What is the first thing that comes to mind when one thinks of blockchain? Bitcoin, and perhaps to a lesser extent, Ethereum. But wait, isn’t Ethereum just another cryptocurrency? Well, no not exactly.
The confusion is understandable because every time you search cryptocurrency, one of the top results would be some variation of ‘ Bitcoin and Ethereum are the largest and second largest cryptocurrencies by market cap.’
While Ethereum does have its native coin, it is much more than a payment system. Ethereum has been instrumental in the development and application of smart contracts. In a similar vein to cryptocurrencies, smart contracts also allow two parties to transact directly without the involvement of a trusted third party.
What makes contracts smart? What precisely is Ethereum? What kind of stuff can I use it for? Read ahead to find answers to all your Ethereum-related queries.
A Brief History
Vitalik Buterin is the brain behind the conception of Ethereum. In late 2013, Buterin published his white paper titled ‘ Ethereum: A Next-Generation Smart Contract and Decentralized Application Platform.’
While Bitcoin was primarily an alternative method of payment, Ethereum aimed to utilize blockchain technology for various other uses such as the implementation of smart contracts.
Buterin envisaged Ethereum as a blockchain with its own built-in Turing complete programming language. He stated in the white paper that this would enable the creation of “contracts” and many other technologies that were not even imagined yet. All this could be made possible simply by “writing up the logic in a few lines of code.”
Vitalik Buterin was later joined by Gavin Wood, Charles Hoskinson, Amir Chetrit, Anthony Di Iorio, Jeffrey Wilcke, Joseph Lubin, and Mihai Alisie to turn the idea of Ethereum Blockchain into reality.
After being announced in 2014 at the North American Bitcoin Conference in Miami, Ethereum debuted in 2015 with “Frontier” as its official version and the native cryptocurrency Ether(ETH). The initial block reward for mining Ether was 5 ETH.
Ether, the Ethereum network’s native cryptocurrency, was sold at a price of $0.31 per coin at its launch in 2014. It managed to raise more than $16 million for the Ethereum development project.
ETH is the second largest cryptocurrency after Bitcoin and as of November 2022, it was trading at an average of above $1,200.
How Does Ethereum Work?
Ethereum is a decentralized blockchain platform. It establishes a peer-to-peer network to allow people to transact with each other without the overarching oversight of a central regulating entity.
The most prominent feature of Ethereum is its smart contracts. These are electronic contracts containing the rules of a transaction. They self-execute as soon as certain pre-determined conditions are met. Thus, they do away with the need for a middleman or broker to negotiate and execute a contract.
1. Ethereum and Blockchain
The primary technology underlying the Ethereum network is blockchain. Blockchain is a decentralized, open-source ledger. There is a long chain of interlinked blocks.
These blocks contain the record of transactions that is open to everyone on the network. Any willing person can view and verify the records. Openness and transparency are thus, core tenets of blockchain technology.
Though it has applications in several domains, blockchain has primarily been used for the development and propagation of cryptocurrencies.
Ethereum is different from other platforms in the sense that it doesn’t just seek to create a cryptocurrency but also expands the use cases of blockchain. Smart contracts are one example of such innovation.
Ethereum’s vision and efforts have played a large role in the development of Decentralized Finance(DeFi), Initial Coin Offerings(ICOs), and decentralized apps(dApps).
2. Is Ethereum a Cryptocurrency?
The short answer is No. Ethereum is not a cryptocurrency. Cryptocurrencies are digital currencies that are not backed or regulated by any government or central bank, unlike fiat currencies.
Though both utilize blockchain technology, Ethereum is actually a platform for application development. It aims at diversifying the use of blockchain beyond cryptocurrencies and Bitcoin.
Ethereum has its own native currency called Ether. It belongs to a category of cryptocurrencies called Altcoins which is simply a name for all the cryptocurrencies that are not Bitcoin.
In common parlance, the name Ethereum is used to refer to both the platform and its currency. Technically though, Ethereum is the network while Ether is the currency used to pay for transactions on the network.
Uses of Ethereum
Ethereum aims for the widespread adoption of blockchain technology in diverse domains in order to improve transparency. It has found usage in various spheres such as:
Ethereum is not controlled by any one central entity. It is rather community-driven. All one needs to access financial services powered by Ethereum is an internet connection. Therefore, it is helping in building a more equitable financial system.
Ethereum’s currency Ether can be used to buy goods and services from businesses that accept cryptocurrency. It is also used to pay for the computation of transactions done on the Ethereum network.
3. Smart Contracts
Smart contracts are perhaps one of the most innovative technologies developed on the Ethereum network. It refers to electronic contracts that don’t require any intermediary for their execution. They automatically execute transactions once certain conditions are met.
4. Decentralized Finance(DeFi)
Defi refers to decentralized financial services on a decentralized blockchain network. It aims at providing access to fast, efficient, open and transparent financial services in contrast to the opacity propagated by the traditional financial system.
Though the application of Defi is not limited to any particular network Ethereum is the most popular.
Gaming is not exactly the first thing that comes to mind when one thinks of Ethereum or blockchain. But the reality is blockchains and particularly Ethereum are increasingly becoming popular in the gaming world.
Ether, for example, can be used for faster payments for in-game purchases like avatars and skins.
6. Decentralized Autonomous Organizations(DAOs)
Ethereum.org describes DAOs as “member-owned communities without centralized leadership.” These are collaborative communities where individuals work with each other without being under any leader. The spending of funds and the method of working are defined by a blockchain-based code.
DAOs are truly democratic in the sense that proposals are implemented by voting and consensus to ensure that everyone has a chance to be heard.
Understanding Ethereum 2.0
Ethereum 2.0 refers to a major upgrade in the Ethereum network that came into effect in September 2022.
It merged the two parallel blockchains- Ethereum Mainnet running on Proof-of-Work(PoW) and Beacon Chain using Proof-of-Stake(PoS) into a unified blockchain using Proof-of-Stake. This merger was to be called Ethereum 2.0
The term was, however, replaced by “Merge” as it was felt that Ethereum 2.0 implied a completely different operating system when it was, in fact, the opposite of that.
Ethereum 2.0 is supposed to have two major features:
The 2.0 upgrade included a shift from mining to the staking of Ether. Unlike proof-of-work which has a heavy carbon footprint, proof-of-stake is expected to reduce the Ethereum network’s energy consumption.
It will do so by eliminating the competitive lottery system of mining associated with proof-of-work. Instead, validators would be selected by the algorithm whenever a new transaction is initiated.
These validators would be rewarded with crypto after the validation of the transaction.
Sharding is a mechanism meant for upgrading Ethereum’s scalability.
This concept can be better understood by taking the example of a single lane vs multi-lane highway. While a single-lane highway works fine for the most part, it might become congested during peak hours. This slows down the movement of traffic and causes jams.
The solution is to build multi-lane highways to split the traffic. Similarly, requiring each node to validate each transaction can slow the processing, especially during the time of peak activity.
Shard Chains split the database horizontally to divide the load. Transactions can be processed parallelly rather than waiting for clearance in a single line.
Ethereum is expected to roll out Sharding sometime in 2023.
Ethereum 2.0 offers multiple benefits to the network and investors such as:
1. Energy Efficiency: The Ethereum Foundation estimates that the new upgrade would cut the network’s energy usage by 99.95% making it more environmentally sustainable.
2. Faster Transactions: With the complete implementation of Ethereum 2.0, it is expected to be able to process about 100,000 transactions per second.
3. Better Security: Many experts consider proof-of-stake to be more secure than proof-of-work. This is because tampering with the blockchain would require ownership of 51% of all the crypto on the network.
Plus, proof-of-stake makes it easier to identify and remove the malicious actor in case of an attack.
Ethereum Merge Explained
Before talking about Merge, it is important to understand the concept of consensus mechanisms.
Ethereum is based on blockchain technology. It is a decentralized ledger with blocks of information interlinked with each other by chains. Since blockchain is decentralized, there is no central entity regulating it. Transactions on the blockchain network have to be verified by participants before a new block can be added to the chain.
The protocols meant for establishing consensus among participants or nodes are called consensus mechanisms. These mechanisms are of two types:
This is the most widely used consensus mechanism. Here, miners compete to solve a difficult puzzle whenever a new transaction is initiated. The node which manages to solve the puzzle first is then rewarded with cryptocurrency.
The main limitation of PoW is that consumes large amounts of energy equivalent to the energy consumption of many countries.
In Proof-of-Stake, there are validators in place of miners. These validators have to pledge their coins to be able to validate transactions on the network. The algorithm chooses the validator who then verifies the transaction and is rewarded in return.
The significant change brought by Ethereum’s upgradation to Merge was the replacement of PoW by PoS. It is estimated that this change will bring down Ethereum’s energy consumption by 99.95%. Ethereum claims that this move will make it more sustainable and a green blockchain.
Ethereum Merge also set into motion the network’s move towards better scalability via a process called sharding; something which was not possible with proof-of-work.
Ethereum Smart Contracts
Smart contracts are digital contracts that are stored on a blockchain network. They eliminate the need for an intermediary for contract execution and immediately come into force as certain predetermined conditions are met.
These contracts are secured by cryptography and since the application is built on blockchain, the chances of tampering with the contract are quite low. Because there is no paperwork to process, smart contracts are fast and efficient, and cost-saving.
Though they are not necessarily restricted to any particular network, Ethereum is the most famous platform when it comes to smart contracts. Smart contracts are also credited for aiding in the development of decentralized apps and several other uses.
Ethereum uses its own Solidity programming language to write smart contracts. This makes them largely immune to manipulation attempts.
Ethereum Virtual Machine
Ethereum Virtual Machine(EVM) can be said to be the bedrock of Ethereum’s operations. It is the program that facilitates the smooth execution and functioning of smart contracts.
EVM is also the holy grail of developers. It is because it is Turing complete. This means it can run any program coded in any programming language. This has provided significant assistance in the development of decentralized apps(dApps).
Ethereum vs. Bitcoin
Ethereum and Bitcoin are two names that come up most frequently in any discussion regarding blockchain and cryptocurrency. They are, after all, the second-largest and largest cryptocurrencies by market cap respectively.
However, what differentiates Bitcoin from Ethereum? Is it like when almost the same products are marketed with different names?
The answer is, well, not exactly. Bitcoin is a digital currency meant for the primary purpose of being an alternate method of payment. While Ethereum is more of a blockchain-based platform. It has its own native currency called Ether(ETH).
The main difference, however, is that Ethereum is programmable while Bitcoin is not. It means that other applications be built on the Ethereum Network. In addition to providing payment services, Ethereum has also facilitated the development of smart contracts and decentralized applications like Uniswap and Dark Forest.
Apart from the different consensus mechanisms used by both, proof-of-work for Bitcoin and proof-of-stake for Ethereum, Bitcoin’s block time is also higher than Ethereum’s. A BTC transaction is cleared in approximately 10 minutes while it takes ETH only 14 to 15 seconds to be validated.
Should I Invest in Bitcoin or Ethereum?
The ultimate question that any investor asks is, is it better to invest in Bitcoin or Ethereum? Honestly, it depends first and foremost on what you want because cryptocurrencies are inherently risky investments due to their volatile nature.
Additionally, even Bitcoin and Ethereum differ in their purpose. While Bitcoin is meant to be a currency(albeit virtual), Ethereum is meant to be a platform for multiple other applications like smart contracts and decentralized apps.
It is also important to be aware of the price movements of Bitcoin and Ether and the larger trends in the cryptocurrency market before investing in anything. The better option is to evaluate your goals and risk tolerance and consult with a professional before investing in cryptocurrencies including Bitcoin and Ether.
Ethereum, with its innovative vision, promises an ecosystem that is open, community-based, equitable, and censorship-resistant. It is a platform that anyone from anywhere in the world can access. The only thing needed is an internet connection.
While 2022 has been a hard year for the digital money market with Ethereum prices being on the down low, there are expectations that it would eventually bounce back with more vigor and energy.