What is Ethereum (ETH)?
Ethereum is a blockchain platform for decentralized applications and the second most valuable cryptocurrency (ETH) in terms of capitalization. Why is this so? Why do so many people use it? Let’s find out!
This network is used by the majority of popular DeFi and NFT projects.
Who created Ethereum and when?
Vitalik Buterin is considered to be the main creator and ‘face’ of Ethereum. He was born in the Moscow suburb of Kolomna in 1994. He and his parents moved to Canada when he was six years old, where he still resides today. He has always been interested in programming and computer science since he was a child. He studied cryptography at university.
In 2011, Vitalik Buterin founded Bitcoin Magazine, one of the first cryptocurrency-related publications.
In 2013, he published the Ethereum white paper, a blockchain for developing decentralized applications based on smart contracts. Other co-founders of Ethereum were Gavin Wood, Charles Hoskinson, Anthony Di Iorio, and Joseph Lubin.
After the white paper's publication, Buterin received a $100,000 grant from the Thiel Fellowship fund, which was founded by entrepreneur Peter Thiel. He put this money towards the ICO. During the tokensale, 31 550 BTC were obtained, which was worth approximately $18.5 million at the time.
In the summer of 2015, the main Ethereum network was launched. Ethereum Foundation, a non-commercial organization registered in Switzerland, has been in charge of project development since its inception.
What features does Ethereum have?
The primary distinction between Ethereum and bitcoin has evolved into fully-fledged smart contacts. This is a computer algorithm that enables transactions to be carried out without the involvement of a third party. In fact, this is a “digital contract” with predefined conditions that must be met under specific circumstances. This enables you to move business operations to the blockchain and eliminate the “human factor.” There are an infinite number of application scenarios for smart contracts.
EVM (Ethereum Virtual Machine) is a ‘distributed computer’ that executes smart contracts. If the main function of the bitcoin network is transactions between accounts in a distributed registry, then EVM can handle much more complex operations programmed in smart contracts.
User tokens
Users on Ethereum could create their own tokens. For such tokens, a single ERC-20 standard was developed. The value of user tokens is derived from the availability of benefits within a particular application. Ethereum was the first widely used blockchain for startups that monetized themselves with their own tokens.
Furthermore, due to the ERC-721 standard, Ethereum has grown in popularity as a blockchain for NFT. These are non-fungible tokens with unique information, such as an image or a file. NFT is a singular digital object that cannot be duplicated.
What is ether?
Ether (ETH) is a colloquial name for Ethereum — a native cryptocurrency. It is needed for the operation of decentralized applications and payment of transaction fees in this network.
Recently, ether staking has become operational: ETH holders can block coins and profit from them. However, you will be able to recover them only after the end of the Ethereum 2.0 network update. To participate in ether staking, you must either launch your own node (which requires equipment and 32 EHT) or use a special service, such as Everstake, Lido, or Binance.
By market capitalization, ETH is the second largest digital asset in the cryptocurrency market. By the end of April 2022, the total number of ether coins in circulation will have surpassed $362 billion. In less than two years, the Ethereum exchange rate has increased tenfold: in July 2020, one coin cost $300; by the end of 2021, its price was set at or above $3000. Ethereum can be purchased on almost any cryptocurrency exchange.
What is hacking The DAO?
The first major crisis for Ethereum was the DAO hack. This is a decentralized autonomous organization (DAO) that intends to manage an investment fund through member votes. The DAO work was planned to be built on Ethereum smart contracts. According to the results of the initial coin offering (ICO) held in 2016, its founders raised $150 million.
In June 2016, a hacker used an exploit to hack the project’s smart contract, removing $50 million worth of The DAO tokens from it. After that, the Ethereum team conducted a hard fork of the network to return the stolen funds to the victims. A section of the community that disagreed with this decision continued the previous branch, naming its project Ethereum Classic.
Did Tokensales emerge because of Ethereum?
In 2017, the cryptocurrency market began to grow rapidly, and everyone in the world became aware of it. People, including retail investors, began to invest in digital assets. Hundreds of projects appeared at the time, all attempting to replicate Ethereum’s success by publishing white papers and holding an ICO. Because ERC-20 was available, anyone could create their own token.
The 1st quarter of 2018 saw the highest level of tokensale activity, with fees totaling around $7 billion. But then they virtually stopped holding ICOs: cryptocurrency prices began to fall, and token sales were criticized by authorities in various countries.
Investors have lost confidence in ICOs because they have become a popular tool for scammers.
Gradually, new tokensale formats emerged: IEO (Initial Exchange Offering) — to sell project tokens via special service at the exchange, IDO (Initial Decentralized Offering) — to attract investors through asset farming.
How did Ethereum lead to DeFi?
Ethereum was primarily responsible for the birth of Decentralized Finance (DeFi). Several landmark projects appeared on the basis of this blockchain in 2017–2018, contributing to the popularity of DeFi:
- MakerDAO. The first widely used protocol enables any user to create an algorithmic DAI stablecoin backed by various crypto assets. The protocol is administered by the DAO, in which holders of the Maker token (MKR) can vote.
- Compound. Liquidity pools were used for the first time in this project for various crypto assets. Furthermore, Compound hosted the first-ever IDO for its users by distributing the COMP management token through farming.
- Uniswap. A protocol for trading cryptocurrencies in which the mechanism of automatic market makers was used for the first time. It creates some kind of depth of market and matches orders without using an order book. Uniswap was the first blockchain protocol to allow for relatively quick trading transactions.
- Today, DeFi is used by hundreds of projects, including Aave, Curve Finance, Balancer, dYdX, Notional, and others. They use a variety of blockchain technologies, but Ethereum was the first.
Does Ethereum have competitors?
The blockchain platform model has proven itself, and Ethereum, along with bitcoin, has emerged as the dominant crypto project. However, the main components of Ethereum have not been changed in several years, and the crypto industry has come a long way in that time. The performance of the main blockchain platform is no longer adequate.
Now, Ethereum’s network can only process 13–15 transactions per second (TPS), it has repeatedly experienced failures and delays due to overload, and transfer fees are consistently high.
At the same time, its modern “killers” outperform them by tens or hundreds of times. Tezos blockchain speeds exceed 1000 TPS, Polkadot speeds up to 3000 TPS, Terra speeds up to 10,000 TPS, and Solana speeds up to 50,000 TPS.
Each blockchain platform provides its own scalability solution, that is, the ability to increase throughput as load increases. Solano, for example, employs an implementation of the Practical Byzantine Fault Tolerance consensus algorithm, whereas Polkadot is made up of several interconnected blockchains.
However, the benefits of increased scalability are offset by the drawbacks described in the blockchain trilemma. It states that a decentralized network can only provide two of three key properties — performance, security, and decentralization — at the same time. Both Ethereum and its competitors are attempting to work around this theorem, but there is no universally accepted solution as of yet.
How is Ethereum evolving?
Ethereum’s developers have devised several methods to increase its bandwidth. One of the directions is second-level solutions (Layer 2).
These are applications and frameworks that run on top of the primary “first-level” blockchain (Layer 1). An additional “layer” allows you to reduce transfer fees while increasing transaction speed.
On the Ethereum blockchain, L2 solutions are implemented using Rollup technology, which allows you to include hundreds of transactions passing through the second level in a single first-level transaction. Arbitrum One, Optimism, and dYdX are examples of such applications.
Sidechains are another option. These are “parallel” networks that are linked to the main blockchain and allow transactions to take place between them. Polygon is an example of an Ethereum — compatible sidechain.
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What is Ethereum 2.0?
Ethereum 2.0 is a major update designed to increase the scalability of this blockchain platform through global changes in its architecture.
Key Changes of Ethereum 2.0:
- Switching to the Proof-of-Stake consensus algorithm;
- Implementation of sharding technology: division of the blockchain into managed segments (shards) and parallel execution of operations in each of them;
- A new eWASM virtual machine that will support smart contracts developed in popular programming languages.
- Switching to the Proof-of-Stake consensus algorithm;
- Implementation of sharding technology: division of the blockchain into managed segments (shards) and parallel execution of operations in each of them;
- A new eWASM virtual machine that will support smart contracts developed in popular programming languages.
The update is implemented in several stages, the exact timing of all its points is unknown. According to rough estimates, the work will be completed in 2023–2024.
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