Ethereum 101: Everything You Need to Know About Ethereum

Ethereum has revolutionized the blockchain landscape since its inception in 2015. As a decentralized platform, it has expanded the possibilities of blockchain technology beyond simple cryptocurrency transactions. Ethereum’s ability to support smart contracts and decentralized applications (DApps) has paved the way for innovations in various sectors, including decentralized finance (DeFi), non-fungible tokens (NFTs), and decentralized autonomous organizations (DAOs).

This article delves into the core aspects of Ethereum, explaining its fundamental concepts and key features. Readers will gain insights into how Ethereum works, the role of Ether as its native cryptocurrency, and the platform’s scalability challenges. Additionally, the article explores Ethereum’s wide-ranging applications, from DeFi protocols to NFT marketplaces, and discusses its impact on the broader blockchain ecosystem. By the end, readers will have a comprehensive understanding of Ethereum’s significance in the evolving world of blockchain technology.

What is Ethereum?

Ethereum is a decentralized global software platform powered by blockchain technology . It has revolutionized the blockchain landscape since its inception in 2015, expanding the possibilities of this technology beyond simple cryptocurrency transactions. Ethereum is often referred to as “Blockchain 2.0” due to its potential applications across various sectors beyond finance .

At its core, Ethereum is a blockchain network that introduced a built-in Turing-complete programming language for creating diverse decentralized applications (dApps) . This innovative platform is fueled by its native cryptocurrency, ether (ETH), which is used to power transactions and computational processes within the network .

The Blockchain Platform

Ethereum utilizes a blockchain, which is essentially a distributed ledger. Information is stored in blocks, each containing encoded data from the previous block and new information. This creates an encoded chain of information that cannot be altered. An identical copy of this blockchain is distributed throughout the network .

What sets Ethereum apart is its design as a scalable, programmable, secure, and decentralized platform. It allows anyone to create any secured digital technology, positioning itself as a distributed virtual computer on which applications can be developed .

Ethereum’s blockchain operates on two layers. The execution layer handles transactions and validations, while the consensus layer maintains attestations and the consensus chain . Recently, Ethereum transitioned from a proof-of-work to a proof-of-stake consensus mechanism, which allows users to validate transactions and mint new ETH based on their ether holdings. This significant upgrade aims to enhance the platform’s efficiency and reduce its environmental impact .

Smart Contracts

One of Ethereum’s most prominent features is its ability to implement smart contracts. These are self-executing contracts with the terms of the agreement directly encoded into lines of code . Smart contracts run on the Ethereum blockchain, eliminating the need for intermediaries and increasing the efficiency and security of transactions .

Smart contracts are written in Solidity, a programming language similar to JavaScript . The code defines the conditions under which the contract will be executed and the actions that will be taken when those conditions are met . For instance, a smart contract could be used to transfer ownership of a digital asset from one party to another when specific criteria are satisfied .

These contracts have numerous applications across various industries. In the supply chain sector, they can automate the tracking of items, increasing efficiency and transparency. In real estate, smart contracts can simplify property transactions by eliminating the need for intermediaries like real estate agents .

Decentralized Applications (dApps)

Decentralized applications, or dApps, are software programs that run on a blockchain or peer-to-peer network of computers instead of on a single computer . Unlike traditional applications, dApps operate in a public, open-source, decentralized environment, free from control and interference by any single authority .

Ethereum provides a flexible platform for creating new dApps, offering the infrastructure needed for developers to focus on finding innovative uses for digital applications . This has enabled the rapid deployment of dApps in several industries, including banking and finance, gaming, social media, and online shopping .

A popular example of a dApp is CryptoKitties, a blockchain-based virtual game that allows players to adopt, raise, and trade virtual cats. Each CryptoKitty is unique, owned by the user, and validated through the blockchain . Another example is Uniswap, a decentralized exchange protocol built on Ethereum that enables users to trade directly with each other without needing an intermediary .

Ethereum’s ability to support smart contracts and dApps has paved the way for innovations in various sectors, including decentralized finance (DeFi), non-fungible tokens (NFTs), and decentralized autonomous organizations (DAOs). As Ethereum continues to evolve and address scalability challenges, it remains at the forefront of blockchain technology, driving the development of Web3 and shaping the future of decentralized applications.

How Does Ethereum Work?

Ethereum Virtual Machine (EVM)

The Ethereum Virtual Machine (EVM) serves as the heart and soul of the Ethereum network, acting as a decentralized computer that runs on the global network of Ethereum nodes . This open-source platform has redefined the landscape of blockchain technology by providing a runtime environment for executing smart contracts and decentralized applications (DApps) . The EVM operates as a Turing-complete, sandboxed execution environment, capable of performing any computation while ensuring code execution remains isolated and secure .

Ethereum developers compile their smart contracts into bytecode that can be executed by the EVM . Once deployed on the blockchain, this code becomes immutable. Users and DApps interact with the EVM by sending transactions to Ethereum addresses containing executable code . These transactions trigger the EVM to execute the code, which can read from and write to the Ethereum state, enabling the creation of various decentralized applications .

The EVM’s decentralized and deterministic execution ensures that all nodes on the Ethereum network reach consensus on state changes caused by transactions . This process maintains the integrity and trustworthiness of the blockchain. The EVM’s strength lies in its global scale, with thousands of nodes executing code collaboratively, ensuring redundancy, security, and immutability .

Gas and Transaction Fees

Ethereum uses a gas system to manage resource allocation efficiently and ensure users pay for the computational power they use . Gas is the unit that measures the computational power required to conduct a transaction, which varies depending on the transaction’s complexity . The gas price, measured in gwei (a smaller unit of ETH equal to 0.000000001 ETH), determines the cost per unit of gas .

The formula for calculating gas fees changed with the London upgrade in August 2021 . Before the upgrade, users had to estimate their gas price based on network congestion. The new formula introduced a fixed per-block base fee and a flexible block size to tackle network congestion . The current formula for calculating gas fees is:

Gas fee = Gas units (limit) * (base fee + priority fee)

This change aimed to remove the unpredictability of gas fees based on network traffic and eliminate the need for users to outbid each other .

Mining and Consensus

Ethereum originally relied on a Proof of Work (PoW) consensus algorithm to validate transactions and add them to the blockchain . In this system, miners competed to solve complex mathematical puzzles, with the winner earning the right to add a new block to the chain and receive rewards in the form of newly minted ETH and transaction fees .

However, in September 2022, Ethereum transitioned from PoW to Proof of Stake (PoS) through an event known as The Merge . This shift was crucial for deploying sharding, a mechanism that uses multiple side chains to offload transactions from the mainnet, potentially increasing Ethereum’s scalability and transaction speed .

In the PoS system, validators take on the role of miners . Instead of running crypto mining machines, validators are required to hold and “stake” a certain amount of ETH to participate in the validation process . The likelihood of a validator being chosen to propose a new block is proportional to the amount of ETH they have staked .

This transition to PoS aims to address some of the limitations of the PoW consensus mechanism, particularly the high energy consumption required to maintain the network’s security . While The Merge itself didn’t immediately lower gas costs, it laid the groundwork for future upgrades that could significantly improve Ethereum’s scalability and potentially reduce transaction fees .

Ether: The Cryptocurrency of Ethereum

What is Ether?

Ether (ETH) is the native cryptocurrency of the Ethereum network, serving as the lifeblood of its operations. While often referred to as the “fuel” of the network, ether plays a multifaceted role within the Ethereum ecosystem . It stands as the world’s second-largest virtual currency by market capitalization, second only to Bitcoin (BTC) .

Ether’s functionality extends beyond being a mere cryptocurrency. It serves as an investment asset and a means of exchange, holding market value and being tradable for fiat currency on various cryptocurrency exchanges . The Ethereum community often metaphorically refers to ether as the “gas” that powers the network, drawing parallels to how money is spent to buy gas that fuels a car .

One of ether’s unique features is its diverse range of denominations. These denominations are incrementally smaller than a satoshi, Bitcoin’s smallest unit. The breakdown of ether’s denominations is as follows :

Denomination	Ether Equivalent
Wei	1 quintillionth
Kwei	1 quadrillionth
Mwei	1 trillionth
Gwei	1 billionth
Szabo	1 millionth
Finney	1 thousandth
Kether	1 thousand
Mether	1 million
Gether	1 billion
Tether	1 trillion

How to Obtain Ether

Acquiring ether involves a straightforward process, although it differs from purchasing traditional stocks or mutual funds. Here’s a step-by-step guide to obtaining ether:

Choose a reputable cryptocurrency exchange or trading platform .
Create an account on the chosen platform, complying with know-your-client procedures .
Deposit fiat currency into your account. This can typically be done via bank transfer, debit card, or sometimes through services like PayPal .
Use the deposited funds to purchase ether at the current market price .
Once the purchase is complete, you can choose to keep your ether on the exchange or withdraw it to a personal wallet .

It’s worth noting that while most exchanges don’t have minimum purchase amounts, it’s essential to consider transaction fees, which might make very small purchases (like $10 worth of ether) less economical .

Storing and Using Ether

After acquiring ether, proper storage becomes crucial for security. Here are some key points to consider:

Wallets: Ether can be stored in digital wallets, which come in two main types: hot wallets (connected to the internet) and cold wallets (offline storage devices) .
Cold Storage: For enhanced security, especially for significant amounts of ether, cold storage is recommended. Cold wallets are physical devices disconnected from the internet, offering better protection against hacking attempts .
Exchange Storage: While exchanges offer built-in wallets, it’s generally advised to transfer ether to a personal wallet for increased security and control .
Using Ether: Ether can be used for various purposes within the Ethereum network, including paying for transaction fees (gas fees), participating in decentralized finance (DeFi) protocols, and purchasing non-fungible tokens (NFTs) .
Gas Fees: When using ether for transactions on the Ethereum network, users pay gas fees. These fees consist of a block base fee, which is burned after the transaction, and a tip received by the validator .

As of May 28, 2024, ether was priced at approximately $3,850 per token, with a market capitalization of $461.83 billion and 120.14 million coins in circulation . This data underscores ether’s significant position in the cryptocurrency market and its potential for future growth and adoption.

Key Features of Ethereum

Programmability

Ethereum has revolutionized the blockchain landscape by introducing programmability as a core feature. This allows developers to create and deploy decentralized applications (DApps) and smart contracts on the Ethereum platform . The Ethereum Virtual Machine (EVM) serves as the runtime environment for compiling and deploying these smart contracts, which are written in the Solidity programming language .

Smart contracts are self-executing agreements with the terms directly encoded into lines of code . They facilitate the exchange of assets between parties without the need for intermediaries, enhancing efficiency and security in transactions . Once executed, smart contracts become immutable, ensuring that all related transactions are permanently registered and cannot be altered .

Decentralization

Decentralization is a fundamental principle of Ethereum, aiming to distribute power and control across the network rather than concentrating it in the hands of a single authority. The platform’s design allows for the creation of decentralized applications where participants serve as the decision-making authority .

Ethereum’s transition from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism in September 2022, known as “The Merge,” was a significant step towards increased decentralization . This shift aimed to lower barriers to entry and encourage broader participation in the network .

However, challenges to full decentralization persist. As of May 2023, 51% of detected Ethereum nodes were running in the United States, with 17% in Germany . Additionally, approximately 50% of validator nodes were deployed on Amazon Web Services (AWS), and 70% of all nodes were using cloud providers . This concentration raises concerns about the network’s resilience and true decentralization.

Immutability

Immutability is a key feature of Ethereum, ensuring that once data is recorded on the blockchain, it cannot be altered or deleted. This characteristic provides a high level of security and trust in the network’s transactions and smart contracts .

However, the concept of immutability in Ethereum has faced challenges and debates. The DAO hack in 2016, where a vulnerability in a decentralized investment fund’s code allowed a user to move nearly a third of the funds, highlighted the potential risks of immutable code . Similarly, the Parity wallet incident in 2017 resulted in the permanent freezing of approximately 514,000 ether wallets due to a software vulnerability, leading to a loss of around USD 150 million .

These incidents have sparked discussions about the balance between immutability and the need for error correction or upgrades. Hard forks, which create new versions of the blockchain with different consensus rules, have been used to address critical issues while maintaining the principle of immutability on the original chain .

As Ethereum continues to evolve, it faces the challenge of maintaining its core features while addressing scalability and centralization concerns. The ongoing development of solutions like danksharding aims to improve the platform’s scalability without compromising its fundamental principles of programmability, decentralization, and immutability .

Use Cases and Applications

Decentralized Finance (DeFi)

Decentralized finance (DeFi) represents a groundbreaking application of Ethereum’s technology, offering an open and global financial system built for the internet age. DeFi challenges the traditional centralized financial system by empowering individuals with peer-to-peer transactions and reducing the need for intermediaries . This new paradigm opens up financial services to anyone with an internet connection, allowing users to maintain control and visibility over their money .

DeFi applications cover a wide range of financial services, including:

Lending and Borrowing: Users can lend their cryptocurrencies to earn interest or borrow funds using collateral. Decentralized lending platforms offer advantages such as higher interest rates compared to traditional banks and the ability to borrow without providing personal information .
Trading: Decentralized exchanges (DEXs) enable users to trade different tokens without relinquishing control of their assets. These platforms operate 24/7, providing constant market access .
Savings and Investments: DeFi platforms offer innovative savings products, such as no-loss lotteries like PoolTogether, where users can potentially win prizes while retaining their initial deposit .
Asset Management: Automated fund management products on Ethereum allow users to grow their portfolios based on predefined strategies, eliminating the need for human managers and associated fees .
Insurance: Decentralized insurance aims to make coverage more affordable, transparent, and efficient, with faster payouts and lower costs due to increased automation .

The growth of DeFi has been remarkable, with the total value locked (TVL) in DeFi protocols reaching significant levels. This rapid expansion demonstrates the increasing adoption and potential of decentralized financial services.

Non-Fungible Tokens (NFTs)

Non-fungible tokens (NFTs) have emerged as a revolutionary application of Ethereum’s blockchain technology, enabling the tokenization of unique digital assets. Unlike cryptocurrencies such as Ether, where each token is identical and interchangeable, NFTs are individually unique, with distinct properties that make them non-fungible .

Key characteristics and applications of NFTs include:

Digital Art and Collectibles: NFTs enable artists to tokenize their work, providing verifiable ownership and scarcity in the digital realm. This has opened up new avenues for artists to monetize their creations and for collectors to own authentic digital assets .
Gaming and Virtual Worlds: NFTs can represent in-game items, characters, or virtual real estate, allowing for true ownership and interoperability across different gaming platforms .
Identity and Certification: NFTs can be used for identity security, storing personal information on an immutable blockchain that cannot be accessed or stolen without the owner’s keys .
Fractional Ownership: NFTs enable the democratization of investing by allowing fractional ownership of physical assets, such as artwork or real estate .
Event Tickets: NFTs can serve as tamper-proof event tickets, with organizers controlling the number of tickets issued and buyers assured of their authenticity .

The unique properties of NFTs have led to significant market growth and adoption across various industries, demonstrating their potential to revolutionize digital ownership and asset management.

Decentralized Autonomous Organizations (DAOs)

Decentralized Autonomous Organizations (DAOs) represent a novel organizational structure enabled by Ethereum’s smart contract capabilities. DAOs operate without a central governing body, instead relying on collective decision-making processes encoded in smart contracts .

Key features and applications of DAOs include:

Governance: DAOs use token-based voting systems to make decisions, with voting power often distributed based on token ownership or reputation within the organization .
Treasury Management: DAOs typically have built-in treasuries that can only be accessed through collective approval, ensuring transparent and democratic fund management .
Investment: DAOs can function as decentralized venture capital funds, allowing members to collectively invest in projects or assets .
Community Projects: DAOs enable global collaboration on shared goals, as demonstrated by projects like CityDAO, which used Wyoming’s DAO law to purchase land near Yellowstone National Park .
Protocol Governance: Many DeFi protocols are governed by DAOs, allowing token holders to participate in decision-making regarding protocol upgrades and parameter adjustments .

The DAO concept has gained traction due to its potential to create more transparent, efficient, and democratic organizations. However, challenges remain, including regulatory uncertainties and the need for robust security measures to prevent exploitation of smart contract vulnerabilities .

As Ethereum continues to evolve, these use cases and applications demonstrate the platform’s potential to transform various sectors, from finance and art to governance and community organization. The ongoing development of Layer 2 scaling solutions and the transition to Ethereum 2.0 are expected to further enhance the capabilities and adoption of these innovative applications.

Conclusion

Ethereum has undoubtedly caused a revolution in the blockchain landscape, expanding the possibilities of this technology far beyond simple cryptocurrency transactions. Its ability to support smart contracts and decentralized applications has paved the way for groundbreaking innovations in various sectors, including decentralized finance, non-fungible tokens, and decentralized autonomous organizations. The platform’s core features of programmability, decentralization, and immutability have positioned it as a key player in shaping the future of digital interactions and transactions.

As Ethereum continues to evolve, it faces challenges related to scalability and centralization. However, ongoing developments like the transition to proof-of-stake and the implementation of Layer 2 scaling solutions aim to address these issues. The platform’s wide-ranging applications and growing ecosystem suggest that Ethereum will keep playing a crucial role in driving the development of Web3 and molding the future of decentralized technologies. With its strong foundation and active community, Ethereum is well-positioned to continue its impact on the broader blockchain ecosystem for years to come.