Ethereum: What is the concept and how does it operate?
By If Bitcoin is viewed as the promising currency of the future, then what exactly does Ethereum represent? For those new to the world of digital currencies, this would naturally be the burning question, especially when they repeatedly encounter Ethereum cryptocurrency listed alongside Bitcoin on various platforms and in the media. Nevertheless, it would be inaccurate to perceive Ethereum as a direct rival to Bitcoin. It pursues distinct objectives, possesses unique characteristics, and operates on a different technological framework.
Ethereum stands as a decentralized blockchain network fueled by the Ether token, providing users with the ability to conduct transactions, generate interest from their holdings via staking, engage in the creation and storage of nonfungible tokens (NFTs), trade cryptocurrencies, partake in gaming activities, access social media platforms, and explore numerous other functionalities.
Ethereum has been hailed as the future evolution of the digital realm. While traditional platforms such as Apple’s App Store embody the essence of Web 2.0, Ethereum stands as the embodiment of Web 3.0 – a decentralized, community-driven network. This cutting-edge internet sphere facilitates decentralized applications (DApps), decentralized finance (DeFi), and decentralized exchanges (DEXs).
Evolution of Ethereum
Ethereum’s ascent to becoming one of the world’s top blockchain projects was not immediate. Co-founded by Vitalik Buterin, the platform emerged as a response to the limitations of Bitcoin, ultimately shaping a new era of digital innovation.
Vitalik Buterin unveiled the Ethereum whitepaper back in 2013, introducing the concept of smart contracts – self-executing “if-then” agreements that paved the way for decentralized app creation. Even though blockchain technology had seen DApp development before, there was a lack of compatibility among platforms. Buterin’s vision for Ethereum was to bridge this gap, creating a harmonized environment for DApps to operate and communicate, essential for sustained user engagement.
This marked the inception of Ethereum 1.0, akin to the App Store by Apple: a singular hub housing a myriad of diverse applications, all adhering to a standardized set of regulations.
The network operates with a set of hardcoded rules that are autonomously enforced, allowing developers to implement their own rules within DApps. There is no central authority, unlike Apple, which constantly modifies and enforces regulations. Instead, the community holds the power.
Token presale
Naturally, creating such a network comes at a cost. Therefore, Buterin and his co-founders – Gavin Wood, Jeffrey Wilcke, Charles Hoskinson, Mihai Alisie, Anthony Di Iorio, and Amir Chetrit – conducted a token presale to generate $18,439,086 in Ether, supporting Ethereum’s current and future advancements.
The team initiated the establishment of the Ethereum Foundation in Switzerland aiming at the upkeep and advancement of the network. Shortly thereafter, Buterin made public the foundation’s intention to operate as a not-for-profit entity, leading to the departure of certain co-founders.
As time elapsed, developers brought their individual decentralized concepts to Ethereum. In 2016, these individuals set up The DAO, a democratic assembly that engaged in voting on network modifications and propositions. The entity was supported by a smart contract and bypassed the necessity for a CEO holding authority over Ethereum. Instead, a majority vote was required for changes to be enacted.
Nonetheless, the situation took a turn for the worse when an unidentified cybercriminal absconded with $40 million from The DAO’s reserves by exploiting a security vulnerability. In response to the embezzlement, The DAO opted for a “hard fork” of Ethereum, breaking away from the original network and transitioning to a new protocol, essentially undergoing a substantial software upgrade. This fresh fork maintained the Ethereum moniker, while the initial network persisted as Ethereum Classic.
Distinguishing between Ether and Ethereum
Ether can be utilized as a digital currency for financial transactions, an investment asset, or a means of preserving value. Ethereum functions as the blockchain platform where Ether is stored and traded. As highlighted earlier, this platform provides a range of additional functionalities beyond ETH.
The Ethereum network offers the ability to securely save information and operate decentralized apps. This empowers users with data autonomy and enables unrestricted app usage without centralized oversight.
A particularly fascinating application of Ethereum involves self-enforcing contracts, known as smart contracts. In this scenario, two parties establish an agreement to provide goods or services at a later date. Unlike traditional contracts, legal professionals are not required: The parties encode the terms on the Ethereum blockchain. Upon fulfillment of the contract stipulations, it automatically executes and transfers Ether to the designated party.
Advantages of Ethereum
- Established and extensive network. Ethereum offers a robust network that has undergone rigorous testing over many years and facilitated the exchange of billions in value. It boasts a dedicated global community and the most expansive ecosystem within the realms of blockchain and cryptocurrency.
- Diverse functionalities. In addition to functioning as a digital currency, Ethereum supports a variety of financial transactions, facilitates smart contract execution, and provides data storage for external applications.
- Continuous evolution and advancement. A vast group of Ethereum enthusiasts is always on the lookout for innovative methods to enhance the system and create novel applications. Avital states, “Given Ethereum’s widespread appeal, it often emerges as the favored blockchain network for fresh and daring (and occasionally daring) decentralized applications.”
- Shuns middlemen. Ethereum’s decentralized platform vows to enable users to bid farewell to middlemen, such as legal professionals responsible for drafting and deciphering contracts, financial institutions acting as intermediaries in monetary dealings, or external web hosting providers.
Drawbacks of Ethereum
- Soaring costs of transactions. The surging popularity of Ethereum has resulted in escalated transaction expenses. The fees for Ethereum transactions, commonly referred to as “gas,” are subject to fluctuations and can be exorbitant. This is advantageous for miners earning profits, yet detrimental for regular network users. In contrast to Bitcoin, where transaction validators receive network rewards, Ethereum mandates that transaction participants bear the cost.
- Risk of crypto inflation. Despite the annual cap of 18 million Ether releases, Ethereum lacks a lifetime restriction on the total coin supply. Consequently, Ethereum might exhibit characteristics akin to traditional currencies and may not witness the same level of appreciation as Bitcoin, which upholds a stringent lifetime coin limit.
- Developers face a formidable learning curve with Ethereum. Transitioning from centralized systems to decentralized networks can pose a significant challenge for developers navigating the complexities.
What does Ethereum 2.0 entail?
Ethereum 2.0 made a monumental shift in 2022 by transitioning the blockchain from proof-of-work to proof of stake consensus mechanism. This revolutionary change eliminated the necessity for miners, who traditionally carried out validations using expensive crypto mining equipment that consumed substantial energy.
Staking, the process of locking a specific amount of cryptocurrency to partake in transaction verification, superseded mining in validating transactions. The implementation of Ethereum 2.0 resulted in a remarkable reduction of the cryptocurrency’s carbon footprint by almost 99.9%.
The upcoming era
In the past few months, there has been a significant uptick in interest surrounding the blockchain, with developers leveraging its capabilities to create various decentralized finance ventures and NFTs. The introduction of innovative applications, such as these pioneering projects on a publicly accessible blockchain, has already set off a remarkable domino effect, as proponents argue that heightened engagement lures in a growing number of developers to Ethereum. This expanding environment is additionally enriched by Ethereum-based casinos that harness smart contracts to provide open and equitable gaming opportunities, thereby broadening the spectrum of the platform’s utility.
Despite ongoing concerns surrounding Ethereum’s delayed technological advancements, there is uncertainty regarding its ability to keep up with faster rivals and establish a unanimous consensus on its future role in the expanding crypto sphere.
Conversely, advocates such as Garg caution that Ethereum’s enduring importance could lead to a market shift, potentially propelling Bitcoin back to its unrivaled supremacy.
