Ethereum is the first blockchain-based network that supported smart contracts, making it the most well-established home for decentralized applications.
Ethereum is the first blockchain-based network that supported smart contracts, making it the most well-established home for decentralized applications.
By 2013, cryptocurrency-driven blockchain platforms like Bitcoin and Litecoin were already drawing the public eye. However, when Ethereum founder Vitalik Buterin introduced his new blockchain platform, he proposed functionality beyond the simple exchange of digital assets—functionality built on smart contracts. Ethereum’s expressive Turing-complete smart contract capabilities would allow developers to create sophisticated programs powered by a decentralized network of nodes (computers) that made their execution trustless and secure.
Although Ethereum has remained true to this core mission, it has grown and evolved significantly over the ensuing years. Smart contracts powered the creation of more than 4000 Ethereum-based decentralized applications (dapps) by 2023. Many of these have shaped an effort called decentralized finance (DeFi), seeking to improve on the shortcomings of traditional banking/payment rails. Network congestion has inspired the creation of scaling solutions like Polygon, Optimism, and Arbitrum. And perhaps most famously, in September 2022 the Ethereum network formally switched from a Proof of Work consensus mechanism (like Bitcoin) to a less energy intensive Proof of Stake model.
Many smart contract blockchain platforms have since joined Ethereum, including Solana, Cardano, Binance’s BNB Chain, and Avalanche. However, Ethereum’s first mover advantage, active development, massive decentralization (due to many nodes), and overall security have maintained its place in front of the field.
Ether, or ETH, is the primary unit of Ethereum’s ecosystem. This cryptocurrency is used for transactions of value (e.g., payments), settling of transaction fees, and for staking to secure the network.
How was Ethereum developed?
Ethereum was introduced by founder Vitalik Buterin in a 2013 whitepaper. In this document, he detailed the need for a Turing-complete (fully computationally capable) blockchain-based system. Contrasting with Bitcoin’s code that is narrowly tailored for the transfer of value, Buterin wanted to build more functionality into his network.
A yellowpaper was soon published by software developer Gavin Wood, further describing the technical aspects of Ethereum. Other contributors included Charles Hoskinson and Joseph Lubin. In many cases, the success of Ethereum launched these early developers to successful crypto-based careers. Wood later created Polkadot, Hoskinson led the development of Cardano, and Lubin founded the dapp developer ConsenSys.
A token sale was held in 2014, in which investors could buy ETH with bitcoin. In total, this raised over $18 million for the project. This seed money allowed the team to continue their work and culminated the release of the earliest implementation of Ethereum, nicknamed “Frontier,” in July 2015.
Since its launch, updates to Ethereum have included important security upgrades, a resolution for the hack of a smart contract protocol called The DAO (which resulted in the creation of Ethereum Classic), changes to block mining rewards, introduction of ETH burning, and multiple steps leading up to a switch from Proof of Work (PoW) to Proof of Stake (PoW). Importantly, a 2015 upgrade called Frontier Thawing set the stage for an eventual transition to PoS, which occurred 7 years later—almost to the week—with the launch of the Paris upgrade, nicknamed “The Merge.”
How does Ethereum work?
Put simply, Ethereum is a blockchain-based computing network. As such, it serves to securely account for assets on the network, provide a framework for building applications, and process transactions of value among users and its programs. To accomplish these goals, it relies on a Proof of Stake blockchain, a network of interconnected computers called nodes, and a computation motor called the Ethereum Virtual Machine (EMV).
Blockchain technology
Taking cues from Bitcoin’s trailblazing technology, Ethereum was built as a blockchain. As data (transactions) pass through Ethereum’s network, they are batched into blocks which are sequentially added to the growing chain. This way, all assets on the Ethereum network can be traced back to their creation, one step at a time.
Like Bitcoin, Ethereum uses a network of independent, interconnected computers (nodes) to assure the validity of the data. This makes Ethereum’s blockchain a distributed ledger. Because each node stores the entirety of the blockchain, nodes can contest and overrule any incorrect assertion made by bad actors. In other words, if someone tries to fraudulently assert “I have 1 million ETH,” the rest of the network can confirm this is not the case. Not all blockchains are distributed, but the more nodes connected to a network, the more decentralized and thus secure a blockchain can be.
Proof of Stake and Ethereum nodes
However, while Bitcoin remains a Proof of Work (PoW) blockchain, Ethereum transitioned to a Proof of Stake (PoS) consensus mechanism in 2022. This change consumes less energy than Bitcoin’s PoW model, and many argue that it lowers the threshold for participating as an Ethereum node.
In PoS, nodes deposit a “stake” of a minimum amount of ether (initially set to 32 ETH), and in doing so they become eligible to validate network transactions. As validator nodes process transactions, propose blocks, and add those blocks to the chain, they can claim rewards in the form of ETH. This incentivizes providing a positive service to the chain and its community of users.
Similarly, if a node isn’t operating well (e.g., gets disconnected frequently), its stake can be slashed (taken away) as a penalty. In fact, other nodes can redeem rewards for reporting validators that should be slashed, further securing the network and assuring its continued operation.
Ethereum Virtual Machine (EVM)
Ethereum’s most revolutionary feature was the introduction of blockchain-based network computing. The Ethereum Virtual Machine (EVM) is the platform that defines the rules that guide Ethereum and all of the decentralized applications (dapps) that exist on the network.
The EVM provides the tools necessary to write computer code and execute it across the vast, distributed nodes that make up Ethereum. A developer can write code (in a programming language like Solidity) and run it through the EVM to launch it as an application publicly on the Ethereum protocol. EVM-based code leverages the use of smart contracts—programs that are tied to an Ethereum address and contain both functions and data that, once implemented, can run automatically and transparently once implemented.
Smart contracts have already created an ecosystem where innumerable possibilities have been realized. They paved the way for ERC20 tokens, which constitute many of the most valuable (and most traded) cryptocurrencies in the market. Smart contracts dictate the rules for every decentralized finance (DeFi) protocol, transforming the crypto community’s vision of digital asset banking/transactions. They also laid the groundwork for the creation of non-fungible tokens (NFTs), helping to bring crypto into the public eye.
Since Ethereum’s introduction of the EVM, many other cryptocurrency-based protocols have made themselves “EVM compatible.” These include Avalanche, the BNB Chain, and scaling solutions like Polygon and Optimism. By conforming to Ethereum’s long-held standard, they can benefit from more active development by programmers and usage by end users.
How is ETH used?
Ether (ETH) is the cryptocurrency that underpins Ethereum’s vast ecosystem. The ETH coin has three primary roles. First, it is used as a medium of exchange for users and dapps alike. When users make payments on Ethereum, many times it is in the form of ETH. It is also used to pay transaction fees, which are calculated in the form of “gas.” The amount of gas required to pay for a transaction depends on the complexity of the transaction being performed. Finally, users can stake their ETH to the network. In doing so, they become validator nodes that maintain the security of Ethereum by confirming transactions and batching them into blocks on the chain.
Token economics and distribution
There is no maximum to the number of ether that will ever be created. This contrasts with the capped-supply model pioneered by Bitcoin and echoed by many other coins and tokens. Instead, ETH is issued (created) at a controlled rate according to how much ETH is staked on a given day. In fact, there are two main controls that both limit inflation and, at times, have also contributed to ETH’s _de_flation: 1) decreased ETH issuance and 2) ETH burning.
Immediately after the Merge, issuance of ETH was reduced by approximately 88%. In other words, stakers received only about 12% of the ETH that was previously directed to Ethereum’s pre-Merge miners. Furthermore, a 2021 update called EIP-1559 introduced ether burning where a portion of every transaction fee is burned (destroyed). This reduces the net issuance of ETH and during periods of high transaction fees has resulted in significant deflationary pressure on ETH. By July 2023, a total of approximately 3.5 million ETH had been burned.
At genesis, 60 million ETH were created and distributed to early investors. (These investors bought their tokens for approximately $0.29 in the pre-mine token sale.) Another 12 million ETH were generated as the project launched, split between early contributors (like Vitalik Buterin) and the Ethereum Foundation. Since then, all newly created ether have been created through block creation.
Conclusion
- Ethereum is a blockchain-based distributed computing protocol that was the first of its kind, paving the way for many others over the ensuing years.
- The protocol employs a blockchain, a Proof of Stake consensus mechanism, a distributed network of computers (nodes), and software called the Ethereum Virtual Machine to accomplish its ambitious goals.
- The ETH cryptocurrency underpins the functioning of the network by providing a medium of exchange, a way for stakers to secure the network and earn rewards for their service, and a currency by which users pay to have their transactions processed.
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