The Ethereum blockchain is a decentralized, open-source blockchain featuring smart contract functionality. Ethereum is the second-largest cryptocurrency by market cap after Bitcoin.
Ethereum was proposed in 2013 by programmer Vitalik Buterin and went live in 2015. Since then, Ethereum has become one of the most widely used and innovative blockchains. This comprehensive guide will explain what Ethereum is, how it works, its history, use cases, and outlook.
What is Ethereum?
Ethereum is an open-source, blockchain-based distributed computing platform featuring smart contract functionality. A blockchain is a decentralized, distributed ledger that records transactions permanently and securely.
Key features of Ethereum:
- Decentralized – Runs on computers all over the world, not controlled by a single entity.
- Transparent – All transactions are viewable on the public Ethereum blockchain.
- Secure – Cryptography ensures transactions cannot be altered or deleted.
- Smart contracts – Self-executing code that runs on Ethereum, facilitating transactions.
Ethereum enables developers to build and deploy decentralized applications (dApps). Instead of having to build an entirely original blockchain for each new application, Ethereum enables the creation of potentially thousands of different applications all on one platform.
How Ethereum Works
Ethereum works similarly to other blockchains like Bitcoin in a number of ways:
- Blocks – Transactions are recorded in blocks which build on top of each other forming a chain (hence, blockchain).
- Mining – Ethereum uses a proof-of-work consensus mechanism for mining new blocks. Miners compete to complete transactions and get rewarded in Ether.
- Ether – The cryptocurrency used on the Ethereum network is called Ether. It is used to pay for transaction fees and computational services.
However, Ethereum differs from Bitcoin in a few key ways:
Smart Contracts
As mentioned previously, one of Ethereum’s defining features is its support for smart contracts. Smart contracts are self-executing code run on the blockchain that facilitate, verify, and enforce the negotiation of a contract.
This enables the performance of credible transactions without third parties. For example, a smart contract could be used to automate the execution of a function once certain conditions are met.
Faster block times
Ethereum blocks are confirmed faster than Bitcoin blocks. The average Ethereum block time is between 10-19 seconds, while Bitcoin blocks take about 10 minutes on average. This allows for faster transaction confirmation.
Different mining algorithm
Ethereum uses Ethash while Bitcoin uses SHA-256. Ethash is designed to require more memory, making it ASIC-resistant to help promote decentralization of mining.
Brief History of Ethereum
Ethereum was first proposed in 2013 in a whitepaper by programmer Vitalik Buterin. Buterin envisioned Ethereum as expanding the utility of cryptocurrencies by enabling developers to create applications on top of the Ethereum blockchain.
In 2014, Buterin and other co-founders secured funding through an online public crowd sale. They officially launched the Ethereum mainnet on July 30, 2015.
72 million Ether were premined for the crowd sale making Ethereum one of the biggest ICOs (Initial Coin Offerings) ever at the time.
Some key events in Ethereum’s history:
- 2014 – Ethereum project announced & crowd sale held
- 2015 – Mainnet launched
- 2016 – Major DAO hack leads to Ethereum fork
- 2017 – EEA (Enterprise Ethereum Alliance) formed to connect enterprises to Ethereum
- 2021 – EIP-1559 upgrade alters Ethereum fee structure
Ethereum has consistently remained the second largest cryptocurrency behind Bitcoin in terms of market capitalization since its creation.
Ethereum Use Cases
The Ethereum blockchain has a wide variety of use cases. Here are some of the top applications of Ethereum:
Decentralized Finance (DeFi)
Decentralized finance refers to financial services on public blockchains. Ethereum is the dominant blockchain used for DeFi through Ethereum-based protocols. DeFi allows for activities like lending, borrowing, derivatives, and more without centralized intermediaries.
Popular DeFi apps: Uniswap, Aave, Compound, MakerDAO.
Non-Fungible Tokens (NFTs)
Non-fungible tokens (NFTs) are unique cryptographic tokens that represent ownership of digital items like art. Most NFTs are part of the Ethereum blockchain. NFTs are revolutionizing digital ownership and the collectibles market.
Popular NFT platforms: OpenSea, Rarible, SuperRare, Foundation.
Stablecoins
Stablecoins are cryptocurrencies pegged to another asset, usually a fiat currency like the US dollar. They provide price stability, unlike volatile coins like Bitcoin. Many leading stablecoins like Tether run on the Ethereum blockchain.
DAOs (Decentralized Autonomous Organizations)
DAOs are organizations that operate without centralized control. DAOs are governed by smart contracts on Ethereum, executing votes and rules automatically without an authority.
Notable DAOs: MakerDAO, Compound, dxDAO.
Games & Collectibles
From CryptoKitties to Gods Unchained, Ethereum enables games and digital collectibles with real ownership secured by the blockchain. These games usually use NFTs and can incorporate DeFi elements.
The Ethereum Network & ETH
There are some key concepts related to the Ethereum network architecture and its native cryptocurrency Ether (ETH) to understand:
- The Ethereum network consists of nodes that maintain and verify the network. Ethereum currently uses a proof-of-work consensus mechanism but is transitioning to proof-of-stake.
- Gas refers to the fee required to conduct a transaction on Ethereum. You pay gas in ETH. Gas prices fluctuate based on network demand.
- ETH is the native cryptocurrency of the Ethereum network. It is used to pay for transactions, gas, and computational services. New ETH is primarily issued to miners as rewards.
- ERC-20 is a common technical standard used for smart contracts on Ethereum for tokens and cryptocurrencies. Many DeFi applications use ERC-20 tokens.
- The Ethereum Virtual Machine (EVM) is the Ethereum runtime environment that handles smart contract execution. It provides security through sandboxing.
Understanding these basics is important for utilizing the Ethereum blockchain as a developer or user.
The Future of Ethereum
Ethereum has a bright future ahead with many protocol improvements in the works. However, there are also challenges to overcome.
Transition to Proof-of-Stake
Ethereum is transitioning from proof-of-work to proof-of-stake consensus, which will improve speed, cost, and sustainability. However, delays have pushed back the transition. Successfully completing The Merge to proof-of-stake will be a major milestone.
Scaling Solutions
Scaling solutions are needed to improve Ethereum’s transactions per second and reduce congestion. Layer 2 solutions like rollups and sidechains show promise for helping Ethereum scale while retaining decentralization and security.
Competition from New Blockchains
Many new blockchains have emerged claiming superior technology to Ethereum. Blockchains like Solana and Cardano both aim to be faster and cheaper than Ethereum. Staying competitive is key for Ethereum to maintain dominance.
Overall, Ethereum looks poised to continue evolving and powering decentralized apps, finance, NFTs, and more. But it must stay agile to keep up with emerging competition and complete pivotal upgrades like The Merge. Exciting times lie ahead.
Conclusion
In summary, Ethereum is a groundbreaking blockchain enabling decentralized applications through smart contracts. Created in 2015, Ethereum quickly rose to become the second largest blockchain after Bitcoin.
Ethereum powers a range of innovative use cases including decentralized finance, non-fungible tokens, stablecoins, decentralized organizations and more. The native Ether cryptocurrency is used to pay for gas and transactions.
While challenges around scalability persist, Ethereum continues to be on the forefront of blockchain innovation. In the years ahead, Ethereum aims to complete the transition to proof-of-stake consensus and implement further upgrades like sharding. With its strong developer community and ecosystem, Ethereum is positioned to remain a leading blockchain for building decentralized apps.
FAQs
What is Ethereum used for?
Ethereum is used to create and run decentralized applications, conduct financial transactions, tokenize digital assets, and organize decentralized autonomous organizations. Smart contracts enable many of Ethereum’s uses like DeFi and NFTs.
How is Ethereum different from Bitcoin?
While both are cryptocurrencies running on blockchain, Ethereum features smart contract functionality while Bitcoin does not. Ethereum also uses a different hashing algorithm (Ethash instead of SHA-256) and has a faster block time than Bitcoin.
How is ETH generated?
New ETH is primarily generated through the mining process as block rewards. ETH can also be earned through staking once Ethereum transitions to a proof-of-stake consensus mechanism from proof-of-work.
What language are Ethereum smart contracts written in?
Smart contracts are typically written in Solidity, a programming language designed for Ethereum smart contracts. Vyper is another language in use for Ethereum smart contracts.
What is an Ethereum node?
An Ethereum node is any computer that connects to the Ethereum network and maintains a copy of the blockchain. Regular nodes verify transactions while validator nodes actively participate in the proof-of-stake consensus process.