These nodes are run by individuals and businesses worldwide and provide resiliency to the Ethereum network infrastructure. Each node holds a copy of the EVM, which means that any interactions must be verified so that everyone can update their copy.
To allow any node to add a block to the chain without malicious intent, the Ethereum network uses a consensus mechanism through which it checks the legitimacy of the new blocks. Ethereum uses the proof-of-stake consensus algorithm, which requires anyone who wants to add new blocks to the chain to stake ETH - the native currency of Ethereum - as collateral and run validator software.
These validators can then be randomly selected to propose blocks that other validators check and add to the blockchain. There is a system of rewards and penalties that strongly incentivizes participants to be honest and available online as much as possible.
Smart contracts are a fundamental building block for all Ethereum-based applications. Ethereum was the first blockchain to discover and implement smart contracts as part of the functionalities of blockchains. Subsequently, this innovation unlocked more blockchain use cases and ultimately exploded the popularity of decentralized applications.
Smart contracts can be described as computer programs stored on the blockchain that can be set to follow predetermined logic and execute specific actions when certain conditions are met. For example, a smart contract could be set up to hold funds until a certain date. Once those conditions are met, the funds would be automatically released to their intended recipient.
Smart contracts have numerous use cases, including lending apps, decentralized trading exchanges, insurance, crowdfunding apps, and more. Smart contracts can be created using various programming languages, but the most commonly used language is Solidity, which was proposed by Gavin Wood, Ethereum's co-founder, and developed by the company's Solidity team.
On September 15, 2022, Ethereum underwent The Merge upgrade, which transitioned Ethereum from proof-of-work to proof-of-stake. The Merge was Ethereum's most significant upgrade to date and reduced the energy consumption required to secure Ethereum by 99.95%.
What is Ethereum Used For?
Ethereum's use cases are diverse and growing quickly, bringing the benefits of blockchain technology to a wide range of global businesses. Ethereum has seen the creation of thousands of dApps, the accumulation of millions of users, and the generation of many billions of dollars. Let's examine some of the most significant use cases that have emerged on Ethereum.
Decentralized Finance, or DeFi, is perhaps one of the most popular use cases of Ethereum. DeFi allows users to access financial services that are free from the control of traditional financial institutions. This includes services such as lending, borrowing, trading, and investing.
Initial Coin Offerings (ICOs): An ICO is a fundraising method that allows a company to raise funds by issuing its own cryptocurrency or token.
NFTs (Non-Fungible Tokens) are unique digital assets are stored on the Ethereum network, and can represent anything from digital art to collectible in-game items. NFTs have a single owner and can't be duplicated or identical to any other. They are compatible with anything built on the Ethereum platform and can be sold globally.
Stablecoins are cryptocurrency tokens pegged to another asset, usually a fiat currency. Some are backed by a balanced basket of cryptocurrencies. They serve as a reliable store of value, a hedge against price volatility, and a stable global currency. Many crypto exchanges now have their own stablecoins.
DAOs: Decentralized autonomous organizations are internet-based organizations collectively owned and governed by their members via smart contracts. They have in-built treasuries accessible only with the group's permission, and decisions are made via proposals and voting to ensure equal participation.
Vitalik Buterin, the co-founder and creator of the Ethereum whitepaper, is still leading the current Ethereum team.
Buterin initially described Ethereum in a white paper in late 2013, where he argued that Bitcoin and blockchain technology could benefit from other applications besides money and needed a more robust language for application development. Buterin chose the name Ethereum after browsing a list of elements from science fiction on Wikipedia. He aimed to make his platform the underlying and imperceptible medium for the applications running on top of it.
Another key person who played a key role in the development of Ethereum is Gavin Wood, a co-founder who implemented Ethereum in C++ programming language and was the first to run the Ethereum testnet. Wood published the Ethereum Yellow Paper in April 2014 and later developed Ethereum's native programming language, Solidity.
However, due to disagreements with the ways the project is managed, Wood left the Ethereum team in 2016. In total, Ethereum has eight co-founders, including Vitalik Buterin, Gavin Wood, Mihai Alisie, Anthony Di Iorio, Amir Chetrit, Charles Hoskinson, Jeffrey Wilcke, and Joseph Lubin.
Ethereum was announced in January 2014 at the North American Bitcoin Conference in Miami, where Buterin, Wood, Hoskinson, and Di Iorio rented a house to develop a fuller sense of what Ethereum might become.