Ethereum is a decentralized open-source blockchain that uses a software platform called the Ethereum Virtual Machine (EVM) to help build smart contracts and decentralized applications (dApps).
Besides being the oldest smart contract platform out there, crypto projects gravitate towards the Ethereum network because the EVM is Turing-complete (read: can theoretically execute any conceivable computation), the Ethereum network has one of the largest distributed systems of nodes (decentralized), and its token ETH is widely recognized and available on many exchanges.
With Ethereum’s EVM, users can build decentralized applications that remove the need for intermediaries in both financial (ex: sub-currencies, financial derivatives, and contracts, wallets) and non-financial (ex: voting, ownership, file storage) activities.
Ethereum also allows other projects’ tokens to run within the network provided that they follow the ERC-20 standard for smart contracts.
Like ETH, these ERC-20 tokens are fungible, stored, and sent using Ethereum addresses and transactions, and use gas to cover transaction fees.
Ethereum uses a Proof-of-Stake (PoS) consensus algorithm to validate transactions and establish new blocks on the chain.
Features and Functionality
Ethereum stands out from other blockchain platforms due to its unique features:
- Smart Contracts: These are self-executing agreements that automatically perform actions when specific conditions are met, eliminating the need for intermediaries. Smart contracts enable secure and reliable transactions between parties who may not know or trust each other. For example, they can be used to track goods and automate payments in supply chains, improving efficiency and transparency.
- Decentralized Applications (dApps): dApps are applications that run on Ethereum’s decentralized network. They are more secure, transparent, and resistant to censorship than traditional apps. These open-source applications often use cryptocurrency for transactions. Examples include decentralized exchanges (DEXs) like Uniswap, where users can trade crypto without a middleman, and prediction markets like Augur, where participants can bet on future events.
- Ethereum Virtual Machine (EVM): The EVM acts as Ethereum’s engine, running smart contracts across the network. It ensures that code executes exactly as intended, maintaining the blockchain’s security and reliability. By operating across thousands of computers worldwide, the EVM guarantees decentralized functionality.
Scaling Up
As Ethereum’s popularity grows, the network faces increased demand, leading to potential congestion. To address this, Ethereum has introduced several scaling solutions:
- Sharding: This involves dividing the network into smaller, manageable pieces called “shards.” Sharding enhances transaction speed and overall network performance.
- Layer-2 Solutions: These offload some of the transaction load from the main Ethereum blockchain onto smaller, secondary networks. This approach reduces congestion and lowers transaction costs. Examples include rollups, state channels, and sidechains.
Scaling is crucial for Ethereum to remain widely accessible and affordable. Ethereum’s transition to Proof-of-Stake (PoS) has been a significant step toward improved scalability.
Consensus Mechanism
Ethereum uses a Proof-of-Stake (PoS) consensus mechanism to validate transactions and add new blocks to the blockchain. Validators “stake” their ETH to participate, replacing the energy-intensive mining process used in Proof-of-Work (PoW) systems like Bitcoin.
- Energy Efficiency: The shift to PoS has drastically reduced Ethereum’s energy consumption, making it more environmentally friendly.
- Finality: Unlike PoW systems, PoS achieves finality, meaning transactions become irreversible after a certain point, enhancing security and reliability.
Governance Structure
Ethereum governance is primarily off-chain, meaning decisions are made through community discussions and proposals rather than formal on-chain voting.
- The Ethereum Foundation plays a guiding role in the platform’s development and research.
- The decentralized governance approach ensures that no single group holds excessive power, contrasting with models like Delegated Proof-of-Stake (DPoS), where influence is proportional to the stake held.
This inclusive and flexible governance model encourages broad community participation, fostering a collaborative environment for Ethereum’s growth.
For a more in-depth look at the Ethereum network, please visit our Beginner’s Guide to Ethereum in the School of Crypto.
What is the ETH token?
Ether (ETH) is the cryptocurrency that powers the Ethereum platform. It’s used for a few things:
- Gas Fees: You need ETH to pay for transactions on the Ethereum network. These fees go to the people who help process transactions and run smart contracts.
- Making Payments: ETH is used to buy and sell things within the Ethereum ecosystem and beyond.
- Storing Value: Just like Bitcoin, people invest in ETH as a way to store value.
ETH has many uses beyond just paying for transactions, which makes it a versatile tool within the Ethereum ecosystem.
Gas Fees
Gas fees depend on how complex the transaction is and how busy the network is at that moment. You can set a maximum gas fee so you don’t overpay.
If you don’t use all the gas you paid for, the Ethereum network gives you a refund.
When you send a transaction on Ethereum, it goes into a “mempool,” which is like a waiting area for unconfirmed transactions.
If your gas fee is too low, your transaction might get stuck in the mempool until gas prices drop or you increase your fee.
Since Ethereum’s London Hard Fork update in August 2021, gas fees have two parts: a base fee and a tip fee (priority fee).
The base fee changes based on how busy the network is and is burned (destroyed), which reduces the total amount of ETH and can potentially increase its value.
Supply Mechanism
Unlike Bitcoin, which has a fixed supply of 21 million coins, Ethereum has a dynamic supply. New ETH is created with each block, and some ETH is burned with each transaction. This helps to control the value of ETH and prevent inflation.
Interestingly, ETH can act like both an inflationary and deflationary currency depending on how much activity is happening on the network.
When the network is busy, more ETH is burned, which can lead to deflation. When it’s quiet, more ETH is created than burned, which can lead to inflation.
Team Background
Vitalik Buterin, computer programmer and co-founder of Bitcoin Magazine, wrote Ethereum’s introductory paper in 2013.
He recruited the rest of the “first five” co-founders Mihai Alisie, Charles Hoskinson, Anthony Di Iorio, and Amir Chetrit, and eventually added Joseph Lubin, Jeffrey Wilcke, and Ethereum’s yellow paper writer Gavin Wood.
Di Ioro has since moved on to co-found Jaxx wallet maker Decentral; Hoskinson has founded Cardano (ADA); Lubin has founded Metamask’s parent company ConsenSys, while Wood founded Polkadot (DOT), Kusama (KSM), Parity, and the Web3 Foundation.
Token Metrics:
- 1 ETH can be divisible by up to 18 decimals
- ETH addresses have a max length of 42 hexadecimal characters
- Circulating supply: 22M ETH
- Max supply: No max supply, but with a growing number of Ether staked and the upgrade to EIP-1559 (this proposal introduced a fee-burning mechanism), the circulating supply will eventually begin to transition into deflationary conditions.
Notable projects:
- CurveDAO: DEX protocol
- MakerDAO: Stablecoin
- Convex Finance: Curve-booster protocol
- AAVE: lending & borrowing protocol
- HEX: blockchain Certificate of Deposit
- Compound: algorithmic, autonomous interest rate protocol built for developers
- Uniswap: A fully decentralized protocol for an automated market maker
Notable points in project history:
- Whitepaper released in November 2013
- Yellowpaper was released in April 2014
- ETH officially went on sale in September 2014
- An attacker drained more than 3.6M ETH from a DAO in June 2016
- A hard fork split Ethereum’s blockchain into Ethereum (ETH) and Ethereum Classic (ETC) in July 2016
- Byzantium hard fork in October 2017
- Staking contracts introduced in October 2020
- Beacon Chain – the first step to Eth2 – started producing blocks in December 2020
- The Merge – The Ethereum network moved to a proof-of-stake consensus mechanism from proof-of-work in September 2022, reducing the network’s energy demands, and increasing network security while vastly reducing the costs at the same time.
Notable Investors:
| Venture Capital Firm | Description |
|---|---|
| Draper Associates | Has invested in lots of crypto and blockchain projects, like Bancor, Bitcoin, Coinbase, Ethereum, Etherscan, Ledger, Maker, and Tezos . |
| ConsenSys Mesh | The investment arm of Ethereum development studio ConsenSys, has backed dozens of Web3 and DeFi startups, including AirSwap, Hyperledger, and Virtue Poker . |
| Fabric Ventures | A Europe-focused crypto VC firm. Investments include Near Protocol, Basis, and Substack . |
| Coinbase Ventures | Has invested in various crypto and blockchain projects, including Compound, Etherscan, Keep, Cointracker, Synthetix, and OpenSea . |
| Digital Currency Group | Has a portfolio of over 230 projects, including Coinbase, Kraken, Ledger, Etherscan, The Graph, Hubble, Nomics, eToro, and Flare Network . |
Summary
Ethereum is a prominent blockchain platform with features such as smart contracts and decentralized applications (dApps) that enable a wide range of use cases.
Despite challenges like scaling, Ethereum continues to improve through advancements such as sharding and layer-2 solutions, which enhance transaction speed and reduce costs.
The transition to Proof-of-Stake (PoS) has significantly reduced Ethereum’s energy consumption, making it more efficient and sustainable compared to its earlier Proof-of-Work (PoW) model.
Ethereum’s versatility extends beyond being a cryptocurrency platform. It enables the creation of decentralized applications in fields such as finance, gaming, and digital art.
The growth of Decentralized Finance (DeFi) and Non-Fungible Tokens (NFTs) on Ethereum highlights its potential to transform traditional industries and foster innovation.
Notable challenges, such as the DAO hack, have tested Ethereum’s resilience. However, the platform has demonstrated its ability to recover and evolve, driven by its active community and continuous development.
Ethereum remains a foundational technology in the blockchain ecosystem, supporting advancements in decentralized applications.