Ethereum

Ethereum is a decentralized, open-source blockchain platform that enables developers to build decentralized applications (dApps) and deploy smart contracts. With a market capitalization of over $180 billion, Ethereum is one of the most popular and widely used blockchain networks, second only to Bitcoin. Ethereum's popularity is due in part to its ability to offer more than just a cryptocurrency, but also a platform that can facilitate complex transactions and applications. In this beginner-friendly article, we will explore the basics of Ethereum, including its history, architecture, and key features, so you can get a better understanding of this revolutionary blockchain platform.

Brief History of the Ethereum Network

Ethereum was created in 2013 by a young programmer named Vitalik Buterin. Inspired by Bitcoin's potential for creating a decentralized financial system, Buterin wanted to expand the capabilities of blockchain technology beyond simple financial transactions.

Beginnings

Buterin published the Ethereum whitepaper in late 2013, detailing his vision for a blockchain platform that could run decentralized applications (dApps) and smart contracts. The idea quickly gained traction within the cryptocurrency community and a crowdfunding campaign raised over $18 million to fund the project.

The Ethereum blockchain went live in July 2015, marking the beginning of a new era for blockchain technology. With Ethereum, developers could create decentralized applications and smart contracts that could automate a wide range of tasks, from voting systems to supply chain management.

The DAO Fork

The early days of Ethereum were not without their challenges, however. In 2016, a bug in a smart contract known as The DAO resulted in the theft of over $50 million worth of Ether. This event led to a contentious hard fork, with the Ethereum community ultimately deciding to fork the blockchain into Ethereum (ETH) and Ethereum Classic (ETC). The version we now know as Ethereum is the one, where the stolen funds were returned to the investors.

ETH 2.0 and Following upgrades

Since then, the popularity of the Ethereum ecosystem has grown rapidly, while undergoing a set of important upgrades originally marked as Ethereum 2.0. These upgrades proposed major changes, such as the transition of the consensus mechanism from PoW to PoS, the addition of Sharding, Staking changes, and so on. So far, the consensus has been transitioned smoothly, in the event of September 2022, known as the Merge.

Key Concepts of the Ethereum Blockchain

Smart contracts

Smart contracts are self-executing contracts with the terms of the agreement between both parties being directly written into code. They run on a decentralized blockchain network, eliminating the need for intermediaries and creating trustless transactions. Ethereum was the first blockchain platform to enable the creation of smart contracts using its native programming language, Solidity.

Smart contracts provide various benefits:

• Irreversibility - the conditions of a smart contract cannot be changed once it is deployed on the blockchain
• Transparency and efficiency - blockchain itself is fully transparent, and so are the smart contracts
• Security and the trustless environment - does not require parties to trust each other, because the code is executed automatically and independently

Smart contracts can be written by developers and deployed onto the Ethereum network, where they can interact with other contracts, decentralized applications (dApps), and users. These contracts can be executed automatically when certain predetermined conditions are met, such as the transfer of a specific cryptocurrency amount.

dApps

Decentralized applications, or dApps, are one of the most significant innovations that the blockchain industry has introduced. dApps provide a new model for building applications that are decentralized, transparent, and secure. With the rise of Ethereum, which introduced smart contract functionality, dApps became more accessible and easier to build. By utilizing the Ethereum blockchain, developers can build and deploy dApps that can perform complex functions and interact with other smart contracts on the blockchain.

Some of the key benefits of dApps include their decentralized nature, which eliminates the need for intermediaries and allows for more secure and transparent systems. They also have the potential to be more resilient to downtime and censorship, as they are not controlled by any central authority.

Ethereum has a growing ecosystem of dApps, covering a wide range of use cases such as decentralized finance (DeFi), gaming, and social media. Many of these dApps have their own native tokens, which are used to facilitate transactions within the platform.

Ethereum Virtual Machine (EVM)

What we refer to as EVM, is basically a group of computers (nodes), which at any given time agree on the current state of the virtual machine. Any participant of the network can propose changes to the state of the EVM, such as a transaction or a smart contract, these changes later have to be confirmed by the remaining nodes in a process known as consensus.

The EVM is a crucial component of Ethereum because it allows developers to write code in high-level programming languages such as Solidity, which is then compiled into EVM bytecode and executed on the network.

Ether (ETH)

Ethereum's native currency is Ether (ETH), which is a digital asset used as a means of payment on the Ethereum network. ETH is an important part of the Ethereum ecosystem, and it plays a critical role in powering the network's decentralized applications (dApps) and smart contracts.

ETH is used to pay transaction fees on the Ethereum network, which are required for every action that takes place on the network. These fees are paid in gas, which is a unit of measurement for the amount of computational effort required to execute a transaction. Gas is priced in ETH and denominated in gwei, which is a shortcut term for a very small unit of ETH (1 gwei = 0.000000001 ETH)

Summary of the ETH tokenomics

In 2014, Ethereum held an ICO (Initial Coin Offering) to raise funds from investors. ETH tokens were purchased using BTC with the average price of 1 ETH back then being $0.31. The original supply consisted of 72 million tokens, the majority of which (over 80 %) were purchased by investors, and the rest was given to Ethereum founders and creators.

Ethereum does not have a fixed amount of supply, instead, a certain amount of Ether is minted upon every block to reward stakers. On the other side, a certain amount is also burned with every transaction. If the burn rate is higher than the emission rate, Ethereum will become deflationary - reducing supply means an eventual price increase. If more ETH is minted than burned, it will become inflationary.

If you wish to know more about tokenomics in general, feel free to check out our Tokenomics post in the dictionary section.

Consensus Mechanism

Formerly Proof of Work secured Ethereum has transitioned to Proof of Stake (PoS) consensus relatively recently in September 2022 during an event called the Merge. The Merge refers to the unification of the original PoW chain with the Ethereum Beacon chain.

In the PoS network, some users act as Validators, which create new blocks of data and confirm the state with the rest of the validators. In order to become validators, users have to stake at least 32 ETH to show a contribution to the network. Staking refers to offering your assets as collateral and assurance against malicious behavior. If a validator operates maliciously or otherwise disturbs the network, his staked coins may be taken from him. As a reward for confirming transactions, validators receive a certain percentage yield (APR) in a form of newly minted ETH.