What is Ethereum? The Latest Premier Guide 2024
What is Ethereum?
Ethereum is a decentralized global software platform driven by blockchain technology, known for its native cryptocurrency, Ether (ETH). It allows anyone to create any secure digital technology. It has a token designed to pay for the working costs supporting the blockchain, but participants can also use it to pay for tangible goods and services (if accepted).
Ethereum is designed to be scalable, programmable, secure, and decentralized. It is the blockchain of choice for developers and businesses, creating technology to change the operation of many industries and the way we live our daily lives. It supports smart contracts, which are crucial tools behind decentralized applications. Many decentralized finance (DeFi) and other applications use smart contracts in conjunction with blockchain technology.
Learn more about Ethereum, its token ETH, and how they become indispensable parts of non-fungible tokens, decentralized finance, decentralized autonomous organizations, and the metaverse.
Key Points
- Ethereum is a blockchain-based platform known for its cryptocurrency, Ether (ETH).
- The blockchain technology supporting Ethereum allows for the public creation and maintenance of secure digital ledgers.
- Bitcoin and Ethereum have many similarities, but they have different long-term visions and limitations.
- In September 2022, Ethereum transitioned from proof of work to proof of stake.
- Ethereum is the foundation of many blockchain-based technological advancements.
How does Ethereum work?
Vitalik Buterin is credited as the visionary behind Ethereum, introducing it in a white paper in 2014. Ethereum was launched in 2015 by Buterin and Joe Lubin, founder of the blockchain software company ConsenSys.
Ethereum’s founders were among the first to consider the full potential of blockchain technology, not just as a means to secure virtual payments.
Since its launch, Ether has become the second-largest cryptocurrency by market value, second only to Bitcoin.
Blockchain Technology
Like other cryptocurrencies, Ethereum and Ethereum-based products involve blockchain technology. Imagine a long chain of blocks. All information contained in each block is added to every newly created block containing new data. Across the entire network, identical copies of the blockchain are distributed.
This blockchain is verified by a network of automated programs, reaching consensus on the validity of transaction information. No changes can be made to the blockchain without network consensus, making it highly secure.
Consensus is reached using algorithms, commonly known as consensus mechanisms. Ethereum uses a proof of stake algorithm, where a network of participants called validators create new blocks and jointly verify the information they contain. These blocks contain information about the state of the blockchain, a list of proofs (validators’ signatures and votes on the validity of the block), transactions, etc.
* In mid-September 2022, Ethereum officially switched to the proof of stake algorithm, which is cheaper and more environmentally friendly than the proof of work model.
Proof of Stake Mechanism
The difference between proof of stake and proof of work is that it does not require energy-intensive calculations, known as mining, to validate blocks. It uses a finality protocol called Casper-FFG and the LMD Ghost algorithm, combined into a consensus mechanism called Gasper, which monitors consensus and defines how validators are rewarded for their work or penalized for dishonesty.
Individual validators must stake 32 ETH to activate their validation capabilities. Individuals can contribute smaller amounts of ETH but need to join a validation pool and share any rewards. Validators create a new block and prove its information is valid in a process called proof, where the block is broadcast to other validators called a committee, who verify the information and vote on its validity.
Dishonest validators are penalized under proof of stake. Validators attempting to attack the network are identified by Gasper, which determines which blocks to accept or reject based on validators’ votes.
Dishonest validators are punished, their staked ETH is burned and removed from the network. Burning refers to sending cryptocurrency to a wallet without keys, making it no longer in circulation.
Wallets
Ethereum owners use wallets to store their Ether. A wallet is a digital interface that allows you to access Ether stored on the blockchain. Your wallet has an address, similar to an email address, as it is where users send Ether, just as they would send an email.
Ether is not actually stored in your wallet. Your wallet holds the private keys used when initiating transactions, similar to passwords. Each Ether you own is associated with a private key. This key is crucial for accessing your Ether, which is why there’s so much information about using different storage methods to protect your keys.
Historic Split
A notable event in Ethereum’s history is the hard fork or split between Ethereum and Ethereum Classic. In 2016, a group of network participants gained majority control of the Ethereum blockchain, stealing over $50 million worth of Ether raised for a project called The DAO.
The success of this raid was attributed to the involvement of third-party developers of new projects. The majority of the Ethereum community chose to invalidate the existing Ethereum blockchain and approve a blockchain with a modified history to reverse the theft.
However, a small portion of the community chose to retain the original version of the Ethereum blockchain. The unchanged version of Ethereum permanently split into the cryptocurrency Ethereum Classic (ETC).
Ethereum vs. Bitcoin
Ethereum is often compared to Bitcoin. While these two cryptocurrencies have many similarities, there are also some important differences.
Ethereum is described by its founders and developers as “the world’s programmable blockchain,” positioning itself as an electronic programmable network with many applications. In contrast, the creation of the Bitcoin blockchain was solely to support the Bitcoin cryptocurrency.
The maximum number of Bitcoins that can enter circulation is 21 million. The number of ETH that can be created is unlimited, although the time required to process an ETH block limits the number of Ether that can be minted each year. The number of Ether in circulation exceeds 122 million.
Another significant difference between Ethereum and Bitcoin is how each network handles transaction processing fees. These fees are known as “gas” on the Ethereum network and are paid by participants in Ethereum transactions. Fees associated with Bitcoin transactions are absorbed by the broader Bitcoin network. As of September 2022, Ethereum uses a proof of stake consensus mechanism. Bitcoin uses an energy-intensive proof of work consensus, requiring miners to compete for rewards.
The Future of Ethereum
Ethereum’s transition to a proof of stake protocol is part of a major upgrade to the Ethereum platform, allowing users to verify transactions and mint new ETH based on their Ether holdings. This upgrade, previously known as Eth2.0, is now simply called Ethereum. However, Ethereum now has two layers. The first layer is the execution layer, where transactions and validations occur. The second layer is the consensus layer, maintaining proofs and the consensus chain.
This upgrade increases the capacity of the Ethereum network to support its growth, ultimately helping to address long-term network congestion issues that lead to rising gas fees.
To address scalability, Ethereum continues to develop “sharding.” Sharding divides the Ethereum database within its network. This concept is similar to cloud computing, where many computers process workloads to reduce computation time. These smaller database segments, called shards, will be processed by individuals staking ETH. Sharding will allow more validators to work simultaneously, reducing the time needed to reach consensus through a process called shard consensus.
Use in Gaming
Ethereum is also applied to games and virtual reality. Decentraland is a virtual world that uses the Ethereum blockchain to secure items contained within the world. Land, avatars, wearable devices, buildings, and environments are tokenized through the blockchain to establish ownership.
Axie Infinity is another game that uses blockchain technology and has its cryptocurrency, called Smooth Love Potion (SLP), used for in-game rewards and transactions.
Non-Fungible Tokens
Non-fungible tokens (NFTs) became popular in 2021. NFTs are tokenized digital items created using Ethereum. Generally, tokenization assigns a specific digital token to a digital asset, identifying it and storing it on the blockchain.
This establishes ownership, as the cryptographic data stores the owner’s wallet address. NFTs can be traded or sold, viewed as transactions on the blockchain. Transactions are verified by the network and transfer ownership.
NFTs are being developed for various assets. For example, sports fans can purchase sports tokens (also called fan tokens) of their favorite athletes, which can be considered as trading cards. Some of these NFTs are images similar to trading cards, while others are videos of memorable or historic moments in an athlete’s career.
Development of DAOs
Decentralized Autonomous Organizations (DAOs) are a collaborative decision-making method through a distributed network.
For example, suppose you create a venture capital fund and raise funds through fundraising, but you want the decision-making to be decentralized, with distribution being automatic and transparent.
DAOs can use smart contracts and applications to collect votes from fund members and purchase enterprises based on the majority vote of the group, then automatically distribute any returns. All parties can view transactions, and there’s no third-party involvement in handling any funds.
The role cryptocurrencies will play in the future remains unclear. However, Ethereum seems poised to play a significant and upcoming role in personal and business finances and many aspects of our modern lives.
How do I buy Ethereum?
Investors can buy and sell Ether using one of the best cryptocurrency trading platforms. Ethereum is supported by dedicated cryptocurrency exchanges, including Coinbase, Kraken, Gemini, Binance, and brokerage firms such as Robinhood.
How does Ethereum make money?
Ethereum is not a centralized organization making money. Validators participating in the Ethereum network are rewarded with ETH for their contributions.
Is Ethereum a good investment?
Like any investment, the answer depends on your financial goals, objectives, and risk tolerance. The cryptocurrency ETH can be volatile, putting capital at risk. However, as an investment, it’s certainly worth exploring, as the various existing and emerging innovative technologies using Ethereum could play a larger role in society in the future.
Is Ethereum a cryptocurrency?
Ethereum has a native cryptocurrency known as Ether or ETH. Ethereum itself is a blockchain technology platform supporting various decentralized applications (dApps), including cryptocurrencies. The ETH coin is often referred to as Ethereum, although the distinction remains that Ethereum is a blockchain-driven platform, and Ether is its cryptocurrency.
Can Ethereum be converted to cash?
Yes. Investors holding the cryptocurrency ETH can complete this process using online exchanges such as Coinbase, Kraken, and Gemini. Simply set up an account on the exchange, link a bank account, and then send ETH from the Ethereum wallet to the exchange account. Place an order to sell the ETH on the exchange. Then, once sold, transfer the US dollar proceeds to the linked bank account.
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