Category: 1. Introduction to Ethereum

The Ethereum platform has a native cryptocurrency, known as Ether or ETH. Ethereum itself is a blockchain technology platform that supports a wide range of decentralized applications (dApps), including cryptocurrencies. The ETH coin is commonly called Ethereum, although the distinction remains that Ethereum is a blockchain-powered platform and Ether is its cryptocurrency.

Ethereum is not a centralized organization that makes money. Miners and validators who participate in operating the Ethereum network, usually by mining, earn ETH rewards for their contributions.

Investors can use one of many cryptocurrency exchange platforms to buy and sell Ether. Ethereum is supported by dedicated crypto exchanges, including Coinbase, Kraken, Gemini, and Binance, and by brokerages like Robinhood.

Ethereum’s transition to the proof of stake protocol, which enables users to validate transactions and mint new ETH based on their Ether holdings, is part of a major upgrade to the Ethereum platform known as Eth2. The upgrade also adds capacity to the Ethereum network to support its growth, which helps to address chronic network congestion problems that have driven up gas fees.

Ethereum adoption is continuing, including by high-profile enterprises. In 2020, chipmaker Advanced Micro Devices (AMD) announced a joint venture with ConsenSys to create a network of data centers built on the Ethereum platform. Since 2015, Microsoft has had a partnership with ConsenSys to develop Ethereum Blockchain as a Service (EBaaS) technology on Microsoft’s Azure cloud platform.

Ethereum is often compared to Bitcoin. While the two cryptocurrencies have many similarities, potential investors should pay attention to some important distinctions.

Ethereum is described as “the world’s programmable blockchain,” positioning itself as an electronic, programmable network with many applications. The Bitcoin blockchain, by contrast, was created only to support the bitcoin cryptocurrency.

The Ethereum platform was founded with broad ambitions to leverage blockchain technology for many diverse applications. Bitcoin was designed strictly as a cryptocurrency.

The maximum number of bitcoins that can enter circulation is 21 million. The amount of ETH that can be created is unlimited, although the time that it takes to process a block of ETH limits how much Ether can be minted each year. The number of Ethereum coins in circulation is more than 118 million at the close of 2021.

One major difference that affects investors is how the Ethereum and Bitcoin networks treat transaction processing fees. These fees, known as “gas” on the Ethereum network, are paid by the participants in Ethereum transactions. The fees associated with Bitcoin transactions are absorbed by the broader Bitcoin network.

A significant way that Ethereum and Bitcoin are similar is that both of the blockchain networks consume vast amounts of energy. Each of these blockchains operates using the proof of work protocol, which is a methodology that requires extensive computing power to validate transactions and mint new currency. Ethereum is gradually transitioning to a different operating protocol known as proof of stake, which uses much less energy.

Vitalik Buterin, who is credited with conceiving the original Ethereum concept, published a white paper to introduce Ethereum in 2013. The Ethereum platform was launched in 2015 by Buterin and Joe Lubin, founder of the blockchain software company ConsenSys. The founders of Ethereum were among the first to consider the full potential of blockchain technology, beyond just enabling the secure trading of virtual currency.

One notable event in Ethereum’s history is the hard fork, or split, of Ethereum and Ethereum Classic. In 2016, a group of network participants gained majority control of the Ethereum blockchain to steal more than $50 million worth of Ether, which had been raised for a project called The DAO. The success of the raid was attributed to involvement by a third-party developer for the new project. While the majority of the Ethereum community opted to reverse the theft by invalidating the existing Ethereum blockchain and approving a blockchain with a revised history, a fraction of the community chose to maintain the original version of the Ethereum blockchain. That unaltered version of Ethereum permanently split to become the cryptocurrency Ethereum Classic, or ETC.

Since the launch of Ethereum, Ether as a cryptocurrency has risen to become the second-largest cryptocurrency by market value. It is outranked only by Bitcoin.

Ethereum, like other cryptocurrencies, uses blockchain technology. Imagine a very long chain of blocks linked together, with all of the information about each block known to every member of the blockchain network. With every member of the network having the same knowledge of the blockchain, which functions like an electronic ledger, distributed consensus can be created and maintained about the status of the blockchain.

Blockchain technology creates distributed consensus about the state of the Ethereum network. New blocks are added to the very long Ethereum blockchain to process Ethereum transactions and mint new Ether coins, or to execute smart contracts for Ethereum dApps.

The Ethereum network derives its security from the decentralized nature of blockchain technology. A vast network of computers worldwide maintains the Ethereum blockchain network, and the network requires distributed consensus—majority agreement—for any changes to be made to the blockchain. An individual or group of network participants would need to gain majority control of the Ethereum platform’s computing power—a task that would be gargantuan, if not impossible—to successfully manipulate the Ethereum blockchain.

The Ethereum platform can support many more applications than ETH and other cryptocurrencies. The network’s users can create, publish, monetize, and use a diverse range of applications on the Ethereum platform, and can use ETH or another cryptocurrency as payment.

Ethereum is a platform powered by blockchain technology that is best known for its native cryptocurrency, called Ether, or ETH, or simply Ethereum. The distributed nature of blockchain technology is what makes the Ethereum platform secure, and that security enables ETH to accrue value.

The Ethereum platform supports Ether in addition to a network of decentralized apps, otherwise known as dApps. Smart contracts, which originated on the Ethereum platform, are a central component of how the platform operates. Many decentralized finance (DeFi) and other applications use smart contracts in conjunction with blockchain technology.

As a cryptocurrency, Ethereum is second in market value only to Bitcoin as of December 2021.

KEY TAKEAWAYS

• Ethereum is a blockchain-based platform that is best known for its cryptocurrency, ETH.
• The blockchain technology that powers Ethereum enables secure digital ledgers to be publicly created and maintained.
• Bitcoin and Ethereum have many similarities but different long-term visions and limitations.
• Ethereum is transitioning to an operational protocol that offers incentives to process transactions to those who own the largest amounts of ETH.

In practice, participants don’t write new code every time they want to request a computation on the EVM. Rather, application developers upload programs (reusable snippets of code) into EVM storage, and users make requests to execute these code snippets with varying parameters. We call the programs uploaded to and executed by the network smart contracts.

At a very basic level, you can think of a smart contract like a sort of vending machine: a script that, when called with certain parameters, performs some actions or computation if certain conditions are satisfied. For example, a simple vendor smart contract could create and assign ownership of a digital asset if the caller sends ether to a specific recipient.

Any developer can create a smart contract and make it public to the network, using the blockchain as its data layer, for a fee paid to the network. Any user can then call the smart contract to execute its code, again for a fee paid to the network.

Thus, with smart contracts, developers can build and deploy arbitrarily complex user-facing apps and services such as: marketplaces, financial instruments, games, etc.

Ether (ETH) is the native cryptocurrency of Ethereum. The purpose of ether is to allow for a market for computation. Such a market provides an economic incentive for participants to verify and execute transaction requests and provide computational resources to the network.

Any participant who broadcasts a transaction request must also offer some amount of ether to the network as a bounty. This bounty will be awarded to whoever eventually does the work of verifying the transaction, executing it, committing it to the blockchain, and broadcasting it to the network.

The amount of ether paid corresponds to the time required to do the computation. These bounties also prevent malicious participants from intentionally clogging the network by requesting the execution of infinite computation or other resource-intensive scripts, as these participants must pay for computation time.