What is Ethereum (ETH)?

Ethereum is a leading public blockchain network that introduced smart contracts, decentralized applications (dApps), and other decentralized solutions to the cryptocurrency industry.

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 manage the network. Instead, Ethereum users collectively maintain and secure the blockchain.

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.

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, and 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 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.

Ethereum's co-founders

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.

From a technical standpoint, AI digital currencies aren’t too dissimilar from any other type of token in the crypto market. They rely on a blockchain ledger and a decentralized network of users to operate, just like bitcoin (BTC) and other cryptocurrencies.

There are several key components to the Ethereum network.

Ethereum blockchain

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. The transition to a proof-of-stake algorithm also lays the technical foundations for future scalability improvements that should help to increase Ethereum's transaction throughput.

Nodes

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 Sept. 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.

The main cryptocurrency powering Ethereum is called ether or ETH.

ETH is used to power smart contracts and transactions on the decentralized network. Ether is currently the world's second largest cryptocurrency by market capitalization (market cap).

Ether can be bought and sold on cryptocurrency exchanges and is used by many as a store of value, similar to Bitcoin.

Ethereum blockchain users must pay network fees, known as gas fees, to complete their actions and validate transactions. Ethereum denominates these fees in ETH.

Ether's issuance fluctuates based on the total amount of ETH staked. ETH is also burned on every transaction, causing the supply to be elastic. As Ethereum is used more, more ETH is burned.

This elastic supply of ETH was introduced through EIP-1559. ETH started with an initial supply of 72 million at initial launch. 80% of the initial supply was sold to the public and 12 million were held in reserves for the Ethereum Foundation. Ethereum has no maximum supply and the circulating supply as of April 2023 is ~120.5 million.

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 investing platforms, investors are constantly judging the potential of Ethereum as a next generation cloud computing and smart contract platform.

Ethereum allows developers to create a range of interoperable utility tokens and decentralized applications.

These applications can provide many of the same services traditional institutions offer, but without the need for any human middlemen to determine the outcome of financial agreements.

Smart contracts power these innovative applications, and have led to the creation of the decentralized finance (DeFi) sector.

Ether can also serve as a medium of exchange to transfer value and perform financial transactions without central authorities. Because of its potential to become a deflationary digital asset, some may 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 innovative types of crypto tokens that allow individuals to prove ownership over digital items without the need for a third-party intermediary. These digital items can be anything from concept artwork, to music files and gaming assets.

Some of the most popular NFT collections on Ethereum today include CryptoPunks, Bored Ape Yacht Club, and Doodles to name a few.

Now you have a better understanding of the Ethereum network and its native cryptocurrency, Ether (ETH), why not take the next step on your crypto journey?

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