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What is Ethereum?
One of the more popular things about crypto are the available options. And while Bitcoin may be the most-recognized cryptocurrency, it also has healthy competition of its own. One of those being Ether — the second-largest cryptocurrency on the market.
Ethereum (ETH) is an open-source public service that uses blockchain technology to securely facilitate smart contracts and other transactions without a central authority. Records of these transactions are absolute, accurate, and securely shared across the network for added transparency among users.
Ethereum expanded the possibilities of blockchain, the groundbreaking tech behind Bitcoin that supports crypto transactions. The innovation of the Ethereum Blockchain is that it supports the building and execution of apps. Not like TikTok or Instagram, but rather apps made to move things like crypto or anything else that exists in a digital format.
When was Ethereum created? Who owns Ethereum?
Ethereum was conceived in 2013 and officially released on July 30, 2015, by computer programmer Vitalik Buterin.
How does Ethereum work?
Beyond being recognized as the second largest cryptocurrency by market value, Ethereum also has its own main functionalities and characteristics. Let’s walk through them.
Like Bitcoin, the Ethereum network exists on thousands of computers around the world. Because of this, the network is ultimately decentralized and less vulnerable to attacks. If one computer network is attacked, it’s not as dire because thousands of other computers are sustaining the network.
Activity between users on the Ethereum network is known as a transaction. Since 2022, Ethereum has adopted a proof-of-stake (PoS) consensus mechanism, which enables node operators to deposit a “stake” of 32 ETH as collateral. This stake is then included in an Ethereum smart contract and acts almost like an entry fee to become a validator. This stake is used as collateral to keep validators honest. If they act maliciously, validate invalid transactions, or go down, they can lose part of their stake. Validators are randomly selected peers across the Ethereum network who are tasked with authorizing a set of transactions, or blocks, before adding them to the chain. Once the validator approves the transactions, they’ll send a vote (or “attestation”) vouching for the block to be shared across the network. While that may sound all-too complicated for one person, acting as a validator is more accessible now that owning top-notch hardware isn’t a requirement.
PoS comes with other benefits, including increased energy efficiency, reduced centralization risks, and a secure network more users can get involved in.1
So, what’s the incentive for validators in all of this? Payment, of course. For every Ethereum-based transaction, a user pays a fee (also known as “gas”) to get the peer-to-peer interaction started. The gas fee is how the validator is rewarded for verifying the data. Every validated transaction that’s uploaded to the network helps maintain security and incentivizes accurate reporting.
The gas fee also helps limits network spam and the amount of activity a user can make per transaction. Depending on the amount of network transactions, gas fees can be pretty expensive. In some cases, validators may even prioritize transactions with higher gas fees that, in turn, can lead to even higher fees and increased competition between users to have their transactions validated.
Decentralized vs. traditional applications
Decentralized applications are run on a peer-to-peer network without a central server.
Traditional applications are run on a peer-to-peer network with a central server.
Ethereum is a platform where users can develop any type of decentralized application. This means it is a blockchain network that is used to carry out transactions between users, so a central entity is not required to oversee them.
Creating apps on Ethereum can be complex, requiring special software and computer programming experience. Many people buy Ether without any intent to build apps, however they may buy Ether as it is required for payment in order to transact on the Ethereum blockchain.
Smart contracts
In order to have a bigger understanding of Ethereum as a whole, let’s take a closer look at the purpose of Ethereum’s main use case, smart contracts.
Ethereum’s smart contracts are contracts that are coded and stored on the blockchain. These contracts act as an automated agreement between the seller and buyer which can’t be edited or reversed. Because of the network’s decentralization, the automated agreement can make the transaction process more efficient with almost instant confirmation.
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Ether
Ether is Ethereum’s official currency and is used for transactions on its network. Aside from being used in a peer-to-peer setting, Ether can also be used to pay for “computational resources” and transaction-related fees that take place on the network.
Like other cryptocurrencies, Ethereum can be described in terms of its blockchain and its virtual currency. Ether is valued for its purpose in the Ethereum Blockchain, where it is used to pay for the execution of apps. Think of Ethereum as an engine and Ether as its fuel.
What’s Ethereum Virtual Machine?
Ethereum Virtual Machine (EVM) is the engine that understands and manages the blockchain and enables smart contracts. It allows developers to securely create decentralized applications or create code without affecting other important network data or personal information.
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