Ethereum is one of the most popular and innovative cryptocurrencies in the world. But what exactly is Ethereum and how does it work? In this article, we will explore some of the most fascinating aspects of this blockchain-based platform that has revolutionized the fields of finance, technology, and beyond.
1. Ethereum is a blockchain-based platform that has its own cryptocurrency, ether (ETH), which is the second-biggest and second most dominant cryptocurrency by market cap after Bitcoin.
Ethereum is not just a digital currency, but a whole ecosystem that enables users to create and run various applications on a decentralized network. Ethereum’s native currency, ether (ETH), is used to pay for the transactions and computations that power these applications. Ether is also a valuable asset that can be traded on various platforms and exchanges. As of May 2023, ether had a market capitalization of over $221 billion, making it the second-largest cryptocurrency after Bitcoin.
2. Ethereum is also a decentralized computing network that can run a wide variety of applications, including DeFi (decentralized finance). Ethereum aims to be more than a medium of exchange or a store of value, but a technology for building apps and organizations without being controlled by a central authority.
Unlike traditional platforms and services that are run by centralized entities such as governments or corporations, Ethereum allows anyone to create and deploy applications that are open, transparent, and censorship-resistant. These applications can range from games and social networks to lending platforms and decentralized exchanges. One of the most prominent sectors that Ethereum enables is DeFi, which stands for decentralized finance. DeFi aims to provide alternatives to traditional financial services such as lending, borrowing, trading, investing, and more, without intermediaries or gatekeepers.
3. Ethereum was launched in 2015 by 8 co-founders, including Vitalik Buterin and Gavin Wood. Vitalik Buterin co-created Ethereum after World of Warcraft weakened his in-game character, which made him criticize centralized services.
Ethereum was born out of the vision of a group of developers and enthusiasts who wanted to create a more general and flexible blockchain platform than Bitcoin. The project was led by Vitalik Buterin, a Russian-Canadian programmer who was fascinated by Bitcoin and cryptography since he was a teenager. Buterin was also an avid gamer who played World of Warcraft, a popular online role-playing game. However, he became disillusioned with the game when its developers made changes that weakened his in-game character. This made him realize the drawbacks of centralized services that can arbitrarily alter the rules and outcomes of their users. He then decided to create a platform that would allow users to have more control and freedom over their digital assets and interactions.
4. Ethereum is programmable, so you can also build and deploy decentralized applications on its network. Ethereum extends Bitcoin’s innovation by allowing you to write any general program, or contract, on its blockchain.
One of the key features that distinguishes Ethereum from Bitcoin is its programmability. While Bitcoin is mainly designed for transferring value from one address to another, Ethereum allows users to write any kind of logic or code on its blockchain. These codes are called smart contracts, which are self-executing agreements that can enforce the rules and terms of any transaction without intermediaries. Smart contracts can power various applications that run on the Ethereum network, such as games, social networks, NFTs (non-fungible tokens), DAOs (decentralized autonomous organizations), and more.
5. Ethereum has its own smart contract functionality, which are self-executing agreements that can enforce the rules and terms of any transaction without intermediaries. Smart contracts can power various applications, such as lending platforms, decentralized exchanges, NFTs (non-fungible tokens), DAOs (decentralized autonomous organizations), and more.
Smart contracts are one of the most innovative aspects of Ethereum. They are essentially pieces of code that can perform various functions and operations on the blockchain. For example, a smart contract can automatically transfer funds from one account to another when certain conditions are met, or create a digital token that represents a unique asset or collectible. Smart contracts can also interact with each other and form complex systems and organizations that are governed by code rather than humans. Some examples of smart contract-powered applications are:
Lending platforms: These allow users to lend and borrow cryptocurrencies without intermediaries or credit checks. For example, Aave is a popular DeFi protocol that lets users earn interest on their deposits or borrow funds at variable rates.
Decentralized exchanges: These allow users to trade cryptocurrencies without centralized brokers or custodians. For example, Uniswap is a popular DeFi protocol that lets users swap any token pair on its platform using an automated market maker (AMM) mechanism.
NFTs (non-fungible tokens): These are unique digital tokens that represent ownership of scarce or creative assets such as art, music, games, or collectibles. For example, CryptoPunks are one of the first NFT projects that consist of 10,000 pixelated characters with different attributes and rarities.
DAOs (decentralized autonomous organizations): These are organizations that are run by smart contracts rather than human managers or executives. For example, MakerDAO is a popular DeFi protocol that lets users create stablecoins pegged to the US dollar using collateralized debt positions (CDPs).
6. Ethereum has undergone several upgrades to improve its scalability, security, and efficiency. The most recent one was the Ethereum Merge of September 2022, which transitioned Ethereum from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) one.
Ethereum is constantly evolving and improving its technology and features to meet the needs and demands of its users and developers. Since its launch in 2015, Ethereum has undergone several major upgrades or hard forks that have introduced new functionalities or fixed bugs or issues on its network. Some examples of these upgrades are:
Homestead: The first major upgrade in March 2016 that improved security and performance.
Metropolis: A two-part upgrade in October 2017 and February 2019 that introduced new features such as zk-SNARKs (zero-knowledge proofs), account abstraction, and reduced block rewards.
Constantinople: An upgrade in February 2019 that implemented several technical improvements such as EIP-1234 (reducing block rewards from 3 ETH to 2 ETH) and EIP-1283 (reducing gas costs for storage operations).
Istanbul: An upgrade in December 2019 that implemented several compatibility improvements such as EIP-152 (adding support for BLAKE2 cryptographic hash function) and EIP-1884 (repricing certain opcodes for better resource consumption).
Muir Glacier: An upgrade in January 2020 that delayed the difficulty bomb (a mechanism that increases the difficulty of mining over time) for another 4 million blocks.
Berlin: An upgrade in April 2021 that implemented several technical improvements such as EIP-2565 (reducing gas costs for modular exponentiation) and EIP-2929 (increasing gas costs for state access opcodes).
London: An upgrade in August 2021 that implemented several economic changes such as EIP-1559 (introducing a base fee mechanism that burns part of the transaction fees) and EIP-3554 (delaying the difficulty bomb until December 2021).
Altair: An upgrade in October 2021 that implemented several improvements for the Beacon Chain (the PoS network launched in December 2020) such as increasing penalties for validators who are offline or malicious.
The Merge: The most recent and significant upgrade in September 2022 that merged the PoW network with the PoS network, effectively transitioning Ethereum from PoW to PoS consensus mechanism.
7. Ethereum’s PoS consensus mechanism is based on the concept of staking,
which means that users can lock up their ETH tokens to validate transactions and earn rewards.
Ethereum’s PoS consensus mechanism is part of its long-term vision to become more scalable, secure, and sustainable than its previous PoW consensus mechanism. PoS stands for proof-of-stake, which means that users can participate in the network’s security and governance by locking up their ETH tokens in special contracts called validators. Validators are responsible for proposing and attesting new blocks on the blockchain, as well as voting on important decisions such as upgrades or forks. Validators are rewarded for their service with newly minted ETH tokens, as well as transaction fees from the blocks they validate. However, validators also face penalties if they act dishonestly or go offline for too long. The minimum amount of ETH required to become a validator is 32 ETH, which can be deposited either individually or through staking pools or services. As of May 2023, there were over 200 thousand validators on the Ethereum network, staking over 6 million ETH tokens.
8. Ethereum’s PoW consensus mechanism was based on the concept of mining,
which means that users had to use computational power to solve complex puzzles and verify transactions.
Ethereum’s PoW consensus mechanism was inherited from Bitcoin, which was the first cryptocurrency to use this method to secure its network. PoW stands for proof-of-work, which means that users had to compete with each other to solve mathematical problems called hashes in order to create new blocks on the blockchain. The first user who solved the hash was rewarded with newly minted ETH tokens, as well as transaction fees from the block they verified. However, mining was also costly and inefficient, as it required expensive hardware and electricity costs. Mining also contributed to the environmental impact of Ethereum, as it consumed a lot of energy and emitted greenhouse gases. Moreover, mining was vulnerable to centralization and attacks, as some users could gain more power and influence by forming mining pools or using specialized devices called ASICs (application-specific integrated circuits).
9. Ethereum has over 122 million tokens in circulation – over 10 times more when compared to Bitcoin. The supply of ETH is not capped, unlike BTC, which has a limit of 21 million coins. However, there are some mechanisms that reduce the inflation rate of ETH, such as burning fees and rewarding stakers.
Ethereum has a different monetary policy than Bitcoin, which affects its supply and demand dynamics. Bitcoin has a fixed supply of 21 million coins, which means that there will never be more than that amount in existence. This creates a scarcity effect that can increase the value of BTC over time. Ethereum, on the other hand, has no hard cap on its supply, which means that new ETH tokens are constantly being created and distributed to miners or validators. This creates an inflationary effect that can decrease the value of ETH over time. However, Ethereum also has some mechanisms that counteract this effect and reduce its inflation rate. One of these mechanisms is EIP-1559, which was introduced in the London upgrade in August 2021. This mechanism changes the way transaction fees are calculated and paid on the Ethereum network. Instead of bidding for fees in a volatile and unpredictable market, users pay a base fee that is dynamically adjusted according to the network’s congestion level. Part of this base fee is burned or destroyed, which reduces the supply of ETH and creates a deflationary pressure. Another mechanism that reduces the inflation rate of ETH is staking, which was introduced in the Merge upgrade in September 2022. This mechanism allows users to lock up their ETH tokens in validators and earn rewards for securing the network. Staking reduces the supply of ETH in circulation and creates a scarcity effect. Moreover, staking also reduces the issuance rate of new ETH tokens, as validators receive lower rewards than miners.
These are some of the most astonishing facts about Ethereum that you should know. Ethereum is a powerful and versatile platform that has many applications and benefits for its users and developers. Ethereum is also constantly evolving and improving its technology and features to meet the needs and demands of its community and industry. Ethereum is more than just a cryptocurrency, it is a foundation for our digital future.
