What is Ethereum? (ETH)
The Beginner’s Guide to ETH
Ethereum is a leading public blockchain network that introduced smart contracts, decentralized applications (dApps), and other decentralized solutions to the cryptocurrency industry.
- Check the Ethereum price page for more details on the current ETH value, trends, and price history.
The Ethereum network's native cryptocurrency, Ether (ETH), serves as the primary cryptocurrency for powering applications built on top of its blockchain.
Ether is the second-largest cryptocurrency by market capitalization, behind bitcoin (BTC). While many people often compare Ethereum and Bitcoin, the two are significantly different implementations of blockchain technology.
Unlike Bitcoin, Ethereum is not just for preserving or transferring value. Its blockchain provides powerful tools for developers to create and deploy their own interoperable, decentralized assets and services. A core concept behind Ethereum and its various applications is that there are no central authorities to enforce the network. This fact means the network users themselves control decisions made for the group.
The creator of Ethereum, Vitalik Buterin, once described Bitcoin as a pocket calculator and Ethereum as a smartphone. Bitcoin's design means it can perform a single function very well — transferring value. Ethereum developers, on the other hand, can create complex applications with nearly endless capabilities.
Who created Ethereum?
Vitalik Buterin is a Canadian computer programmer born in Moscow, Russia. He is credited with co-founding an early online publication called Bitcoin Magazine in 2011. He created Ethereum in 2013, when he was just nineteen years old.
Buterin later received a Thiel Fellowship to pursue Ethereum full time, and set to work creating a non-profit to help launch the project. The organization became known as the Ethereum Foundation. The Ethereum Foundation team also developed a global community of blockchain leaders, adopters, innovators, developers, and businesses known as the Enterprise Ethereum Alliance. The alliance is focused on addressing global business needs by using Ethereum's underlying technology.
In early 2014, the Ethereum Foundation sold 72 million ETH in an online crowd sale, which generated roughly $18 million in funding.
How does Ethereum work?
There are several key components to the Ethereum network.
First, there is the Ethereum blockchain — the backbone of the Ethereum network. The Ethereum blockchain is responsible for storing and recording all transaction and smart contract data, known as the "state."
Following a major upgrade in September 2022 called "The Merge," Ethereum's blockchain transitioned from a proof-of-work blockchain to a proof-of-stake consensus mechanism. The change, formerly called Ethereum 2.0, allowed the project to dramatically improve its overall energy consumption. Many experts anticipate the transition to a proof-of-stake algorithm to lay the technical foundations for future scalability improvements that should improve Ethereum's transaction throughput.
A distributed network of computers, called nodes, power the Ethereum blockchain. Nodes act as the main source of computing power for the Ethereum blockchain. Rather than relying on a single server for the computational power needed for the entire network, Ethereum relies on a distributed network of nodes. Nodes run client software (software needed to interact with the blockchain) and perform a variety of important roles.
These roles include storing and maintaining a complete transaction history of all ETH transactions. Nodes also help to verify the state of new transaction and smart contract data.
Anyone with sufficient computing resources and an internet connection can run their own Ethereum node. To date, there are more than 6.1 million Ethereum nodes across the globe. Nodes play an important role in securing the consensus layer and execution layer of the Ethereum blockchain.
The higher the number of nodes, the harder it becomes to gain control over a 51% majority of the network. This type of attack can allow a person, or a group of people, to block incoming transactions, manipulate transaction ordering, and process double-spend transactions.
Each validator node (also known as a staker) must lock away an amount of ETH to participate in the transaction verification. As of September 22, 2022 Ethereum verifies transactions using the proof-of-stake consensus algorithm. The larger the network, the greater the amount of staked assets and the more expensive it becomes to gain majority control over the blockchain.
The network also uses an automated penalty system called "slashing" to prevent malicious activity on the network. If a node breaks the hard-coded rules of the protocol, the network can fully or partially confiscate a person's staked assets without warning.
Ethereum virtual machine (EVM)
The Ethereum blockchain isn't just a record of ether transactions. It must also store smart contract data and record new changes made once those contracts are executed. These phases are called "states."
Each time a new block is added, Ethereum's state changes. This term is why Ethereum's blockchain is known as a "world state machine."
A program known as the Ethereum virtual machine (EVM) runs on top of the Ethereum blockchain. The EVM reads and executes all smart contracts. All nodes run the EVM program to make sure smart contracts follow the rules of the protocol.
Smart contracts on Ethereum are predominantly written in a programming language called Solidity. Vyper is another popular language used on the Ethereum network.
Humans can write and understand these programming languages, but the EVM cannot. It must compile the human smart contract programming language into a machine language called EVM bytecode.
Bytecode is broken down into one of 140 opcodes. Each opcode represents a specific function that the EVM can perform. The Ethereum virtual machine is "Turing-complete" because it can essentially perform any type of task by running combinations of these opcodes.
Originally, there were eight Ethereum co-founders, including Buterin. However, over time, all but Buterin left to pursue other interests.
- Gavin Wood – Author of the Ethereum yellow paper, creator of Polkadot and Kusama, and developer of the Solidity programming language.
- Jeff Wilke – Creator of the first Ethereum software implementation.
- Joseph Lubin – Founder of Consensys, a major ethereum investment incubator.
- Charles Hoskinson - CEO and co-founder of Input Output Global (IOG).
- Mihai Alisie - Former Vice President of the Ethereum Foundation, creator of Akasha, and co-founder of Bitcoin Magazine.
- Anthony Di Iorio - Founder of Decentral and Jaxx crypto wallet.
- Amir Chetrit - Colored Coin project contributor.
A more extensive list of founders and contributors can be found on Ethereum’s Wikipedia.
What is ETH?
The main cryptocurrency powering Ethereum is called ether or ETH, a portion of which is minted in every block and distributed to miners.
Notably, Ethereum does not place a limit on the amount of ether that can be minted. Rather, the supply of ether is programmed to increase 4.5% each year, with 2 ETH now minted each block.
This reward has been decreased twice in the network’s history, and was originally set at 5 ETH.
Changes to the monetary policy are generally proposed by developers. Nodes and miners running the software can then accept or decline to upgrade their software to accept the change.
Miners also earn ETH in the form of fees for computations processed by the network. Fees are not paid in ETH, but rather paid in “gas,” a special computational unit.
The more complex the computation, the more gas a given program will require.
This means that any applications or protocols operating on top of Ethereum must continually purchase and spend ether, creating a continued demand for the asset.
Why does ETH cryptocurrency have value?
First, ETH is the native token of Ethereum and powers all activities within the blockchain. To transact value or interact with decentralized applications built on Ethereum, users must pay a gas fee denominated in ETH. This fee covers the node's computational costs, which are required to process different transactions. The more complex the function and the greater the network usage, the higher the gas prices may be. These fees serve as transaction costs by blockchain users to network validators. Users pay gas fees for interacting with a variety of decentralized applications, such as decentralized exchanges like Uniswap, Curve, and Balancer.
Secondly, some may attribute value to ETH because of its inherent qualities. These include being a decentralized, pseudonymous, censorship-resistant form of digital currency that anyone in the world can own.
Finally, the market forces of supply and demand determine the value of Ether. Across dozens of crypto exchanges, investors are constantly judging the potential of Ethereum as a next generation cloud computing and smart contract platform.
What can you do with Ethereum?
With Ethereum, you can create ERC-20 tokens and smart contracts for a variety of applications. You can use Ether as a medium of exchange to transfer money and perform financial transactions without central authorities. ETH is also commonly used to purchase goods and services, both in the real world and within the various dApps Ethereum hosts. Because of its potential to become a deflationary digital asset, many see ETH as a potential store of value. However, ETH is most commonly used to pay for transaction fees on the Ethereum mainnet.
Non-fungible tokens (NFTs) are the latest application of blockchain technology to take off on the Ethereum blockchain. NFTs are a new for of digital record keeping that allows individuals to prove ownership over items without the need for a third-party intermediary. NFTs also allow a distributed network to verify the authenticity of unique digital items such as artwork, music, and gaming assets. The underlying technology behind NFTs is starting to revolutionize the digital asset market. That is because NFTs allow individuals to own unique crypto assets that are not only scarce, but also impossible to replicate. Some of the most popular NFT collections on Ethereum today include CryptoPunks, Bored Ape Yacht Club, and Doodles to name a few.
Finally, Ether enables developers to create decentralized applications powered by smart contracts. These applications can exist without any intermediaries, such as financial institutions or enforcement agencies, determining the outcome of the agreement. Smart contracts are the foundation of innovative uses of blockchain technology such as decentralized autonomous organizations (DAOs).
Ethereum has a long history and is one of the most popular cryptocurrencies in the world. It has utility, value, and investor interest and, in the end, grew from an idea into a global financial force. Not back for the brainchild of a 20-year-old programmer and a few cypherpunks.
Do more with Ethereum
Now you're ready to take the next step and buy some Ethereum!