Ethereum

What is Ethereum (ETH)?

Ethereum is a lot of things to different people. At its core, however, Ethereum is a groundbreaking technology that not only allows users to send cryptocurrency to others without the need for any middleman, but it is also programmable!

Bitcoin revolutionized the world of financial settlement following its launch in January 2009, and Ethereum builds on Bitcoin’s innovation of peer-to-peer electronic cash to add programmability. This means that it serves as the backbone of an immense and yet fast-growing world of financial services, games, and other applications, all decentralized.

The ETH blockchain is programmable via its smart contract functionality.

Smart contracts, first proposed in the early ’90s by prominent cryptographer Nick Szabo, are intended to automatically execute actions when a condition is met via code. In turn, they reduce the need for trusted intermediaries, arbitrations, enforcement, and eliminating exceptions, whether malicious or accidental.

Thanks to these smart contracts, Ethereum allows the deployment of permanent, immutable decentralized applications onto it, that users can interact with. This spurred the growth of Decentralized Finance (DeFi), where applications provide the services normally offered by financial institutions like banks, exchanges and brokerages.

Ethereum’s programmability also allows other digital currencies to be transacted and even live on the ETH blockchain. This includes countless other cryptocurrency coins that use Ethereum’s ERC-20 standard as well as Non-Fungible Tokens, or NFTs, that represent ownership of a digital asset.

When Was Ethereum Launched?

Ethereum was conceived in 2013 by a programmer called Vitalik Buterin. Its whitepaper, published in November of the same year, outlined a way to build decentralized applications to shift the focus of cryptocurrency away from just money and towards application development.

After the project was crowdfunded, its development began in 2014. The Ethereum network eventually went live in July 2015, which makes it six and a half years younger than Bitcoin.

Who are the Founders of Ethereum?

ETH is the brainchild of Vitalik Buterin, who still works on its development, but he had what is now considered an all-star team working alongside him to get the project off the ground.

Dr. Gavin Wood, who went on to create the Polkadot cryptocurrency and network, authored Ethereum’s technical yellow paper and published it in April 2014.

Other notable founders of Ethereum included Charles Hoskinson, who went on to found Cardano, Anthony Di Iorio, Mihai Alsie, Amir Chetrit, and Joseph Lubin.

Ethereum was developed via a series of prototypes through the years 2014 and 2015, and since its initial launch has constantly had protocol upgrades via hard forks.

In 2016, Ethereum Classic was created by a hard fork, following a theft of funds by an unknown hacker.

How Does Ethereum Work?

Ethereum is a network of computers called nodes that build and find consensus on a growing series of batches of transactions, or a blockchain.

Each transaction batch, or block in the chain, has an identifier of the chain that must be present for the block to be considered valid. Whenever a node adds a new block to the chain, transactions in that batch are executed and alter the ETH balances of Ethereum accounts to reflect the new network state.

What Makes Ethereum Unique?

Like Bitcoin, Ethereum is (still, at the time of writing) a proof-of-work (PoW) blockchain that relies on computers on its network, called miners, dedicating their computing power to the security of the network. Unlike Bitcoin, however, ETH adds smart contract functionality to the blockchain.

Also unlike Bitcoin and many other cryptocurrency networks, the ETH blockchain can be used for the launch of fungible ERC-20 and non-fungible ERC-721 tokens.

Ethereum is also used for crowdfunding via Initial Coin Offerings on different projects, Decentralized Finance (DeFi) applications, including decentralized currency exchanges (DEX), games, gambling, and Decentralized Autonomous Organizations (DAO).

What Are Smart Contracts?

Smart contracts were added to Ethereum in order to convert it into programmable money. They allow for the automatic execution of a predefined action when conditions are met.

The smart contract functionality has led many to describe ETH as an evolution of the ‘OG’ cryptocurrency Bitcoin, or a 2nd Generation cryptocurrency, although these smart contracts are neither easy to write nor stop or reverse in case of a problem like the 2016 hack.

However, smart contracts are transparent and visible to all on-chain, functioning similar to a vending machine that, when supplied with the correct amount of funds and the right selection, will give the customer the desired item.

Smart contracts can define rules and automatically enforce them. That said, interactions with them are not reversible.

These smart contracts have allowed for the creation of a vast ecosystem of decentralized applications (dApps), termed as such because they are controlled by the programming logic written into their smart contracts rather than an individual or company.

The financial services ecosystem Ethereum hosts, for example, features dApps performing a multitude of functions. They provide services such as lending and borrowing, token swaps and currency exchange, investments, trading and predictions, payments, crowdfunding, and insurance, among others.

How Much Ethereum Is In Circulation?

In the genesis block, or the first-ever block on the ETH blockchain, 72 million ether was issued, 60 million of which went to participants in the 2014 crowdfunding and 12 million to the development fund. Since then, Ethereum’s supply has increased via block rewards to miners on the network, starting at 5 ETH per block in 2015 and diminishing to 2 ETH since.

As of August 2021, the network upgrade, known as the London hard fork, Ethereum Improvement Protocol 1559 came into effect. EIP-1559 dictated that fees used in transactions are burned and thus take ETH out of circulation.

Previously, Ethereum had no fixed upper limit on its supply. The fee-burning mechanism introduced in 2021 amended the economics of Ethereum to make it deflationary depending on the usage of the network. The more activity, the more fees are burned, and thus ETH becomes more scarce.

Less than two months after the London hard fork, over $1 billion of ETH had already been burned.

How Do You Buy Ethereum?

You can purchase Ethereum on every major cryptocurrency exchange. It is typically traded against most fiat currencies, stablecoins, and is often paired with most other cryptocurrencies.

Not to mention, you can also purchase ETH on any DEX on the Ethereum network, as well as in peer-to-peer transactions. One of the most common sites for buying ETH is Uniswap.

Is It Possible to Buy Ethereum Instantly?

Ethereum transactions aren’t instantaneous but as blocks are mined every fifteen seconds or so, transactions can be settled in well under a minute.

While transactions on traditional financial systems are reflected instantly, those funds don’t actually settle for hours or even days. This makes Ethereum far closer to an instant settlement system.

However, purchasing ETH in different ways may lead to slight differences.

For example, purchasing Ethereum on a centralized exchange (CEX) may seem instantaneous, but the movement of ETH may not actually be taking place. Rather, the ether is simply reflected in the user’s account, while it actually remains in the wallet of the CEX.

It will be transferred when the user withdraws the ETH from the CEX to a private wallet. This may take longer than the usual block mining time because of several reasons, including anti-money laundering protocols as well as batch transferring mechanisms used by the CEX.

Contrastingly, purchasing Ethereum on a DEX will depend on the block mining speed of the blockchain and the network congestion (if any). Using layer-2 solutions can also result in much quicker transaction settlement.

How Do You Store Ethereum?

Ethereum is stored in wallets, which can come in several forms.

As mentioned above, many users hold their ETH on exchanges. This is sometimes called an exchange wallet, although in reality the exchange holds the funds centrally and reflects a user’s nominal balance in their individual account.

Like any cryptocurrency, Ethereum can be held in private custody by individual users as well, using either cold or hot wallets.

Cold wallets, referring to cold storage, are not connected to the internet. Offline devices, such as computers, or simply a piece of paper with private keys are some examples of a cold wallet.

A hot wallet, meanwhile, is a wallet that is connected to the internet. This could come in the form of either a node that stores the entire blockchain or a smaller piece of software, even a browser plug-in or an app.

What Is Ethereum 2.0?

While Ethereum remains a proof-of-work blockchain at the time of writing, Ethereum will switch to proof-of-stake (PoS) later in 2022. This switch will mark a paradigm shift for Ethereum as it would entail a new consensus mechanism as well as sharding as a scaling solution.

With the change to proof-of-stake, the blockchain’s native token ETH will remain the same. Ether can be staked under the new mechanism, or locked up in exchange for the right to participate in block proposals. This is possible thanks to the Beacon Chain going live in December 2020, which allowed staking.

Ethereum validators currently earn a return of approximately 6% APR, but this could change as the staking rewards are determined by the number of stakers. Having begun at 20% for early stakers, the reward will be lowered to between 4.5% and 7%. Staking ETH in Ethereum 2.0 now, however, means funds will be locked up on the network until the upgrade is completed.

What is Proof-of-Stake versus Proof-of-Work?

In a PoW blockchain, computers dedicate their processing power toward solving cryptographic puzzles that help to maintain the network’s security.

In contrast, a PoS blockchain allows validators (who have 32 ETH or more in Ethereum’s case) to validate blocks in a manner proportional to their stake in the system. A validator with more ETH locked away can validate more blocks.

This structure is designed to disincentivize attacks on the system as the participants with the power to do so stand to lose the most.

However, the structure also creates advantages for large centralized exchanges if smallholders predominantly use CEX accounts to store ETH. This creates large concentrations of ether in exchange wallets, giving them more sway over the system.

Ethereum Energy Consumption

As Ethereum remains proof-of-work for now, mining still relies on computational power. As such, the same criticisms that Bitcoin has suffered tend to be leveled at ETH in terms of energy consumption.

According to the Digiconomist, Ethereum currently draws over 102 TWh of electricity and has a carbon footprint of 57 megatons. They equate Ethereum’s annual electricity consumption to that of Kazakhstan, and suggest that a single ETH transaction consumes the same amount of power as a U.S. household over 8 days.

Furthermore, Ethereum has been assumed to cost more per KWh as it is ‘ASIC-resistant’, or mined on common graphics processing units (GPUs) rather than specialized machines due to its Ethash algorithm.

However, Ethereum’s shift to proof-of-stake will end GPU mining and instead mean that only validating nodes need to stay connected to the internet 24/7.

If Ethereum 2.0’s PoS shift proves successful in reducing its electricity consumption and carbon footprint, it may become several orders of magnitude cleaner. Ethereum might also become more energy-efficient than its direct competition, the banking system, which was estimated by Galaxy Digital to consume over 263 TWh of energy every year.

Is Ethereum a Good Investment?

Ethereum is often touted by many as ‘Digital Oil’ to Bitcoin’s ‘Digital Gold’, and the comparison arises due to the use of ETH to pay gas fees for the processing of transactions on the network.

Given that these fees are now burned, it is suggested that Ethereum may even become deflationary as its supply decreases with increasing network activity.

This network activity is projected by many to keep increasing as, while decentralized finance is still in its infancy, a huge proportion of the space remains firmly on the Ethereum network, with estimates quoting this figure well above 90%.

What Are Gas Fees?

Gas fees are a measure of the computational power required to push a transaction through a network. In other words, gas fees refer to the fees that the user needs to pay miners to get transactions over the line.

On the Ethereum blockchain, this is paid in ETH, even though the relevant transaction may not be a transfer of the same token.

Since these fees normally amount to a fraction of ether, they tend to be measured in ‘gwei’, or a billionth of ETH.

However, given the continued and increasing popularity of Ethereum, the number of transactions on the network is increasing on average and can sometimes be very high. This has a significant impact on gas fees, often making them prohibitively expensive for smaller transactions.

What Is a Layer 2?

While Ethereum 2.0 aims to address scalability and expensive gas problems, solutions called Layer 2 have emerged to deal with these issues in the meantime.

In short, the Ethereum blockchain itself is the first layer, or Layer 1. Layer 2 solutions, on the other hand, are sidechains or systems designed to batch a huge number of transactions together before returning the data back to the base layer.

There are two main types of Layer 2s: optimistic rollups and yero-knowledge rollups. While both types have different use cases, they both aid in the scaling of Ethereum in the short term and have the potential to help Ethereum outclass traditional payment networks after the ETH 2.0 merge.