What is Ethereum? A Beginner’s Guide

Introduction

Ethereum is the second most popular cryptocurrency in the world. It is also the second-largest cryptocurrency in terms of market cap. Ethereum is one of the earliest blockchains to follow Bitcoin.

There are cryptocurrency investors and institutional traders that have reportedly added Ethereum to their portfolios. This article is going to provide a detailed introduction to the Ethereum blockchain, its native currencies, and its major landmarks.

What is Ethereum Blockchain?

Ethereum blockchain is an open-sourced, trustless, and permissioned network that is based on Distributed Ledger Technology or DLT. Much like many other blockchains, Ethereum has borrowed its core structure from the Bitcoin blockchain.

However, by design Ethereum has added new features to increase its utility. Ethereum blockchain does not only handle digital currency transactions, but it can also host other decentralized applications in its ecosystem. This is the main reason that the Ethereum blockchain has been able to gain traction among investors.

How does Ethereum Blockchain Work?

Ethereum is a computer program, and it can add data and keep records. However, it is not dependent on a single server. Much like its predecessor, Bitcoin, the Ethereum blockchain can remain stored on multiple computers around the world.

At the same time, Ethereum blockchain holders can send and receive digital currencies on the network. However, the blockchain does not require any centralized regulator, but it uses consensus mechanisms such as PoW and PoS to verify transactions.

Ethereum is also a host for other decentralized applications. Developers can create new dApps on the Ethereum network to add new functions and services for crypto investors. There are more than 1600 dApps on the Ethereum network.

Ethereum blockchain has issued a core coin called ETH. At the same time, there are thousands of tokens that are hosted on Ethereum that are issued by the dApp projects that are hosted on it.

What is Ether?

Ether is the native currency of the Ethereum blockchain. Investors can use Ether as an investment, and it is often listed on all major cryptocurrency exchanges. The people who wish to make a transaction on the Ethereum blockchain use Ether coin.

It is important to note that several digital currencies are hosted on the Ethereum network. However, Ether is classified as a coin because it is the main digital currency issued directly by the Ethereum blockchain.

Meanwhile, all the other currencies that are hosted on Ethereum, such as MATIC, Uniswap, Sushi, 1inch, and others, are known as tokens because they are secondary token issues.

How does Ether Work?

Ether is the main coin issued by the Ethereum blockchain, and it holds an important value for all users that are present on the Ethereum network. The users who hold Ether can send or receive transactions on the Ethereum blockchain.

Furthermore, Ether is also used for paying transaction fees on the Ethereum network. The miners who work to verify transactions on the Ethereum blockchain can get paid in the form of Ether. Ether is also important for swaps and exchanges within its ecosystem.

If an Ethereum dApp user holds Ether, they can trade it with other tokens hosted on the Ethereum ecosystem and make profits. In some cases, holding Ether can also grant community rights to Ethereum users.

For example, Ether holders can participate in the voting process on the Ethereum network for any new proposal. Certain dApps grant special privileges for the users who hold a specified amount of Ether.

Origin of Ethereum Blockchain

Ethereum blockchain was co-founded by several contributors, namely Vitalik Buterin, Gavin Wood, Charles Hoskinson, Joseph Lubin, Jeffery Wilcke, Mihai Alisie, Anthony Di Lorio, and Amir Chetrit.

According to Buterin, he came up with the idea of the Ethereum blockchain while playing a game called World of Warcraft. One of his gaming characters was taken down by the developers, and thus he wanted to create a digital space where users were notified about the decision-making process and participated in it.

Furthermore, Buterin introduced the Ethereum network as an extension of the Bitcoin blockchain such that it was able to not only perform digital transactions but also host dApps on its network.

The Ethereum blockchain made its debut in 2012. In the next year, Buterin also published the White Paper for Ethereum, following in the footsteps of the pseudonymous creator of Bitcoin, Satoshi Nakamoto. Ethereum blockchain incorporated smart contracts as one of its distinct and unique features.

In this manner, the Ethereum blockchain was able to act like an app store, just like Google Play or Apple Store, which was able to list decentralized applications in one place.

Ethereum blockchain was able to gain financial backup from financial bigwigs such as JP Morgan, Winklevoss Capital, Placeholder, and George Burke, among others. At present, 14 major investors back Ethereum Foundation.

Important Milestones of Ethereum Blockchain

The current Ethereum Blockchain is widely different from when it was first introduced. Ethereum blockchain has undergone several important changes over the years that have shaped it.

The investors should make a point of learning about all the important landmarks that changed the Ethereum blockchain and played a role in taking it to its current state.

Here are some of the most important and noteworthy milestones during the journey of the Ethereum blockchain:

Frontier

The event when Ethereum made its public debut is dubbed Frontier. It happened on July 2015.

During this event, the Ethereum blockchain also created its first block or the “Genesis Block”.

There were reportedly 8,893 transactions present on the Genesis Block of Ethereum. This block was recorded to send random amounts of Ether to different digital wallet addresses. The block reward for the Genesis Block was 5 Ether.

The founders of Ethereum organized a funding round for Ethereum that was able to raise $18 million in Ether.

Ethereum Foundation

Ethereum Foundation was created in 2013 by Ethereum co-founder Vitalik Buterin. Other Ethereum co-founders such as Charles Hoskinson, Gavin Wood, Anthony Di Lorio, and Joseph Lubin also become members of the Ethereum Foundation.

Ethereum Foundation was a crowdfunding platform, and it became operational in July 2015. By legal definition, Ethereum Foundation is a non-profit organization that aims to work on the development of the Ethereum blockchain and its related technologies, such as dApps.

Ethereum Foundation is not a for-profit enterprise but is part of the Ethereum ecosystem. It has undertaken some important initiatives such as ecosystem support, Devcon, and Fellowship programs.

Ethereum DAO Hack

In 2016, Ethereum onboarded a DAO or Decentralized Autonomous Organization on its network. It was a set of smart contracts that opted to perform specified functions when certain conditions were met. This DAO contained $150 million in reserves to fund various dApp projects on the Ethereum network.

However, the DAO granted hackers an opening to launch a hack attack on the Ethereum network. This is one of the biggest and most talked about hack attacks on the Ethereum network. This hack resulted in the loss of the majority of the funding reserves that were stored in the DAO.

As per the cybersecurity experts, the hackers were able to invade the Ethereum blockchain on account of the technical blind spot left in the DAO.

Ethereum Fork

The hackers of the DAO were able to steal a massive amount of DAO tokens as a result of the exploit. However, they were unable to take out their stolen tokens on account of the 28-day delay protocol present in the Ethereum smart contracts. The Ethereum developers joined their heads to come up with a solution to reclaim the stolen DAO tokens.

One proposal to fix the issue was an update that would result in creating a new Ethereum Fork. A small group of Ethereum users voted to keep the blockchain the same, while others voted in favor of the Ethereum fork.

This resulted in the Ethereum Fork event that split the Ethereum Blockchain into two parts, namely Ethereum Classic and Ethereum 2.0. Consequently, Ethereum was able to recover the stolen DAO tokens. It has forked twice since 2016 to tackle other hack attempts.

Ethereum Merge

When Ethereum started, it incorporated the PoW or the Proof-of-Work Consensus model. PoW is a type of mining or transaction verification system that allow the mining farms to compete with each other to solve the encryption puzzle before others.

However, many cryptocurrency cynics have criticized Ethereum and other blockchains for using PoW on account of its massive energy input requirements. Therefore, after much debate and delays, Ethereum finally transitioned to PoS or Proof-of-Stake consensus mechanism. This event is known as Ethereum Merge, and it took place in 2022.

As a result of the Merge Event, Ethereum was able to merge with the Beacon Chain, and its energy consumption dropped by 99.95%, according to Ethereum org website.

Ethereum Updates

Ethereum developers have kept working on increasing the efficiency of the blockchain by working on major updates since its conception. The goal of the developers is to improve the scalability, decentralization, and security of the Ethereum blockchain.

At the same time, the developers also solve issues related to Ethereum gas fees, block time, block capacity, energy consumption, and others using these updates.

Ethereum blockchain has added updates such as Ice Age, Homestead, Tangarine Whistle, Spurious Dragon, Byzantium, Constantinople, St. Petersburg, Istanbul, Phase 0, Muir Glacier, Berlin, London, Altair, Arrow Glacier, Bellatrix, and Paris. The next updates in line are Shanghai and Capella.

Important Components of Ethereum

Here are some of the most important Ethereum components that every Ether investor should be aware of:

EIP

EIP is a type of standardization for cryptocurrencies that are issued by Ethereum Blockchain. EIP stands for Ethereum Improvement Proposal. Thus far, Ethereum devs have issued several hundred EIPs.

Each EIP represents a unique feature or a directory of features that are present in a digital asset. EIP-20, EIP-1559, and EIP-712 are some of the most popular Ethereum standards.

The developers use these standards to design their decentralized applications that fulfill the requirements such as transferability, malleability, technical soundness, formatting options, code style, etc.

ERC

ERC stands for Ethereum Request for Comment. ERC is a technical standard that is used to streamline the production of digital tokens. ERC-20 is one of the most popular token standards that are adopted by blockchain developers to generate fungible tokens.

This standard ensures that all the new token creation is technically identical to each other. Developers who comply with ERC can add credibility and technical soundness to their digital tokens and dApps.

EVM

Ethereum Virtual Machine or EVM is a runtime execution environment for Ethereum projects. It contains a stacking environment for Ethereum developers. It is written in C++ using the LLVM project compiler, among other programming languages.

EVM performs immutable operations to determine the state of every block on the Ethereum blockchain. It is used by the devs to create new dApps and smart contracts on Ethereum.

Ether

Ether is the main coin issued by the Ethereum blockchain. However, some people may get confused by reading Ether denominated by two different abbreviations, namely ETH, ETC. The fact of the matter is that both ETC and ETH are Ether coins.

The ETC is the native coin of the Ethereum Classic blockchain that chose to remain immutable and unchanged following the Ether DAO fork event. On account of the continued attacks and exploits on ETC, it holds lesser value than ETH.

ETH is the main coin issue of the Ethereum 2.0 blockchain. The other part of the forked Ethereum blockchain incorporates all new updates.

Accounts

There are two basic types of Ethereum accounts. The first one is externally owned accounts that are user accounts, while the other ones are contracts. Both of these account types can contain ETH balances. Ethereum accounts can also send Ether to other accounts.

At the same time, the account holders can also utilize public functions that are present within the contract or create a new contract. Ethereum accounts are listed on the blockchain using addresses.

Only user accounts can create transactions and use public/private keys for security. Meanwhile, Contracts can associate with code or different functions and provide contract storage.

Ethereum Addresses

Ethereum addresses can be identified easily by their prefix “0x”. They are hexadecimal and linked with 20 bytes of ECDSA public key hashes. The average Ethereum address consists of a 40-digit address that can be based on random alpha-numeric values to ensure security for the users.

Ethereum Gas

Transaction fees or Gas is a cost for Ethereum blockchain users for making new transactions. With the PoW consensus model, the Ethereum users who were making transactions paid the miners using transaction fees.

The miners verified the transactions with the biggest transaction fees first. Therefore, during the trading volume spikes, Ethereum gas traditionally hiked exponentially, creating issues for investors.

However, when Ethereum transitioned to the PoS consensus mechanism, some users believed that the gas inflation problem on Ethereum would be solved on account of the random delegation of the transactions for different miners. However, the issue of gas inflation is not fully resolved despite the PoS transition.

Mining

Ethereum depended on PoW miners for a long duration, but it eventually shifted to PoS. Difficulty Bomb is an automated protocol on the Ethereum blockchain that is related to mining. This protocol ensures that the mining difficulty for Ethereum blocks keeps increasing consistently over time.

It is a type of security protocol to ensure that any hackers are unable to track the Ethereum verification process or launch an attack on it.

Difficulty Bomb has been present in Ethereum since its inception, and it was added to ensure that Ethereum transitions from PoW to PoS in the future. The update that introduced Difficulty Bomb on the Ethereum blockchain is known as Ice Age.

Advantages and Limitations of Ethereum

Pros

Ethereum is decentralized and ensures anonymity for its users. At the same time, it uses a democratic method of governance and lacks censorship. The dApps on Ethereum do not exercise any regulatory control over its users whatsoever. All decisions on Ethereum are finalized after community voting.

The Ethereum democratic environment also prevents bad actors from taking over. Hackers cannot hit the blockchain with a 51% attack.

Ethereum consists of smart contracts. It means that it can automate several functions that can offer digital services for its users for a lower price and higher efficiency. It also removes the need for depending on expensive, regulated, and conditioned third-party applications.

Ether has an infinite supply, which means that it can operate as a global medium of exchange. Ethereum’s utility is practical and real, and it ensures long-term demand for Ether.

Cons

Ethereum lacks sufficient scalability to operate as a global financial network. It needs to improve its second transaction processing limit and block time to prevent lags.

Ethereum suffers from gas fee inflation. During trading volume spikes, the users may end up paying bigger gas than their transaction amount.

Big companies have taken up stakes in Ethereum which means that they can hold massive amounts of Ether. However, if one of these big corporations decides to dump their ETH holding, the price of ETH can crash exponentially.

Conclusion

Ethereum is one of the most popular blockchains and cryptocurrency projects in the DeFi space. It is only second to Bitcoin in terms of its traction and popularity.

However, it still needs to eliminate some of its biggest technical hurdles to maintain its position as a world leader. At the same time, it is impossible to ignore Ethereum as one of the foundational projects of a digital economy of the future.