Ethereum Explained: Meaning, History & Technology
Following the advent of Bitcoin, Ethereum is regarded as the second cryptocurrency to have captured people’s hearts.
Ethereum was created and co-founded by Vitalik Buterin. After Bitcoin, Ethereum has the second-largest market capitalization.
Let us explore what Ethereum is all about.
What is Ethereum?
Ethereum is a decentralized system for peer-to-peer transactions, app development, asset ownership, and other purposes. It is the best option for developers that want to create decentralized, secure, and immutable digital technology.
Ethereum uses Blockchain technology, which is what the majority of cryptocurrencies adopt.
Ethereum is also referred to as Ether, its currency.
People frequently confuse Ethereum with Ether(ETH). Although used interchangeably, there is a significant distinction.
What is Ether?
While Ethereum is a platform that allows scalable decentralized infrastructures such as Decentralized Finance (DeFi), Ether is not.
Ether is Ethereum’s blockchain native currency.
Ether is required if one wants to participate in the Ethereum network. It is, as ethereum.org states, the lifeblood of Ethereum.
For example, if you wish to transfer money (cryptocurrency) to a friend using the Ethereum network, you must pay a fee in Ether.
If you wish to use a decentralized application on the Ethereum network, you will also have to pay a fee in Ether.
While Ether, or ETH, appears similar to cash, it is not. There are some distinctions;
- ETH is yours; there is no central authority, government, or bank standing between you and your money.
- Cryptography secures ETH, shielding your funds from harmful assaults.
- You are free to send your ETH to anybody or any place. The bank, or any other central entity, cannot place any restrictions on it.
- You only need a smartphone, an internet connection, and a wallet to use ETH.
- ETH is flexible. It is divisible by 18 decimal places.
What is Blockchain Technology?
Blockchain is a database, however, it is not the same as traditional databases. A blockchain is a database that saves records and information in blocks that are subsequently connected via cryptography.
A blockchain, in simple terms, is a repository for records of transactions that cannot be changed, erased, edited, or destroyed.
A network of programs must verify a block before it is added to the blockchain. Before a transaction is regarded as genuine by the network, they must reach a consensus. No one can edit the records independently since a change can only be made if a consensus is reached.
A consensus mechanism is a protocol utilized by a network of programs to reach a consensus. Proof of Work is what aids this protocol.
Proof of Work
Proof of Work, sometimes known as PoW, is a type of technology intended to identify or stop the misuse of computational resources.
According to Wikipedia, Proof of Work is a type of cryptographic proof in which a network must demonstrate to other networks that it has used a specific amount of processing resources.
In the world of cryptocurrencies, this process is known as mining, and networks that validate other networks are known as miners.
Information from the previous block is encrypted when a new block is opened. All the networks get this encryption. Then, they use their computational power to decrypt it.
The first miner to break the encryption receives an ether reward.
Proof of Work uses high computational power, which consumes large energy. Due to the high energy consumption, Ethereum has transitioned to another consensus protocol called Proof of Stake.
Proof of Stake
Compared to PoW, this approach utilizes a lot less processing power. In contrast to Proof of Work, this Proof of Stake operates differently.
In Proof of Stake, miners would have to stake their ETH to participate in the mining process. This ETH will serve as collateral as well as an incentive.
Proof of Work, as opposed to Proof of Stake, calls for miners to compete for incentives. Transactions are verified by randomly selected miners who stake their ETH.
They are known as “Validators” in Proof of Stake, not miners. They will receive payment in ETH if a transaction is confirmed.
What makes Ethereum unique?
Like all other cryptocurrencies, Ethereum is a digital currency. But why is it so distinctive? And why do some believe Ethereum will eventually overtake Bitcoin?
Although Ethereum is similar to other cryptocurrencies, its technology is unique.
Let us examine how Ethereum and Bitcoin vary from one another.
The only purpose of Bitcoin is as a medium of exchange for peer-to-peer transactions. Ethereum offers a lot more.
Although blockchain technology powers both Ethereum and Bitcoin, Ethereum is far more sophisticated and superior.
Ethereum is a blockchain technology that facilitates peer-to-peer transactions and also enables other software and technological advancements to be built on top of it. To avoid confusion, visualize the Ethereum blockchain as a set of Legos.
The Ethereum blockchain is popularly known as the world’s programmable blockchain.
There can only be 21 million bitcoins in circulation at any given time. There is no limit to how much Ether can be created. However, there are structures in place to stop Ether from being over-circulated.
On the Ethereum network, smart contracts are used to write programs and other technologies that are built on it.
Smart Contracts
Smart contracts are technologies that allow transactions to be executed when specific criteria are met without the assistance of a third party or other entity.
No central authority is needed because a smart contract is written in lines of code, which is the law guarding it.
You can create a smart contract that takes part of your salary — when paid — and invests it in a company.
The historical split of the Ethereum blockchain
In 2016, the Ethereum blockchain was hard forked into two — Ethereum and Ethereum Classic.
The Ethereum community decided to run an investment campaign using a smart contract called The DAO.
In just 28 days, the community raised $150 million.
After the investment campaign ended, a hacker took advantage of a vulnerability in the smart contract’s code. Using the same vulnerability, white hat hackers decided to drain the remaining funds before the hacker did.
The white-hat hackers were able to secure 70% of the money.
After that, a soft fork and a hard fork were proposed.
A hard fork modifies a blockchain’s original code in a large and significant way. A soft fork consists of minor updates to the blockchain’s base code.
The Ethereum community was allowed to vote, majority of the participants decided to implement a hard fork. The original blockchain, was given the name Ethereum Classic(ETC) after the hard fork, and the Ethereum blockchain preserved its original name (ETH).
The opposition to the hard fork chose to stick with Ethereum Classic, the first blockchain, instead of switching.
The people that went against the hard fork decided to remain with the original blockchain, Ethereum Classic.
What is Ethereum Merge?
Due to excessive energy usage, Ethereum switched from Proof of Work to Proof of Stake as a consensus method. This change will reduce the cost of electricity by 99.95%.
The Beacon Chain is an existing Proof of Stake network for Ethereum. Although it was introduced in 2020, no transactions have been carried out using it.
People mistakenly believe that following the merge, gas fees will be reduced. That is not true.
However, the merge will create future opportunities for reduced gas fees.
Ethereum wallets
As was previously stated, Ether is required to interact with the Ethereum network. You will need an Ethereum wallet to store your Ether.
Although Ether will always exist on the blockchain, a wallet is required to access the one you own.
Your wallet address is a public key. You can think of it as a bank account number. You can use it to send and receive crypto.
Private keys grant you ownership of your account and, thus, your money. Private keys are seed phrases given by your Ethereum wallet.
If your private keys get out, your funds are in danger.
How can I buy Ethereum?
You can buy and sell Ethereum using one of the numerous central exchanges. Central exchanges that sell Ethereum are Coinbase, Binance, Kraken, Gemini, etc.
Conclusion
So many technology infrastructures now exist on the Ethereum blockchain. Infrastructures like Defi and NFTs.
Defi is more of a financial infrastructure that wants to end limitations in financial services.
NFTs are a form of digital token that is indivisible. Having an NFT proves you own an asset, digital good, etc.
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