What is Ethereum?

Ethereum is an open-source blockchain that allows people to use a native cryptocurrency and other digital assets like Bitcoins and altcoins on the network, as well as store data and run decentralized finance and other applications. Its native currency, ether (ETH), is the second most popular cryptocurrency after Bitcoin. While Bitcoin was designed strictly as a payment method, Ethereum was designed to leverage blockchain technology for more diverse applications. The network describes the technology as “the world’s programmable blockchain.”

In this article, we’ll cover:

• History of Ethereum
• How Ethereum works
• Use cases for Ethereum
• Pros of Ethereum
• Cons of Ethereum

History of Ethereum

Ethereum was conceived in 2013 by programmer Vitalik Buterin, developed by Gavin Wood, Charles Hoskinson, Anthony Di Iorio, and Joseph Lubin throughout 2014, and launched its cryptocurrency in 2015 at a price of $0.31 per coin. It was designed to build on what Bitcoin had started back in 2009, but with a few key differences. Buterin believed that Bitcoin’s blockchain functionality was too limited. The Ethereum blockchain provides flexibility because it is programmable and allows the execution of smart contracts and the building of many types of decentralized applications. Buterin has compared the differences between Bitcoin and Ethereum to the differences between a pocket calculator and a smartphone.

How does Ethereum work?

Like other types of cryptocurrency, the Ethereum network relies on blockchain technology. Blockchain uses cryptography to keep the network secure and verify transactions. Users keep the keys to access their crypto coins and tokens in a crypto wallet. Transactions on the blockchain are validated by a peer-to-peer network of independent computers, or nodes, running automated programs that verify each transaction, then bundle the data into blocks and add them to the chain. The entire Ethereum blockchain is public: anyone can join the network and view the ledger. The network’s security hinges on the fact that no changes can be made to the ledger once a transaction is validated. 

Historically, Ethereum operated under a proof-of-work model, in which mining is performed by nodes on the network solving complex equations to validate transactions and mint new coins. But as of September 2022, it transitioned to a proof-of-stake model, which does not require the mining of new coins. This approach, which is used by most altcoins, requires nodes to pledge a “stake” of coins; once they validate a transaction, they’re awarded with additional coins. This change, referred to as The Merge, was intended to be faster, cheaper, and more environmentally friendly since the proof-of-stake model requires less energy. Ethereum estimates that The Merge reduced the network’s energy consumption by over 99%. 

Smart contracts

Smart contracts are the foundation of the Ethereum network. These contracts are self-executing lines of code containing the terms of an agreement between any two users. If certain conditions are met, smart contracts will automatically execute transactions without the need of an intermediary. They are traceable, transparent, and irreversible. Smart contracts can be used by buyers and sellers to trade coins and tokens, but they also have a wide variety of other applications for many industries. 

Ethereum use cases

The Ethereum network can be used to buy and sell crypto: ether coins as well as many other cryptocurrencies. You may also use a multitude of other decentralized finance applications. Other use cases enabled by smart contracts on the Ethereum blockchain include:

• Exchanging NFTs (non fungible tokens) and other tokens
• Decentralizing and securing domain names 
• Protecting and trading intellectual property
• Voting in decentralized autonomous organizations (DAOs) 
• Verifying digital identities
• Tracking items in a supply chain 
• Facilitating insurance policies
• Executing a variety of functions for loans and mortgages

Ether: Ethereum’s native cryptocurrency

Ether, the native cryptocurrency of the Ethereum blockchain, is the second most popular digital currency behind Bitcoin. Ether can be traded on a cryptocurrency exchange or used as payment for peer-to-peer transactions or at merchants that accept it. Investors can also use ether for crypto staking on the Ethereum network. 

Ether is the fuel that supports the Ethereum ecosystem. Users pay transaction fees in ether, and validators are rewarded with coins when they add blocks to the chain. Ethereum refers to the cost required to conduct a transaction or execute a contract on the blockchain as a gas fee, and it’s determined by the computational cost of validating a specific transaction as well as supply and demand.  

For many investors, Ethereum’s appeal is the opportunity to buy and sell crypto coins in the hopes of making money. Like other types of investments, the value of ether fluctuates based on market supply and demand. Investors may buy ether and hold onto it in the hopes that the crypto asset will increase in value over time. 

Advantages of Ethereum

Ethereum shares the advantages of many other forms of crypto: a permissionless, decentralized ledger that’s considered both secure and efficient. It also has a tremendous amount of flexibility for use cases beyond finance.   

• Decentralized: Because there’s no central body controlling or regulating Ethereum, authority is distributed to no one and everyone simultaneously. 
• Secure: Established blockchains like Ethereum are considered highly secure. Data cannot be taken away, only added, which makes altering the system extremely difficult. 
• Permissionless: Ethereum is open for anyone to participate in the network and view the ledger. This provides anonymity, greater privacy, and increased accessibility. 
• Efficient: With the switch to the proof-of-stake validation model, the Ethereum network is expected to run more quickly while using less energy.
• Flexible: Unlike crypto blockchains that were built specifically for cryptocurrency and other financial transactions, the blockchain supports a wide range of use cases for developers who want to build apps on the network.

Disadvantages of Ethereum

• Stability concerns: With recent changes to the network’s validation model, some worry that Ethereum could be less stable than in the past. 
• Less scalability: Because each Ethereum transaction on the blockchain is validated by a single node, Ethereum is seen as less scalable than some other crypto networks. 
• Potential vulnerabilities: There are separate platforms for smart contracts, the ledger, and more, which some say could make Ethereum more vulnerable to malfunctions and hacks.
• Volatility: Like other cryptocurrencies, the value of ether tends to be highly volatile. While all investing involves risk, including the risk that you could lose money, crypto investing is often considered higher risk due to the rapid swings in the value of assets.