Ethereum: Everything to Know

By  Beluga Team July 5, 2023

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Summary

  • Ethereum is a decentralized, open-source blockchain platform
  • The network allows developers to build special software called smart contracts to build decentralized applications (Dapps)
  • The native cryptocurrency of Ethereum is called ether (ETH)
  • Ethereum's smart contracts are self-executing programs that automatically enforce the rules and regulations of an agreement

Overview

Ethereum is a platform that can execute smart contracts, special software that enables applications to be built on top of blockchain and cryptocurrencies.

Ethereum's native cryptocurrency, Ether (ETH), is used to pay for transaction fees and incentivize miners. The network wants to encourage miners to validate transactions on the network. Ethereum's smart contracts run on the Ethereum Virtual Machine (EVM). The EVM is a decentralized runtime environment that executes smart contracts. This enables developers to built decentralized apps, or Dapps, which is software that can use cryptocurrencies in-app. Ethereum can also allow for the creation and management of decentralized autonomous organizations (DAOs). A DAO is an organization run by smart contracts and governed by its members. DAOs allow for decentralized decision-making and eliminate the need for a central authority.

A Brief History

In 2013, Vitalik Buterin, a Canadian programmer, proposed the idea of a decentralized platform that could execute smart contracts. Buterin was a co-founder of Bitcoin Magazine. He had a deep understanding of the limitations of Bitcoin as a platform for building software application on top of its network.

In late 2013, Buterin published the Ethereum whitepaper. This paper outlined the specifications of Ethereum as a platform. In 2014, Ethereum conducted its initial coin offering (ICO). The event raised over $18 million. The funds allowed the Ethereum team to develop the platform and launch it in 2015.

Since its launch, Ethereum has undergone several upgrades. The most significant was the network's 2022 transition from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism. The PoS mechanism relies on validators to stake ether to validate transactions. This transition is expected to make the Ethereum network more energy-efficient and scalable. The PoS consensus mechanism also allows for faster transaction processing.

What is Ethereum?

Ethereum is a decentralized platform that allows developers to build special cryptocurrency software applications. Ethereum is built on a blockchain, defined as a distributed ledger that records all transactions on the network. Ethereum's blockchain is unique in that it allows for the execution of smart contracts.

Ethereum's smart contracts run on the Ethereum Virtual Machine (EVM), a decentralized runtime environment. The EVM is a Turing-complete machine. This means it can execute any program that can be expressed in code. The EVM allows users to create complex applications that can run autonomously without the need for a central authority.

Ethereum's native cryptocurrency is ether (ETH). ETH can be used to pay transaction fees or incentivize miners to validate transactions on the network. Ether can be used as a store of value and a means of exchange, just as Bitcoin.

Getting Started

  • Set up a digital wallet to store Ether. There are many different types of wallets available. The list includes physical hardware wallets, which allow a user to keep their crypto offline and are very secure, software wallets, browser wallets and browser extension wallets. Each type of wallet has its own benefits and drawbacks. With a wallet, a user can check their account balance, manage an ether-based account and send funds. It is important for an investor to choose the wallet or types of wallets that best meet an individual's needs.
  • Acquire Ether. An investor can do this by purchasing ETH on a cryptocurrency exchange or by accepting it as payment for goods or services. Once an investor has some ETH, they can use it to interact with Dapps and smart contracts on the Ethereum network.
  • Use dApps. Popular Dapps on the Ethereum network include Uniswap, a decentralized exchange that allows users to trade cryptocurrencies without the need for a centralized intermediary, Aave, a decentralized lending platform and Compound, a decentralized borrowing and lending platform.

Unique Aspects

Ability to execute smart contracts. Smart contracts are stored on the Ethereum blockchain. Smart contracts can be used to automate a wide range of tasks. These range from simple transactions to the use of complex financial instruments.

Create new tokens using the ERC-20 standard. ERC-20 tokens are cryptocurrencies that are created on the Ethereum blockchain. They follow a set of standardized rules. This makes them easily transferable and compatible with other Ethereum-based applications.

Approach to consensus. Ethereum has transitioned to a proof-of-stake (PoS) consensus mechanism. This type of consensus mechanism relies on validators to stake ETH to validate transactions. This transition is expected to make the Ethereum network more energy-efficient and scalable. In contrast, Bitcoin uses a proof-of-work (PoW) consensus mechanism. That mechanism requires miners to solve complex mathematical problems to validate transactions,

Advantages

  • Smart contracts. Ethereum's smart contracts allow for automated and trustless execution of contracts. This eliminates the need for intermediaries. It also reduces costs.
  • Decentralization. Ethereum is decentralized, meaning there is no central authority controlling the network. This feature makes the platform more secure. It also makes Ethereum more resistant to censorship and attacks.
  • Programmability. Ethereum's programmable blockchain allows developers to create a wide range of Dapps. Software engineers can customize these Dapps according to their specific needs.
  • Interoperability. Ethereum's open-source nature and its compatibility with other blockchain platforms such as Avalanche allow for interoperability between different systems.
  • Community. Ethereum has a large and active community of developers and users. The parties contribute to the platform's development and improvement.

Disadvantages

  • Scalability. Ethereum's architecture could limit its scalability. The architecture leads to slow transaction times and high fees during periods of high network usage.
  • Security. Ethereum is perhaps more secure than traditional centralized systems. Yet it is still vulnerable to hacks and attacks. One instance of this was the infamous The DAO hack in 2016.
  • Energy consumption. Ethereum, as almost all other blockchain platforms, requires a significant amount of energy to operate. This causes concerns about its environmental impact.
  • Complexity. Ethereum's programming language, Solidity, can be complex and difficult to learn. This can make it challenging for some developers to build on the platform.
  • Governance. Ethereum's governance structure is still evolving. The community has not yet defined a clear process for decision-making and protocol upgrades.