What Is Ethereum?

In this article, we explore the foundations of Ethereum — how it works, its advantages, and the potential impact on the future of decentralised applications.

Jun 21, 2023
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What Is Ethereum

Key Takeaways:

  • Ethereum aims to provide a decentralised computing network built on blockchain technology that allows the creation of smart contracts.
  • It is one of the most popular platforms in the world for creating decentralised applications (dapps), hosting thousands of them, as well as tokens, exchanges, and tools. 
  • Bitcoin and Ethereum share some similarities, but there are key differences between the two.
  • Unlike in the Bitcoin network, smart contracts are the fundamental building blocks of all applications in Ethereum, allowing network interactions and business functions to run in a trustless manner.
  • Ethereum’s large and robust network, programmability, and high liquidity are just some of its advantages, while its drawbacks include scalability issues and fluctuating transaction fees. 

Introduction to Ethereum

The concept of Ethereum was developed in 2013 by its founders Vitalik Buterin and Gavin Wood. Along with the network’s co-founders, Charles Hoskinson and Anthony Di Iorio, they launched the Ethereum network in 2015 with the aim of building a platform that goes beyond the capabilities of Bitcoin. The primary goal of Ethereum is to provide a decentralised computing network built on blockchain technology that allows developers to create and manage smart contracts and decentralised apps (dapps) without the need for a central authority.

What Is Ethereum?

Built on a blockchain network, Ethereum is a global, decentralised platform for digital money, smart contracts, and applications. It intends to provide a blockchain with built-in Turing-complete programming language, allowing the creation of smart contracts and applications. These applications can handle various functions, such as storing and transferring personal data, executing complex financial transactions, and managing smart contracts. 

As one of the most popular platforms in the world, the Ethereum blockchain runs thousands of games, fungible and non-fungible tokens (NFTs), financial apps, developer tools, decentralised autonomous organisations (DAOs), and even hosts other cryptocurrencies.

The native cryptocurrency of Ethereum is called Ether (ETH), which secures the network, serves as a gas fee, and underpins the Ethereum financial system.

Ethereum’s Blockchain Network and Smart Contracts

The blockchain network is central to Ethereum’s functionality. It is a decentralised, distributed system — publicly available to network participants — that acts as a ‘ledger’, recording the network’s entire transaction history. Copies of this ledger are distributed across a global network of computers, called nodes, which are responsible for verifying and recording transactions and smart contract data in the network. Additionally, nodes are in charge of the network’s state: the current information of all the smart contracts and applications running on it. 

Smart contracts are the fundamental building blocks of all applications that run on Ethereum. They are self-executing contracts on the Ethereum blockchain with the terms of an agreement directly written into code, automatically executing when specified conditions are met. Smart contracts allow network interactions and business functions to run in a trustless manner and without the need for intermediaries. 

For a primer on how Ethereum smart contracts work, check out What Are Smart Contracts and How Do They Work?

Ethereum vs Bitcoin

Although Bitcoin and Ethereum share some similarities — mainly, they are cryptocurrencies built on blockchain technology — there are key differences between the two.

Bitcoin was originally intended as a decentralised payment network — its inherent value is derived from transacting its native token, BTC. As an asset, BTC primarily functions as a virtual currency and store of value.

Meanwhile, Ethereum goes beyond payments: As a programmable blockchain, it allows anyone to write smart contracts and build dapps on its network. In terms of network performance, Ethereum’s transactions per second (tps) average is ~24 (at the time of writing), processing transactions faster than Bitcoin (~7 tps).

Block creation time differs, as well: New blocks in Ethereum are created every ~12 seconds compared to Bitcoin’s 10-minute validation time. Moreover, there is no limit on the number of potential Ether tokens, while Bitcoin has a cap of 21 million coins.

Benefits of Ethereum

Ethereum offers several advantages that make it an attractive platform for developers and users alike:

  • Large and robust network: Ethereum has a well-established and tested network with a global community. It also has the largest developer community and one of the most extensive dapp ecosystems in the blockchain and cryptocurrency space.
  • Programmability: Ethereum’s programmability attracts a large community of developers who seek new ways to improve the network and build innovative applications. 
  • High liquidity: Ethereum is the second-largest cryptocurrency (after Bitcoin) by market cap, with high liquidity thanks to its compatibility with a growing list of cryptocurrency exchanges, trading platforms, and brokerages.

Disadvantages of Ethereum

Despite its numerous benefits, Ethereum also has some drawbacks:

  • Scalability: As transaction volume in the network has grown over the years, the network’s speed and size have become increasingly limited. To address the ongoing scalability issue, new scaling solutions have emerged, such as Layer-2 blockchains and rollups. 
  • Transaction costs: Ethereum’s popularity and growing ecosystem have resulted in fluctuating gas fees, which can be costly for users at times.
  • Centralisation and censorship: Some critics argue that moving from a Proof of Work (PoW) to Proof of Stake (PoS) model opened up the Ethereum network to greater centralisation and increased risk of censorship.

Ethereum 2.0: A New Era for Decentralised Applications

During The Merge in 2022, Ethereum switched the platform’s consensus mechanism from PoW to PoS. Transactions in Ethereum are now validated through staking, which involves locking away a portion of cryptocurrency to participate in the transaction verification process. This change eliminated the need for miners, who previously operated expensive crypto mining equipment and consumed vast amounts of energy. 

The upgrade was previously referred to as ‘Ethereum 2.0’; however, that has been phased out to reflect that it was a network upgrade, rather than the launch of a new network. The Merge is just one part of the Ethereum roadmap; the network will undergo multiple upgrades in the future, which are necessary for Ethereum’s long-term success.

How to Buy Ethereum

It is important to note that when purchasing Ethereum, users are actually buying Ether (ETH), which is used on the Ethereum network. Given its popularity, it is easy to buy ETH. Just follow these steps:

  • Choose a cryptocurrency service: Anyone can buy ETH from crypto wallets directly or exchanges (centralised or decentralised). The Crypto.com Exchange and the Crypto.com App are popular options for buying and selling cryptocurrencies.
  • Choose a payment method: Deposit cash or link a bank account/debit card to fund purchases of ETH. Users can also use other payment methods, such as Apple Pay or Google Pay, to make a purchase.
  • Buy ETH: Use the deposited funds to purchase ETH at the current price.
  • Use a wallet: Transfer the ETH to a secure digital wallet or cold wallet to protect it from potential hacks or theft.

Review our step-by-step guide on buying cryptocurrencies: How to Buy Cryptocurrencies.

Conclusion — Is Ethereum Worth Buying?

Buying Ethereum can be an attractive proposition for various reasons, such as its value as a virtual currency, the potential for increased demand for ETH as more people utilise Ethereum dapps, as well as ongoing platform improvements and continuous innovation in the network. However, before making any significant purchase of ETH or other cryptocurrencies, it is imperative to practise diligence and perform proper research.

In conclusion, Ethereum represents a significant milestone in the development of dapps and smart contracts. Its innovative approach to creating a decentralised computing network on the blockchain has the potential to change the way we interact with technology and conduct transactions. As Ethereum continues to evolve and grow, how the platform shapes the future of dapps and the broader world of blockchain technology will be exciting to watch.

Due Diligence and Do Your Own Research

All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, cybersecurity, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Any descriptions of Crypto.com products or features are merely for illustrative purposes and do not constitute an endorsement, invitation, or solicitation.

Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.

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Ethereum

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