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What is Ethereum?
Ethereum is a blockchain network that uses the Ether token to secure transactions, earn interest through staking, store and use nonfungible tokens (NFTs), trade cryptocurrency, play games and use social media.
It is currently a proof of work (PoW), but it is moving to proof-of-stake (PoS), with Ethereum 2.0, for scalability and a more eco-friendly approach.
Many see Ethereum as the next step on the internet. Web 2.0 is represented by centralized platforms such as Apple’s App Store.
Ethereum, however, is a decentralized, user-powered network. It is more like a trustless, automated version of traditional finance. Defi (Decentralized Finance) already has billions of dollars in total value in projects, which is expected to increase.
History of Ethereum
Ethereum was not always the most prominent blockchain project in the entire world. Vitalik Buterin co-created the project to address Bitcoin’s weaknesses. In 2013, Buterin published the Ethereum whitepaper, which details smart contracts. These are immutable and automated “if-then” statements that allow for the development of decentralized apps. Although DApp development was already possible in the blockchain space, platforms were not interoperable. Buterin wanted Ethereum to unify them. He believed that unified DApps’ interaction and running was the best way to keep adoption.
So, Ethereum 1.0 was born. It is like Apple’s App Store. There’s one place for thousands of applications that adhere to the same ruleset. However, the ruleset is embedded into the network and enforced by developers. It doesn’t have a central authority, as Apple does when it changes or enforces regulations. Instead, power lies in the hands and actions of individuals who form a community.
Building such a network takes a lot of money. Buterin, his co-founders, Gavin Wood and Jeffrey Wilcke, Charles Hoskinson and Mihai Alise, Anthony Di Iorio, and Amir Chetrit, held a token presale to raise $18,439.086 in Ether. This action will fund Ethereum’s future and present developments.
To maintain and develop the Ethereum network, the group also established the Ethereum Foundation in Switzerland. Buterin soon announced that the foundation would operate as a non-profit, prompting some of its co-founders and friends to leave.
Developers came up with their decentralized ideas over time and eventually created Ethereum. These users created The DAO in 2016, a democratic group that could vote on proposed network changes and other proposals. A smart contract backed the organization and eliminated the need for a CEO to have control over Ethereum. To implement changes, a majority of the members had to vote.
This all turned out to be a disaster when an unknown hacker took $40 million from The DAO’s funds due to a security vulnerability. The DAO voted to reverse the theft by voting “hard fork” Ethereum. This meant that the network diverged from the new one, and the protocol was upgraded. In addition, it was undergoing major software updates. While the new fork kept the name Ethereum, the original network is now known as Ethereum Classic.
What is Ethereum?
The Ethereum network is distributed on many computers around the world, much like Bitcoin. Users participate as “nodes” rather than a central server. The network is decentralized, highly resistant to attacks, and virtually invulnerable to being down. It doesn’t matter if one computer crashes because thousands of other computers keep the network running.
Nodes are running in the Ethereum network, and the whole network system is called Ethereum Virtual Machine (EVM). Every node has a copy of the EVM. This means that all interactions need to be verified for everyone to update their copy.
Otherwise, network interactions are called “transactions.” They are stored in blocks on Ethereum’s blockchain. Miners validate these blocks before being committed to the network. Thus, they act as transaction history and a digital ledger. A proof-of-work consensus technique is mining to verify transactions. A 64-digit unique code identifies each block. To prove that the code is unique, miners use their computing power. Thus, they are “proof” that their work is done, and they get rewarded with ETH.
All transactions on Ethereum are public, just like Bitcoin. The network’s miners broadcast the completed blocks to all users, verifying the change and adding them to everyone’s ledger copy. Thus, the network keeps a complete history of all transactions and confirms blocks can’t be altered.
If miners get paid for their work, where is the ETH? Every transaction is subject to a fee called “gas,” which is paid by the user who initiated it. This fee is paid to the miner to validate the transaction. It encourages future mining and ensures network security. The gas serves as a limit on the amount of transactions a user can perform. It is also used to stop network spam.
Because ETH is more a utility token than a token of worth, there is an infinite supply. It is constantly in circulation as miner rewards and staking rewards once the network has moved to PoS. The theory is that Ether will always remain in demand. Therefore, inflation should not devalue the asset beyond its use.
Many people find that Ethereum gas fees can be pretty high due to network activity. Because a block can only hold a certain amount of gas, it can vary based on transaction amounts and types. As a result, miners will select transactions that have the highest gas fees to validate transactions. This increases competition, which causes fees to rise and congested the network in busy times.
Network congestion is a serious problem. However, it is being addressed in Ethereum 2.0 — a complete overhaul that will be discussed separately.
To interact with Ethereum, you need cryptocurrency. This currency is kept in a wallet. The wallet acts as a passport to the Ethereum ecosystem and connects to DApps. Anyone can use the wallet to purchase goods, play games, lend money, and perform all other activities that they would on the internet. Users are required to give their personal information to use the traditional internet. Websites run by centralized entities then make money from this data.
Cryptocurrency replaces data, so users can browse anonymously and interact with each other. DApps are nondiscriminatory. No DApp, whether lending or banking, can refuse to lend or approve someone because of their financial status or race. An intermediary cannot block what they consider “suspicious transactions.” Users can control what and how they do things, which is why many consider Ethereum Web 3.0 — the future for web interaction.
Ethereum vs. Bitcoin
Although Bitcoin is the most popular cryptocurrency, the Ethereum community wants to grow the project. The first is digital money and serves that purpose well. However, Bitcoin is not without its faults. Bitcoin is a PoW network, which has been struggling to scale. Some believe it’s more like gold, a store of value. Also, there is a hard cap at 21M coins for Bitcoin, strong support for this discussion itself.
Ethereum, on the contrary, plans to take over our existing internet infrastructure. ETH is more used to communicate with the network than to transfer money. However, it can do both.
What has been done with Ethereum?
The Ethereum network’s most outstanding achievement is undoubtedly decentralized finance. DApps that perform multiple functions within the ecosystem were created between 2019 and 2020. The Ethereum network will see more use of DApps, the more they will be used. The most significant Defi scene in Ethereum is successful DApps that have brought more attention to the platform over time.
Artists are one example. They make millions by selling their work on the blockchain using nonfungible tokens (NFTs). You might wonder, “Digital arts are so easy to copy. Why buy them?” Collectors desire ownership. NFTs are a form of secure storage and also provide proof of ownership. This is a one-stop shop for collectors, so it’s easy to see why.
This is why one would choose the original “Mona Lisa,” even though a copy may be indistinguishable. Online games also have NFTs, which can be used to purchase accessories and valuable items. In addition, artists can help players decorate their homes and characters, creating an additional income stream.
Developers have created uncensored social media apps, allowing users and others to tip each other for content. Gamers can invest in assets and grow them, then make a profit. This will enable them to extract real value from their gaming time. Freelance platforms and prediction platforms offer accurate forecasts, while freelance platforms don’t take a significant cut of every payment.
All of this is managed autonomously via blockchain and smart contracts. As a result, Defi gives users greater control over their funds than ever.
Advantages of Ethereum
Ethereum has many other advantages, including anonymity and decentralization. For example, Twitter can punish users who tweet offensive content. On an Ethereum-based social network platform, this can only be done if the community votes for it. This allows users to discuss their views as they wish, and people can decide what should or shouldn’t be said.
Bad actors cannot take over if they don’t meet community requirements. To make a change, someone with bad intentions would have to control 51%. This is almost impossible in most cases. This is much safer than simply a server that can be accessed.
Smart contracts automate many of these steps, as well as those taken by traditional web authorities. Upwork, for instance, requires freelancers to use the platform to find clients and then set up payment agreements. Upwork uses a percentage of every contract to pay its employees and cover server costs. A client can create a smart contract on Web 3.0 that says, “If the work has been turned in by X time, the funds shall be released.” Once the contract is written, both parties cannot alter the rules.
It is effortless to buy Ether now a day. PayPal and its Venmo subsidiary allow you to purchase crypto with fiat currency directly within the application. They’re bound to get involved soon, considering the millions of users on each platform.
Ethereum’s Disadvantages
Although it may sound like the ideal platform, Ethereum still has some key issues.
Scalability is the first. Buterin saw Ethereum as the web, with millions of users interfacing at once. However, the PoW consensus algorithm limits such interaction by block validity times and gas fees. Thus, decentralization can be a problem. On the other hand, a centralized institution has perfect and smooth transaction processes.
The second is accessibility. At the time of writing, Ethereum is difficult to use for new users and expensive to develop. In addition, certain platforms require certain wallets. This means that one must transfer ETH from their current wallet into the required wallet. But, again, this is a step that users are already familiar with, and it’s not recommended for beginners.
PayPal has added crypto support to its platform, but the users cannot do anything other than holding it there. To increase accessibility, the platform must integrate with Defi or DApps.
The actual act of using Ethereum must be simplified. It is quite different to learn about blockchain and use it.
What is Ethereum 2.0 (Eth2)?
Ethereum 2.0 is being upgraded slowly. However, it is expected that it will bring a proof-of-stake consensus algorithm. In addition, the traditional Ethereum network will merge with the Beacon Chain, which is Ethereum 2.0’s first feature. This merger is expected to take place between 2020 and 2022.
Although the Beacon Chain isn’t much different at first glance, it makes it easier to see how future upgrades such as shard chain will be made. Do you remember the scaling issue we discussed earlier? The process of sharding and sharding are vital to solving scaling problems.
Sharding refers to the spreading of transactions over multiple smaller blockchain networks. Users with weaker hardware can run these smaller networks because they store only information from one shard and not the entire network. In addition, sharding allows for easier validation of Ethereum and decongests the main network.
Many cryptocurrency enthusiasts are bullish about Ethereum 2.0. Celebrities are using NFTs to their advantage, and there is a growing awareness of blockchain technology. All of this activity has led to high transaction fees and slower validation time, which is why Ethereum 2.0 is so important. Fees can sometimes cost more than half the transaction amount. DApp developers are working hard to make it more accessible for mainstream adoption.
The proof-of-stake consensus is a crucial feature of Ethereum 2.0. Ethereum 2.0 marks the transition to a PoS consensus algorithm instead of mining which is expensive and energy-intensive. The proof-of-stake algorithm replaces miners with validators. These users store and validate the Ethereum blockchain and perform other functions such as verifying transactions. They are essentially another type of node.
A minimum of 32 ETH must be staked to become a validator. This is at least during the initial period of Ethereum 2.0. Validators can earn ETH by leaving a computer connected with the network. It is believed that holders of ETH will have the best intentions for the network and will do their best to ensure its success. A validator can also lose their ETH if they fail to participate or do something wrong.
Proof-of-stake is faster and more accessible than traditional blockchain consensus. It doesn’t require any special hardware, unlike mining. Anyone with funds and a device can take part. This accessibility should lead to a more fantastic network. Blocks that are validated by more validators will be validated more often. Additional validators decentralize Ethereum further, increasing security and the role of the validators.
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