What is Ethereum? What is ETH Used For?

Ethereum's decentralized status is enabled by smart contract technology. Since it is an open-source software, Ethereum’s source code is available to the public. In other words, it is open to inspection, modification, and distribution by anyone.

Ethereum: A Brief History

The creator of Ethereum, Vitalik Buterin, first outlined the cryptocurrency in a white paper published in late 2013. Buterin envisioned a platform with a more robust scripting language that would go beyond Bitcoin's financial use cases. The vision was to build a decentralized Turing-complete computing platform for smart contracts, programmable money, and decentralized applications.

Buterin and the other Ethereum cofounders started a crowdsourcing initiative to fund their project in 2014. The campaign raised over $16 million from the sale of ETH tokens to participants. On July 30, 2015, Ethereum made its official launch, effectively creating its "genesis block."

Ethereum has undergone planned upgrades over the years to improve the project's functionality. In 2016, the network was hacked and $50 million of the $150 million raised by The DAO, a decentralized organization (DAO), was stolen.

This raised concerns about Ethereum's security, resulting in a hard fork that split the blockchain into two blockchains: Ethereum (ETH) and Ethereum Classic (ETC).

What are smart contracts?

A smart contract is a self-executing program that automates predetermined actions specified in an agreement between parties. Smart contracts typically carry out the terms and conditions agreed upon between the parties in an "if, then" fashion. Once executed, smart contracts are irreversible.

Smart contracts eliminate the need for a centralized party to facilitate a transaction, powering decentralization in Ethereum and other blockchain networks. Asset transfers are done in a transparent and trustless manner. Transaction parties are not required to trust one another; if either party fails to honor the agreement, the Smart contract will not execute. Smart contracts are a vital part of decentralized applications. They are responsible for the decentralized aspect of decentralized apps.

ERC-20 is the technical standard that governs the implementation of fungible tokens in smart contracts on Ethereum. It enables developers to create “smart-contract-enabled tokens” that can be used with other Ethereum products and services. Fungible tokens are anything that is not unique and can be transferred such as an asset, ownership, or cryptocurrency.

How are smart contracts different to traditional contracts

Traditional contracts are collections of legally binding clauses written in a natural, human-readable language. Most traditional contracts include a written agreement signed by the two transacting parties and witnessed by an impartial third party to attest to their authenticity. The most significant difference between smart contracts and traditional contracts is the involvement of a third party. Other distinctions manifest in:

Contract Creation

Traditional contracts entail a lengthy and time-consuming process that usually involves printing, signing, and scanning. When parties must meet in person, the process becomes even more time-consuming. The entire process can take several days. Using a ready-made contract platform like Ethereum, smart contracts can condense this process to a few minutes.

Contract Execution

To fulfill a traditional contract, the paying party must manually pay the promised quantities on time, and the receiving party must manually confirm payments. This process necessitates more organizational efforts on the part of both parties. Remittance is automated and happens automatically in smart contracts when the agreed-upon and coded criteria are met.

Cost

Due to additional fees charged by third parties, traditional contracts are more expensive. When potential contract difficulties, such as arbitration, are involved, they also come with "hidden expenditures." Smart contracts eliminate all of these costs, making them significantly less expensive.

Errors

Traditional contractual processes have a high potential for manipulation or error. This usually leads to lengthy periods of court battles. Smart contracts, on the other hand, are fully automated, and any manipulations are easily detectable. In addition, erroneous code will not run properly.

DApps: What Are They and How Do They Work?

Decentralized applications (dApps) are open-source digital software programs that run on a blockchain or peer-to-peer (P2P) computer network rather than a single computer. DApps are thus independent of a centralized authority.

DApps are possible because their backend code (smart contracts) runs on a decentralized network (in this case, Ethereum) rather than a centralized server. Ethereum-based dApps rely on the network for storage and security. The frontend and user interface code of a dApp can be written in any coding language, just like conventional apps. Once they have been deployed, dApps are extremely difficult to modify.

Most developers prefer to build their dApps on Ethereum because it has a large and active developer community that ensures updates are released on time. Furthermore, the network has cutting-edge developer tools such as EVM and a variety of app templates, which speeds up coding. Examples of dApps built on Ethereum include Uniswap, MakerDAO, 1Inch, and Rarible.

How is Ethereum different to Bitcoin?

Ether (ETH) is the second largest cryptocurrency by market cap after Bitcoin (BTC). Ether and Bitcoin have many similarities, such as being native tokens to their respective ecosystems, but they also have many differences. Here are some key distinctions between the two cryptocurrency coins.

• Ethereum is referred to as "the world's programmable blockchain," and it supports smart contract technology, which powers various applications such as DeFi and NFTs. Bitcoin was developed to support the bitcoin (BTC) cryptocurrency, which is a digital alternative to traditional currencies. As a result, it serves primarily as a store of value and a medium of exchange. However, it is worth noting that Bitcoin has recently begun to integrate smart contract technology.

• Ethereum and Bitcoin also differ greatly in the number of coins in supply. The maximum supply of bitcoin is 21 million, with 19.3 million already in circulation. All BTC coins will be in circulation by 2140 when they have all been mined. Ether has an infinite supply. Ether relies on various mechanisms, such as staking, to remain deflationary. There are currently over 122 million ether coins in circulation.

• Since September 2022, Ethereum has used a proof-of-stake (PoS) consensus mechanism, whereas Bitcoin uses a more energy-intensive proof-of-work (PoW) consensus mechanism.

Proof-of-Stake (PoW) and Proof-of-Work (PoW)

Proof-of-Work (PoW) is a consensus mechanism used to validate transactions and secure the Bitcoin network. Participants known as miners control the creation of blocks and the state of the blockchain in the Proof-of-Work mechanism. Miners use computational power to solve complex mathematical equations to generate a valid block. This is referred to as mining. The first miner to solve the equation, successfully validating a block, is rewarded in BTC coins.

Mining is an energy-intensive process that necessitates a large amount of computing power. The Proof-of-Stake (PoS) mechanism solves the energy consumption issue by replacing it with staking.

Participants in a Proof-of-Stake mechanism, known as validators, do not require powerful machines to validate a block. Instead, they are required to lock up (stake) the blockchain's native cryptocurrency in the network. The blockchain network then chooses one validator at random based on the amount of cryptocurrency staked to validate a block. The validator is compensated with a portion of the transaction fees. Staking helps maintain the security of a network's blockchain.

The Merge and Ethereum 2.0

Until September of last year, Ethereum validated transactions using a PoW mechanism. In mid-September, Ethereum's network was upgraded from a proof-of-work (PoW) mechanism to a proof-of-stake (PoS) mechanism in an event dubbed "The Merge." Ethereum 2.0 became the upgraded version of Ethereum. Ethereum 2.0 promised a 99.95% reduction in energy footprint, scalability, and faster Ethereum network transactions. Following a request from The Ethereum Foundation, the term "Ethereum 2.0" has since been retired. The Foundation requested that users stop using the term because it implied an alternative operating system, which was not the goal of the merge.

Staking

Since the merge, the Ethereum network now uses staking rather than mining to verify transactions. A user must stake at least 32ETH to become an Ethereum validator. The more ETH they have staked, the more likely they are to be chosen by the network algorithm to add the next block to the blockchain.

With the current price of ETH hovering around $1800, 32 ETH equates to $57,600, which may be out of reach for the average investor. Individual investors can pool their resources in what is known as a staking pool to form one powerful validator, and then share the rewards. The underlying Ethereum protocol generates new ether tokens to reward validators in a process known as minting.

Scaling Ethereum: Layer-1 vs Layer-2 vs Layer-3 Networks

To comprehend layer-2 networks, we must first define layer-1 networks and scalability. Layer 1 refers to the fundamental base network and underlying infrastructure of a blockchain, such as Bitcoin and Ethereum. Scalability is the ability of a network to handle increasing processing demands.

Scalability has been one of Ethereum's major issues since its inception. When the network experiences increased usage, it experiences network congestion, which causes transaction fees to skyrocket. Layer-2 networks were created to address this issue. Layer-2 networks are separate blockchain networks built on top of the layer-1 network to improve scalability and efficiency while maintaining its security and decentralization. Layer-2 networks increase transaction speed while lowering costs. Ethereum Layer-2 networks include Polygon (MATIC), Optimism (OP), and Arbitrum (ARB).

While they may solve scalability issues, Layer-2 networks cannot facilitate communication across different networks. This necessitated the development of a new set of solutions known as layer-3 networks. Layer-3 refers to a network layer that is added on top of Layer 2 to increase scalability, improve privacy, and facilitate communication across layers and networks. Most blockchain-based applications and games are layer-3 solutions because they support multiple blockchain platforms through a single app.

Ethereum Price History

Ethereum (ETH) was trading at $1,803.97, up 0.51% on the day at the time of writing. Furthermore, ETH has increased by 50.73% since the start of the year.

Ethereum held an Initial Coin Offering (ICO) in August 2014 and sold 50 million ETH for $0.31 per coin, raising over $16 million. During the 2017 bull market, Ethereum reached $100 for the first time and peaked at $414 in June before dropping. Over the next year, Ethereum grew in popularity as the crypto narrative gained traction. In 2018, the price of ETH skyrocketed to $1,418 before plummeting again. For the next three years, ETH remained below this all-time high. ETH reached a new all-time high of $4,379 in 2021, which has yet to be broken.

Summary

Ethereum is an open-source blockchain-based software platform that uses smart contract technology to deploy decentralized applications (dApps). Ethereum is an open network, whose code is available for anyone to inspect, modify, and redistribute.

The Ether (ETH) token powers Ethereum. Ether can be used to pay for gas, create ETH-based dApp tokens, and invest. Programmer and co-founder of Bitcoin magazine, Vitalik Buterin, created Ethereum as a more intricately scripted platform that would go beyond Bitcoin's financial use cases. Ethereum was forked in 2017 into Ethereum (ETH) and Ethereum Classic (ETC) after the community disagreed on how to handle a network exploit that netted the hacker $50 million.

Smart contracts are the foundation of Ethereum's decentralization. These self-executable, automated contracts allow two parties to transact without the need for an intermediary. Smart contracts are the backend code that powers dApps. Ethereum is the most popular network for dApps, owing to its active developer community and templates that eliminate the need to start from scratch when creating a dApp.

Ethereum is the second most valuable cryptocurrency in terms of market capitalization, after Bitcoin. While both power their respective ecosystems, they differ in several ways. One notable distinction between Ethereum and Bitcoin is that Ethereum employs a Proof-of-Stake (PoS) mechanism to validate transactions and add a block to its blockchain, whereas Bitcoin employs a Proof-of-Work (PoW) mechanism. Ethereum used the PoW mechanism until September of last year when it switched to PoS in an attempt to reduce carbon emissions and achieve scalability.

Ethereum’s scalability issues also prompted the creation of layer-2 scaling networks. Layer-2 scaling (L2s) networks offload some of the processing burden from the Ethereum mainnet, thereby reducing network congestion. In doing so, they reduce transaction processing costs while increasing processing speeds. A new layer of networks known as Layer-3 networks (L3s) sit on top of L2s. Layer-3 networks help achieve network and layer interoperability.

To become a validator on the Ethereum network, a user must stake at least 32ETH (approximately 57,000). Interested stakers can also form a staking pool and "pool" their resources to meet the 32 ETH requirement. The underlying technology of Ethereum mints new ETH to reward validators, effectively introducing new ETH into circulation.

Definitions

Blockchain network: A decentralized data ledger that is securely distributed and immutable. Ether (ETH): Ethereum’s native token. Gas fees: Transaction fees that are paid by network users to validators whenever they use the network for blockchain services.

Whitepaper: A technical and economic overview of a cryptocurrency that is typically issued by the project's team.

Genesis block: Borrowed from Bitcoin, the very first block of a cryptocurrency to be recorded/ mined

DAO: Decentralized Autonomous Organization. A collectively owned organization without centralized management, whose decisions are made by the community per a particular set of guidelines that are implemented on a blockchain. Smart Contract: A self-executing program that automates predetermined actions specified in an agreement between two parties.

ERC-20: The technical standard that governs the implementation of fungible tokens in smart contracts on Ethereum.

DApps: Decentralized applications. Open-source digital software programs that run on a blockchain or peer-to-peer (P2P) computer network rather than a single computer.

The Merge: The name given to the mid-September event where Ethereum upgraded from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) mechanism. Ethereum 2.0: The abandoned moniker used to refer to Ethereum following The Merge

Minting: The process through which Ethereum’s underlying protocol generates new ETH to reward validators.

Staking: Process by which network participants commit their tokens to validate network transactions by locking them up within the network for a set period. Stakers earn staking rewards.

Scalability: The ability of a network to handle increasing processing demands.

Layer 1: The fundamental base network and underlying infrastructure of a blockchain, such as Bitcoin and Ethereum.

Layer-2 networks: Separate blockchain networks built on top of the layer-1 network to improve scalability and efficiency while maintaining its security and decentralization.

Layer-3 networks: A network layer built on top of Layer 2 to increase scalability, improve privacy, and facilitate communication across layers and networks.