What Is Ethereum?

10 Minute Read

Ethereum entered the crypto universe in 2015 when 21-year-old Vitalik Buterin and four other individuals co-founded the platform. Presently, Ethereum is one of the largest networks on Earth, second only to Bitcoin in terms of market capitalization and value. Ethereum has become a blossoming community for users and developers.

But before we get ahead of ourselves, we must understand what Ethereum is and how it became today’s influential crypto platform.

What is Ethereum?

Ethereum (ETH) is a blockchain platform that uses open-source software. A blockchain is a system that records and verifies digital transactions across multiple computers on a peer-to-peer network.

Ethereum houses the world’s second-largest cryptocurrency by market capitalization, ether. The only cryptocurrency worth more is Bitcoin.

Bitcoin (BTC) aims to change the world’s perspective on money by creating a digital currency as an alternative to traditional fiat currencies like the US dollar or the euro. Ethereum was not designed to be an alternative digital currency, and Ethereum allows people to build decentralized applications (dApps) on top of it. These dApps can be made for anything, and include smart contracts, non-fungible tokens (NFTs), and decentralized finance (DeFi) dApps. 

In short, Ethereum aims to revolutionize how internet-based applications operate by giving users more freedom. Ethereum’s decentralized approach allows the platform to do away with intermediaries in favor of smart contracts, which is a code that takes the place of traditional middlemen such as governments and banks and carries out predefined rules automatically.

To understand Ethereum’s potential for applications, transactions, and smart contracts, we must look at how it compares to Bitcoin and its functionality for the average user.

Ethereum vs. Bitcoin: What’s the difference?

Ethereum differs from Bitcoin in many ways with a large fundamental difference is the scope of functionality. From a functionality perspective, Ethereum aims to support applications and smart contracts and offer a decentralized platform which anyone can build on. In contrast, Bitcoin focuses exclusively on being a superior asset and a form of money. 

Ethereum and Bitcoin both rely on blockchain technology. In the past, both relied on the Proof-of-Work (PoW) consensus mechanism to secure the network. However, a rest change in Ethereum's architecture switched Ethereum’s consensus mechanism to Proof-of-Stake (PoS), which upgraded its speed, accessibility, and functionality.

Are Ethereum and ether the same thing?

Ethereum’s website cites ether as “the currency of Ethereum apps.” To use the Ethereum network, one must use ether. 

To further break this down, we can consider ether as Ethereum’s fuel. Ethereum requires a lot of computing power to run, and this power is not available for free. Users are required to pay for Ethereum transactions and operations using ether, which facilitates applications to run on the platform.

How does Ethereum work?

Ethereum's network exists on multiple computer systems globally, making it decentralized. Each system is known as a "node.” Each node has a copy of Ethereum's primary decentralized system, the Ethereum Virtual Machine (EVM). If one node fails, thousands of other systems are in place to back it up, meaning one would have to control a majority of nodes to hack the system. This makes Ethereum immensely difficult to cyber attack, and more difficult as the value of the currency increases.

Like every blockchain, each interaction on Ethereum's network is called a transaction, which is stored in a "block" that miners authenticate. Once authenticated, a transaction becomes publicly visible on Ethereum's blockchain.

Validating a new block is important because it proves the block is unique and immune to duplication. Currently, each block has a 64-digit code to go with it. The entire authentication process is known as PoW, as miners use their advanced computing power to prove each new block is legitimate. Miners receive payment for their work in the form of ether.

What is Ethereum gas?

Users pay validators a fee for transactions using Ethereum gas. If a miner authenticates a particular transaction initiated by a user, the user will pay the miner, further incentivizing mining in the future. Ethereum gas also modulates the number of actions a user can make per transaction, ensuring security on the blockchain and preventing spam because the more transaction demand there is, the higher the gas fee is. This means that at times of peak demand, only users who are willing to pay a steep premium will transact.

How does Ethereum make money?

Ethereum allows users to build applications on its blockchain, with ether as a utility token allowing applications to interact with the blockchain. With recent updates, Ether’s supply is determined by the types of activity on the network, meaning based on its usage, it can be inflationary or deflationary. The value of the network to many is highly correlated to the usage of applications built on top of it, as the more apps that are built on Ethereum, the higher the value of ether. Ethereum historically has far more fees generated than any other blockchain, including Bitcoin.

What is Ethereum used for?

Ethereum's use is not limited to simple transactions. Users can complete complex Ethereum transactions involving smart contracts, where two parties mutually agree to a set of conditions at which to execute a previously agreed-upon transaction. When the set of conditions is met, the contract will automatically come into effect, delivering ether to the relevant party. Applications built on smart contracts can be everything from loans to royalties paid to musicians to agreeing to query data from a blockchain and more.

The combination of Ethereum's decentralized nature, ether's functionality as a utility token, and the growing ecosystem of apps on top of Ethereum fuels its use and appeal. To further understand Ethereum’s practicality, we must look at its advantages and disadvantages for both users and developers.

What is Ethereum 2.0?

Ethereum 2.0 is the long-awaited major upgrade to Ethereum. With ETH 2.0, Ethereum's Mainnet became more scalable. It reduced gas fees, increased TPS, became more deflationary, and made life more convenient for the Ethereum community.

ETH 2.0's major talking point is its transition from a PoW protocol to a PoS one. This gradually reduced the need for miners who use advanced computational power, electricity, and technical expertise. ETH 2.0 saw staking (the process of holding or locking up crypto, by which users may or may not earn rewards), replacing mining, meaning users gained more control over the transaction process. Estimates claim that ETH will now reduce its carbon footprint by up to 99.95%.

The next phase of crypto

The world of cryptocurrency is evolving. Ethereum 2.0’s launch brought many benefits to the crypto space, but it’s not the only cryptocurrency scaling rapidly.

Worldcoin is a new company that aims to give every person on Earth a free share of its cryptocurrency while providing its users with privacy.

At Worldcoin, we aim to empower every human on Earth through the power of cryptocurrency. The best part? All users are created equal and don’t have to pay for their share of Worldcoin.

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