Driven by blockchain technology, Ethereum is a global-decentralised software platform. Investors and developers are primarily familiar with it through its native cryptocurrency, ether (ETH), and its application in blockchain and decentralised finance development.
Ethereum may be used by everyone to develop any type of safe digital technology since it is scalable, programmable, secure, and decentralised. Although its token is intended to be used as payment for blockchain support services, users may, if approved, use it to pay for actual goods and services.
History of Ethereum
Vitalik Buterin, credited with conceiving Ethereum, published a white paper introducing it in 2014.
The Ethereum platform was launched in 2015 by Buterin and Joe Lubin, founder of the blockchain software company ConsenSys.
The founders of Ethereum were among the first to consider the full potential of blockchain technology beyond just enabling a secure virtual payment method.
Since the launch of Ethereum, ether as a cryptocurrency has risen to become the second-largest cryptocurrency by market value. It is outranked only by Bitcoin.
One notable event in Ethereum’s history is the hard fork, or split, of Ethereum and Ethereum Classic. In 2016, a group of network participants gained control of the smart contracts used by a project called The DAO to steal more than $50 million worth of ether.
The raid’s success was attributed to the involvement of a third-party developer for the new project. Most of the Ethereum community opted to reverse the theft by invalidating the existing Ethereum blockchain and approving a blockchain with a revised history.
However, a fraction of the community chose to maintain the original version of the Ethereum blockchain. That unaltered version of Ethereum permanently split to become Ethereum Classic (ETC).
Initially, Ethereum used a competitive proof-of-work validation process similar to that of Bitcoin. After several years of development, Ethereum finally switched to proof-of-stake in 2022, which uses much less processing power and energy.
How Does Ethereum Work?
The distributed ledger used by Ethereum is called a blockchain (like a database). Data is kept in blocks, with each block holding the newly added information together with encoded data from the previous block. This results in an unchangeable chain of encoded information. An exact replica of the blockchain is dispersed throughout the blockchain network.
New ether tokens are given to the validator for the effort necessary to verify the data in one block and suggest a new one for every cell, or block, that is formed. The validator’s address is assigned to the ether.
A network of automatic programmes that agree on the veracity of transaction data validates a new block once it is suggested. After data and hashes are transferred between the consensus layer and the execution layer on the Ethereum blockchain, consensus is reached. The block is finalised once sufficient validators show that their comparison results were the same.
Proof-of-Stake Validation Process
Proof-of-stake differs from proof-of-work in that it doesn’t require the energy-intensive computing referred to as mining to validate blocks. It uses a finalisation protocol called Casper-FFG and the algorithm LMD Ghost, combined into a consensus mechanism called Gasper. Gasper monitors consensus and defines how validators receive rewards for work or are punished for dishonesty or lack of activity.
Solo validators must stake 32 ETH to activate their validation ability. Individuals can stake smaller amounts of ETH, but they are required to join a validation pool and share any rewards. A validator creates a new block and attests that the information is valid in a process called attestation. The block is broadcast to other validators called a committee, which verifies it and votes for its validity.
Validators who act dishonestly are punished under proof-of-stake. Those who attempt to attack the network are identified by Gasper, which flags the blocks to accept and reject based on the validators’ votes.
Dishonest validators are punished by having their staked ETH burned and removed from the network. “Burning” is the term for sending crypto to a wallet without private keys, effectively taking it out of circulation.
Wallets
Ethereum owners use wallets to store their ether. A wallet is a digital interface that lets you access your cryptocurrency. Your wallet has an address, which can be thought of as an email address in that it is where users send ether, much like they would an email.
Ether is not stored in your wallet. Your wallet holds private keys you use as you would a password when you initiate a transaction. You receive a private key for each ether you own. This key is essential for accessing your ether—you can’t use it without it. That’s why you hear so much about securing keys using different storage methods.
Ethereum vs Bitcoin
Ethereum is often compared to Bitcoin. While the two cryptocurrencies have many similarities, there are some important distinctions.
Ethereum is described by founders and developers as “the world’s programmable blockchain,” positioning itself as a distributed virtual computer on which applications can be developed.
The Bitcoin blockchain, by contrast, was created only to support the Bitcoin cryptocurrency as a payment method.
The maximum number of Bitcoin that can enter circulation is 21 million. The amount of ETH that can be created is unlimited, although the time it takes to process a block of ETH limits how much can be minted each year. The number of Ethereum coins in circulation as of April 2024 is just over 120 million.
Another significant difference between Ethereum and Bitcoin is how the respective networks treat transaction processing fees. These fees, known as gas on the Ethereum network, are paid by the participants in Ethereum transactions and burned by the network. The fees associated with Bitcoin transactions are paid to Bitcoin miners.
Ethereum, as of April 2024, uses a proof-of-stake consensus mechanism. Bitcoin uses the energy-intensive proof-of-work consensus, which requires miners to compete for rewards.
Scalability Solutions
To address scalability, Ethereum is continuing to develop a scalability solution called “danksharding.” Sharding was a planned concept that would allow portions (shards) of the blockchain to be stored on nodes rather than the entire blockchain. However, sharding was replaced with plans for danksharding, where transactions are processed off-chain, rolled up (summarised using data availability sampling), and posted to the main chain via a BLOB (Binary Large Object).
Danksharding, using BLOBs, rollups, and data availability sampling, is expected to greatly reduce costs and increase transaction processing speeds when eventually combined in a future update.
Development Roadmap
Lastly, Ethereum publishes a roadmap for future plans. As of April 2024, four primary categories were listed for future work. Those changes will push for:
- Cheaper transactions: Ethereum notes that rollups are too expensive and force users to place too much trust in their operators.
- Extra security: Ethereum notes it wants to be prepared for future types of attacks.
- Better user experiences: Ethereum wants better support for smart contracts and lightweight nodes.
- Future-proofing: Ethereum notes wanting to proactively solve problems that have yet to present themselves.