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What is Ethereum (ETH)?

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PDAX

July 07, 2022

5 min read

BeginnerTokensCrypto BasicsEthereum

TL;DR

Ethereum is the second-largest cryptocurrency, next to Bitcoin. Ethereum utilizes blockchain technology to make its coin function beyond just being a currency, allowing developers to create tokens to run their own programs, contracts, and applications for specific uses.

What is Ethereum (ETH)?

The Ethereum network is the blockchain which is powered by the cryptocurrency Ether (ETH). But beyond being a decentralized network, Ethereum is also a platform on which individuals and companies can build specialized programs and decentralized applications called “dApps”. 

Whereas Bitcoin’s blockchain functions as a globally distributed ledger, Ethereum on the other hand, functions as a globally distributed “server”. 

For comparison, regular applications run on a single machine such as your laptop or mobile phone, they can also connect to a central database such as what popular apps like Facebook or Google do. 

DApps on the other hand, connect to a blockchain, so its functionality and database are maintained by a global network of computers. This makes it much more secure and ensures that the dApp has no singular point of failure. 

And since dApps can be developed for any conceivable purpose that you would with ordinary applications, Ethereum’s legacy can be summed up as combining flexibility with cryptocurrency–which has resulted in the many other kinds of cryptocurrencies and tokens we currently use today. From stablecoins, to decentralized finance (DeFi) tokens, and gaming tokens–all of these were made possible thanks to the development of the Ethereum network. 

How does Ethereum work?

To understand Ethereum, think of its programming code as a “layer” which provides the foundation for dApps to be built on. Any dApp built on top of Ethereum’s “Layer-1” can now access the computing power provided by Ethereum’s global network of computers, called “nodes”.

For the dApp to connect to the blockchain and run its own transactions, it needs another set of codes called “smart contracts”. Smart contracts are what allows for the dApps to automate transactions without the need to be facilitated by a central server or entity. Smart contracts are thus “smart” because their codes are triggered to execute by themselves as soon as their required parameters are met. 

Smart contracts can carry out a wide variety of functions depending on the dApp. For instance, smart contracts are what makes it possible for rewards to be given automatically in play-to-earn blockchain games, as well as execute loans and pay off interest rates in DeFi products. 

Some dApps can even have their own blockchains which can be built on top of Ethereum, as a “second layer” or Layer-2 blockchain. Smart contracts are also used to allow for both layers to transact with one another. 

Ether on the other hand is what facilitates the supply of computing power for the Ethereum layer which all the dApps on the second layer rely on. Similar to the Bitcoin network, Ethereum is powered by a global network of computers called “nodes” which are incentivized to keep their computers running in exchange for ETH which are partly sourced from the fees users pay to process their transactions on the dApps, and partly from a process called “mining”. 

How is new Ether (ETH) made?

Currently, Ethereum’s blockchain operates on a Proof-of-Work (PoW) consensus protocol similar to Bitcoin. What this means is that the network nodes compete with one another in a process called “mining” for processing and validating transactions that take place on the blockchain. Mining is how new coins are “minted” and added to the circulating supply. 

In PoW, these nodes race with another in solving complex mathematical equations, to ensure that they are operating independently from one another. Whichever node gets to solve this equation is then awarded a certain amount of newly minted ETH, which is how node operators are compensated for providing the hardware and computing power for the entire blockchain. 

The problem with PoW mining is that it requires a lot of energy to run, which has led to criticisms regarding its environmental impact and sustainability. 

Aside from that, the demand for mining hardware has also resulted in a global shortage of high performance processors, which is why Ethereum is currently transitioning toward a Proof-of-Stake (PoS) consensus protocol to replace mining with "staking". Dubbed as “The Merge”, the transition is scheduled to take place within 2022

PoS is a more sustainable alternative to PoW as it only requires users to “stake” their coins as a form of collateral to be able to participate in processing and validating transactions. So instead of racing with each other to solve mathematical puzzles, the nodes in a PoS only have to stake higher amounts of coins in order to be given more chances of validating transactions–and thus–earning more rewards. 

Ethereum facts and trivia

Ethereum was originally thought of by programmer Vitalik Buterin in 2013 and he wrote the cryptocurrency’s whitepaper when he was just 19 years old. Buterin was the first to propose that a blockchain should be developed using a “Turing-complete” language–a programming language that can be “computationally universal” allowing it to work with any kind of data set. Though Turing-complete programming is now used everywhere, it was Buterin’s pioneering idea that eventually led to the development of his universally flexible blockchain.

Buterin developed the blockchain with the help of his partners Gavin Wood, Charles Hoskinson (who would later develop Cardano), Anthony Di Lorio, and Joseph Lubin in 2015.

To date, Ethereum remains the most widely used blockchain, with majority of all dApps ever developed built on its platform despite the emergence of other newer Layer-1 blockchains. Things haven’t slowed down yet for Ethereum–in fact–with all the developments taking place and new projects being built, it seems to be only just beginning. 

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DISCLAIMER: The statements in this article do not constitute financial advice. PDAX does not guarantee the technical and financial integrity of the digital asset and its ecosystem. Any and all trading involving the digital asset is subject to the user’s risk and discretion and must be done after adequate and in-depth research and analysis.

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