What is Ethereum?

Ethereum is a decentralized, open-source blockchain featuring smart contract functionality. Ethereum provides a decentralized virtual machine, the Ethereum Virtual Machine (EVM), that can execute scripts and run dapps.

Ethereum was first proposed in late 2013 by Vitalik Buterin, a cryptocurrency researcher and programmer. Development was crowdfunded in 2014, and the network went live on 30 July 2015. Ethereum has pioneered concepts like utility tokens and decentralized finance (DeFi).

Ethereum underpins a multifunctional cryptocurrency ecosystem. As of 2023, Ethereum is the second-largest cryptocurrency by market capitalization behind Bitcoin.

Ethereum as a Platform

Unlike Bitcoin, which is designed primarily as a store of value, Ethereum was designed as a platform for decentralized applications. Ethereum extends the blockchain concepts of Bitcoin to add intrinsic support for smart contracts and decentralized applications. This allows developers to create and deploy applications where transactions and data are verified on the blockchain.

The Ethereum blockchain functions as a decentralized virtual machine called the EVM. Developers can use Ethereum to create dapps, cryptographic tokens, non-fungible tokens (NFTs), decentralized autonomous organizations (DAOs), and launch decentralized finance (DeFi) projects.

Ethereum's native cryptocurrency is Ether (ETH). ETH functions as digital money within the Ethereum ecosystem. ETH also acts as "gas" to power actions on the Ethereum network. Users spend ETH to deploy and interact with smart contracts and dapps.

Some key differences between Bitcoin and Ethereum include:

  • Bitcoin offers basic send/receive functionality, while Ethereum provides a Turing-complete scripting language for Smart Contracts.
  • Bitcoin's Script is limiting and can't build applications, while Ethereum is fully programmable.
  • Bitcoin verifies transactions, Ethereum verifies state changes triggered by transaction execution.

Ethereum allows developers to create decentralized applications on the blockchain that have novel functionality and capabilities.

History of Ethereum

Ethereum was first described in a 2013 whitepaper by Vitalik Buterin. Buterin envisioned Ethereum as a blockchain-based computing platform featuring smart contract functionality.

In 2014, development work commenced funded by an online crowdsale. The crowdsale sold over 60 million Ether at launch, with the proceeds going to the Ethereum Foundation to continue development.

The Genesis block, the first block on the Ethereum blockchain, was mined on July 30th, 2015. The flagship Ethereum software, Go Ethereum or Geth, was released shortly after. Ethereum launched in frontier beta and gradually released improvements over time.

Some notable milestones in Ethereum's development history include:

  • Frontier - Ethereum's initial release, launched live on July 30th 2015. Offered basic mining and blockchain functionality but no GUI.
  • Homestead - March 2016 upgrade that introduced various protocol improvements and fixes.
  • The DAO - The DAO was a decentralized autonomous organization built on Ethereum that raised $150M USD worth of ETH in May 2016. Soon after it was hacked, spurring debate which resulted in a hard fork.
  • Ethereum Classic - Those who rejected the hard fork continued on the original Ethereum blockchain, now known as Ethereum Classic.
  • Byzantium - October 2017 upgrade that added privacy features and delayed the "difficulty bomb" to discourage miners from staying on the old chain after upgrades.
  • Constantinople - February 2019 upgrade that introduced lower gas costs and enabled interoperability between Ethereum and Zcash.
  • Istanbul - December 2019 upgrade that improved operability and enabled interoperability with Bitcoin through sidechains.
  • Berlin - April 2021 upgrade that introduced optimizations like lower gas fees for some transaction types.
  • London - August 2021 upgrade that introduced a base fee for gas prices as well as EIP-1559. This began burning of base fee instead of giving it to miners.
  • The Merge - September 2022 upgrade that transitioned Ethereum's consensus mechanism to Proof-of-Stake. This ended energy intensive proof-of-work mining and slashed the network's energy usage by ~99.95%.

Ethereum has gone through many upgrades during its history to expand functionality and improve operability. Further upgrades are planned to continue Ethereum's development.

"Ethereum has come a long way since its inception in 2015. What started as an experiment in decentralized applications and finance has blossomed into a thriving ecosystem with immense real-world utility" - Vitalik Buterin, Ethereum founder

How Ethereum Works

Ethereum utilizes blockchain technology to create a decentralized computing platform. It expands on the basic blockchain concepts first pioneered by Bitcoin.

Some key components of Ethereum include:

  • The Ethereum Virtual Machine (EVM) - The EVM executes smart contract bytecode on the Ethereum network. It provides a runtime environment for smart contracts.
  • Smart Contracts - Self-executing code that runs on Ethereum. Encode logic that executes when certain conditions are met.
  • Gas - Internal pricing for running transactions and smart contracts. Gas pays for computation and storage costs.
  • Ether (ETH) - Ethereum's native cryptocurrency. Used as digital money and to pay for gas when transacting.
  • Nodes - Network participants who run Ethereum software to process transactions and smart contracts.
  • Miners - (Now called validators) Nodes that create new blocks to add to the blockchain. Responsible for processing and verifying transactions.
  • Accounts - User controlled addresses on Ethereum controlled by private keys. There are user accounts (externally owned) and contract accounts.

When a transaction is initiated by an Ethereum user, it propagates across the network using various P2P communication protocols.

Nodes then validate the transaction to ensure:

  • Correct syntax
  • Sufficient gas
  • Valid signature

Valid transactions are added to blocks by validators. Each block is cryptographically linked to the previous, creating an immutable chain.

These blocks are replicated across nodes on the network to achieve consensus and finality. The state of accounts on Ethereum is updated after transactions are committed.

Ethereum Accounts

There are two types of accounts on Ethereum:

  • Externally Owned Accounts (EOAs) - Controlled by private keys and have associated ETH balances. Users send transactions from EOAs.
  • Contract Accounts - Smart contract code that resides at a specific address. Associated with code and data storage.

Both account types have a 20-byte hexadecimal address that identifies them on the blockchain. Addresses are derived from the public key portion of a key pair.

Users must sign transactions with the appropriate private key to authorize sending from an EOA or contract account. This provides cryptographic security and prevents forged transactions.

When an account receives funds, its balance is increased. Accounts can send funds to other accounts to transfer value. This occurs via transactions propagated on the Ethereum blockchain.

Ethereum Transactions

Transactions are state transition operations on Ethereum. Transactions:

  • Transfer value between accounts
  • Deploy smart contracts
  • Execute smart contract code

Basic transactions contain:

  • recipient - Address receiving transfer
  • signature - Sender's signed authorisation
  • value - Amount of ETH to transfer
  • data - Optional data payload
  • gasLimit - Max gas for tx
  • gasPrice - ETH per gas

The sender must have a sufficient ETH balance to cover the:

  • Value transferred
  • Gas limit * gas price

This ensures adequate payment to validators for computation, storage and inclusion in a block.

Transactions trigger the execution of associated smart contract code if sent to a contract account. This executes in the EVM and can trigger state changes.

Valid transactions are propagated on the network and collected into blocks by validators.

Ethereum Smart Contracts

Smart contracts are self-executing programs deployed to the Ethereum blockchain. They are written in programming languages like Solidity.

When deployed, smart contract code is assigned an Ethereum address. Transactions can be sent to this address to trigger execution in the EVM.

Smart contracts are compiled to EVM bytecode that specifies an execution sequence. They can:

  • Store state in variables
  • Expose functions to execute logic
  • Transfer ETH between accounts
  • Call other smart contracts

For example, a banking smart contract could:

  • Store account balances
  • Expose deposit() and withdraw() functions
  • Update balances when called

Development environments like Remix IDE allow writing, deploying and testing smart contracts.

Popular Ethereum smart contract standards include:

  • ERC-20 - Fungible token standard like DAI stablecoin
  • ERC-721 - Non-fungible token standard like Cryptokitties
  • ERC-1155 - Multi-token standard for fungible + non-fungible tokens

These standard interfaces allow smart contracts to interoperate. For example, decentralized exchanges work with any ERC-20 token.

Decentralized Applications (DApps)

Decentralized applications (dapps) are apps built on smart contract platforms like Ethereum. They have backend code that runs on-chain.

Dapps interact with blockchain-hosted smart contracts for:

  • Business logic
  • Data storage
  • Truth source

This gives several advantages:

  • Zero downtime - Code runs on globally distributed network
  • Censorship resistance - No single entity controls the app
  • Transparent - Code is viewable by all
  • Autonomous - Smart contracts enzymatically execute free of middlemen

Popular types of dapps include:

  • Decentralized finance (DeFi) - lending, trading, banking etc.
  • Games - blockchain-based games with tradable assets
  • Collectibles - Crypto collectibles like CryptoKitties
  • Gambling - Provably fair gambling without central oversight

Dapp code can be written in languages like Solidity (Ethereum) and Rust (Solana). They are accessed via Web3 enabled browsers like Brave, Opera, and Google Chrome with wallet extensions.

Gas and Fees

Executing transactions and smart contracts on Ethereum requires computation and storage. Gas refers to the fee required to conduct these operations.

The gas system ensures adequate payment for resource utilization. Gas fees disincentivize potential spam and abuse of the network.

Each operation has a gas cost based roughly on computational complexity:

  • Adding two numbers - 3 gas
  • Storing one byte - 200 gas
  • Sending funds - 21000 gas

A maximum gas limit and gas price is set by the transaction sender:

  • gasLimit - Max gas to use for the transaction
  • gasPrice - ETH fee per unit gas

Total transaction fee = gasUsed x gasPrice

Any unused gas is refunded to the sender. Gas prices vary based on market demand and network conditions. Sending during high activity periods can require higher gas prices for prompt inclusion.

Decentralized Finance (DeFi)

Decentralized finance (DeFi) refers to financial applications built on blockchain networks like Ethereum. DeFi aims to recreate traditional financial systems in a decentralized architecture, removing intermediaries.

Popular DeFi applications include:

  • Decentralized exchanges (DEXs) - Allow trustless crypto trading without centralized custody
  • Lending & borrowing - Services for collateralized and undercollateralized loans without credit checks
  • Stablecoins - Fiat-pegged digital currencies stabilized by different mechanisms
  • Derivatives - On-chain trading of options, futures, and other derivates contracts
  • Payments - Services for transacting crypto worldwide quickly and efficiently
  • Asset management - Index funds that transparently automate portfolio management
  • Insurance - Services for purchasing non-custodial insurance policies as ERC-20 tokens

DeFi advantages include:

  • Accessibility - Anyone can access DeFi services with an internet connection
  • Transparency - All transactions are viewable on the public blockchain
  • Interoperability - DeFi apps are composable like Lego bricks
  • Automation - Smart contracts remove human intermediaries and overhead

Over $100B is currently locked in DeFi, indicating rapid adoption. However, DeFi also faces challenges like regulations, volatility, risks, and scaling.

Proof of Work Mining

From inception until September 2022, Ethereum utilized a Proof of Work (PoW) consensus algorithm. This allowed distributed nodes to agree on the state of the Ethereum blockchain.

In PoW systems, validator nodes competitively attempt to create new blocks of transactions. This competition involves expended computation power in order to solve a difficult cryptographic puzzle.

The first node to find the solution is allowed to add the next block and receives newly minted cryptocurrency as a reward. The solution is easily verifiable, but extremely difficult to find via trial and error.

By making block creation (mining) resource-intensive, attacks become prohibitively expensive. The aggregate mining power (hashrate) across the network contributes to overall security.

However, PoW is extremely energy intensive. At peak usage, Ethereum's PoW mining required nearly as much electricity as the entire country of Thailand!

The Merge to Proof of Stake

In September 2022, Ethereum successfully completed a landmark upgrade known as "The Merge". This transitioned Ethereum's consensus mechanism from Proof-of-Work (PoW) to Proof-of-Stake (PoS).

Proof-of-Stake secures network transactions by having validators stake Ether rather than expend computing power. The PoS validators take turns proposing blocks based on their economic stake.

Benefits of PoS consensus include:

  • Energy efficiency - >99.95% less energy usage
  • Lower barriers to entry - Less technical hardware needed
  • Better incentives - Discourage centralization risks
  • Faster transactions - Improved speeds possible

The Merge represented the official switch to PoS after years of meticulous research, engineering and community coordination. It ushered in a new era for Ethereum with a vastly more sustainable and scalable future ahead.

The Merge was a monumental technical achievement for the blockchain industry. It successfully transitioned one of the largest and most utilized networks to a radically different and cutting-edge consensus algorithm.

Challenges and Criticisms

While extremely useful and innovative, Ethereum does face some challenges and criticisms. These include:

Network congestion - Popular dapps like DeFi can congest the network and cause volatile gas fees. Upgrades like sharding aim to expand capacity.

Cost - Interacting with Ethereum can be expensive for users due to gas fees. Alternatives like layer 2 scaling aim to improve cost.

Complexity - Ethereum has a steep learning curve. It's difficult for beginners to use without ample education.

Scams/hacks - Irreversible transactions make Ethereum vulnerable to scams, hacks, and accidents if users aren't cautious.

Regulation - Regulation remains unclear but growing for cryptocurrencies. More rules would affect Ethereum's censorship resistance.

Despite these current challenges, work is ongoing to mitigate them without compromising core values. Ethereum has outstanding developers continually pioneering novel solutions.

Future Developments

Development continues on enhancing Ethereum's scalability, functionality, decentralization and security.

Some upcoming developments include:

  • Sharding - Sharding will partition the network to spread transaction load across 64 new chains. This exponentially increases capacity.
  • eWASM - eWASM will replace Ethereum's EVM with a new Web Assembly based virtual machine. This enhances dApp portability.
  • Proof of Stake - Proof of Stake will replace energy intensive proof of work mining with staked validators. This improves sustainability.
  • Statelessness - Statelessness will minimize client storage requirements. This improves accessibility and hardware requirements.
  • Privacy - Privacy enhancements like zkSNARKs will enable confidential transactions on Ethereum. This expands use cases.

Ethereum researchers are exploring novel solutions like verifiable delay functions, Phi accrual failure detectors, fork-free protocols, and economic finality. The future looks bright for Ethereum innovations!


To summarize, Ethereum provides a decentralized computing platform enabling DApps, DeFi, NFTs, DAOs, and much more. It expands on Bitcoin's innovation with programmable money and smart contract functionality.

Ethereum is currently the most-utilized blockchain globally, settling over $1 trillion in transactions annually. It has birthed entire sub-industries and showcases the extensive potential of blockchain technologies.

However, Ethereum is still in its early innings. Exciting innovations around scalability, security, and sustainability will continue to unfold. With brilliant researchers and developers working round the clock, the best is yet to come for Ethereum.

Does Ethereum really have a future in the face of intense competition?

Ethereum is facing increasing competition from alternative smart contract platforms like Polkadot, Solana, and Binance Smart Chain. However, there are several reasons why Ethereum still has a strong future despite new challengers:

Network effects - As the first programmable blockchain, Ethereum enjoys enormous network effects. It has by far the largest developer community and dapp ecosystem. These network effects help reinforce Ethereum's dominance.

First mover advantage - Ethereum also benefits from first-mover advantage. It pioneered smart contracts and has become deeply entrenched across blockchain use cases like DeFi and NFTs. These include major projects like Uniswap and CryptoKitties that benefit from Ethereum's longevity.

Roadmap & upgrades - The Ethereum roadmap includes major upgrades to improve scalability like sharding and security with Proof-of-Stake. These will help Ethereum better compete on speed, cost, and sustainability.

Decentralization - Ethereum has a vast, globally distributed network of nodes. This makes Ethereum more decentralized than smaller challengers, enhancing security and community trust.

Institutional adoption - Ethereum enjoys growing institutional support from major banks, businesses, and investors. This mainstream adoption benefits Ethereum's legitimacy and sustainability.

Is it too late to invest in Ethereum?

Many potential investors wonder if they've missed the boat on Ethereum since it is already a top cryptocurrency. However, there are several reasons it may still be early to invest in Ethereum:

1. Mainstream adoption is still upcoming

While Ethereum has seen impressive growth, blockchain technology and DeFi are still in their infancy in terms of mainstream usage. Less than 1% of the population uses cryptocurrencies currently. As adoption grows, Ethereum has substantial room for growth.

2. Scalability upgrades will expand capacity

Ethereum's current limitations on speed and cost will be addressed by sharding, Proof-of-Stake, Optimistic rollups, and other upgrades. This will allow more users and transactions, boosting Ethereum's utility.

3. Future developments expanding functionality

Ethereum's developer community continues building the next generation of DeFi applications, DAOs, NFT platforms, games, and more. More use cases will drive demand for ETH and gas fees.

4. Increased institutional investment onboarding new users

Growing Wall Street interest is bringing new users and capital into Ethereum. Increased institutional investment leads to greater mainstream adoption.

5. Total market cap remains small relative to assets like gold

Ethereum's current market cap is a fraction of the $10+ trillion gold market. Considering Ethereum's functionality beyond just store of value, its market cap has substantial room to grow.

In summary, while Ethereum has seen impressive growth already, the technology and ecosystem are still early in realizing their full potential. Therefore, there is a long runway ahead for Ethereum to continue expanding in utility and value.

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