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Ethereum: A Guide to the Decentralized Platform and Cryptocurrency

Ethereum is one of the most influential and revolutionary platforms in the history and future of blockchain and cryptocurrency It is more than just a digital currency or a distributed ledger It is a programmable platform that enables users to create and run various applications based on smart contracts.

In this article, we will explore and explain what is Ethereum how does it work what are its advantages and disadvantages what are its key differences from Bitcoin what are its real-world applications and what is its history and future

We hope that this article will help you understand and appreciate the innovation and potential of Ethereum and its ecosystem.

What Is Ethereum?

Ethereum is a decentralized, open-source, and programmable platform that allows users to create and run various applications based on smart contracts. Smart contracts are self-executing agreements that are written in code and stored on the blockchain, a distributed ledger that records and verifies transactions. Ethereum enables users to create and interact with decentralized applications (DApps) that can offer various services such as finance, gaming, social media, art, and more.

Ethereum is also a cryptocurrency that powers the network and its applications. The native currency of Ethereum is called ether (ETH), which can be used to pay for transaction fees, computational resources, and other services on the network. Ether can also be traded on various exchanges or stored in digital wallets.

How Does Ethereum Work?

Ethereum works by using a network of nodes that communicate and validate transactions using a consensus mechanism called proof-of-work (PoW). PoW is a process that requires nodes to solve complex mathematical problems in order to create new blocks of transactions and earn rewards. PoW ensures that the network is secure and resistant to attacks, but it also consumes a lot of energy and resources.

Ethereum is planning to transition to a more efficient and scalable consensus mechanism called proof-of-stake (PoS) in the near future. PoS is a process that requires nodes to stake their ether in order to participate in the network and earn rewards. PoS does not rely on computational power, but rather on economic incentives and penalties to ensure the network’s security and integrity.

Blockchain Technology

Blockchain technology is the core innovation behind Ethereum and other cryptocurrencies. A blockchain is a system of records that are linked together using cryptography and distributed across multiple computers or nodes. Each record or block contains information such as transactions, timestamps, and hashes that link it to the previous block. The blockchain is constantly updated and synchronized among all nodes, creating a transparent and immutable history of events.

Blockchain technology enables peer-to-peer transactions without intermediaries or central authorities, enhancing trust, efficiency, and security. Blockchain technology also enables smart contracts, which are self-executing agreements that are written in code and stored on the blockchain. Smart contracts can automate various tasks and functions, such as payments, escrow, voting, identity verification, and more.

You should read the unique article we wrote about Blockchain! Blockchain 101: What Is It, How It Works, and Why It Matters

Wallets

Wallets are software applications or devices that allow users to store, send, receive, and manage their ether and other cryptocurrencies. Wallets can be classified into two types: hot wallets and cold wallets. Hot wallets are connected to the internet and provide easy access and convenience, but they are also more vulnerable to hacking and theft. Cold wallets are offline and provide more security and protection, but they are also less convenient and accessible.1

Wallets can also be classified into two categories: custodial wallets and non-custodial wallets. Custodial wallets are controlled by third-party services or platforms that hold the user’s private keys and funds, such as exchanges or brokers. Non-custodial wallets are controlled by the user who holds their own private keys and funds, such as hardware wallets or software wallets.

Historic Split

Ethereum experienced a historic split or fork in 2016 due to a controversial event known as the DAO hack. The DAO was a decentralized autonomous organization that was built on Ethereum as a venture capital fund for DApps. The DAO raised over $150 million worth of ether from investors in a crowdfunding campaign, but it was soon hacked by an anonymous attacker who exploited a vulnerability in its code and drained over $50 million worth of ether.

The Ethereum community was divided on how to deal with the hack and recover the funds. Some proposed to revert the hack by altering the blockchain’s history through a hard fork, which would create a new version of Ethereum with different rules and transactions. Others opposed this idea as it would violate the principle of immutability and undermine the trust in the network.

The hard fork was eventually implemented by the majority of the community, creating Ethereum (ETH) as we know it today. However, some miners and users decided to continue running the original version of Ethereum without the hard fork, creating Ethereum Classic (ETC) as a separate cryptocurrency with its own blockchain.2

Ethereum vs. Bitcoin: Key differences

Ethereum and Bitcoin are both decentralized platforms that use blockchain technology and cryptocurrencies to enable peer-to-peer transactions without intermediaries or central authorities. However, they have some key differences in terms of their purpose, design, functionality, and performance.

You should read the unique article we wrote about Bitcoin! Bitcoin: The Revolutionary Digital Currency

  • Purpose: Bitcoin was created as a digital currency that aims to provide an alternative to fiat money and store of value. Ethereum was created as a programmable platform that aims to provide an alternative to traditional internet and web services.
  • Design: Bitcoin uses a simple and limited scripting language that only allows basic transactions and functions. Ethereum uses a Turing-complete and expressive programming language that allows complex transactions and functions, such as smart contracts and DApps.
  • Functionality: Bitcoin only supports one type of application, which is the transfer of value. Ethereum supports multiple types of applications, such as finance, gaming, social media, art, and more.
  • Performance: Bitcoin has a slower and more limited transaction capacity, with an average of 7 transactions per second (TPS) and a block time of 10 minutes. Ethereum has a faster and more scalable transaction capacity, with an average of 15 TPS and a block time of 15 seconds.
Bitcoin (BTC)Ether (ETH)
FOUNDED20092015
TRADINGCryptocurrencyCryptocurrency, smart contracts and other exchanges
BLOCK TIME10 minutes12 seconds
CONSENSUS PROTOCOLProof of Work (PoW)Proof of Stake (PoS)
EXECUTABLE CODE Doesn’t useDoes use
ENCRYPTION ALGORITHMSHA-256Ethash
Bitcoin and Ethereum Compared

Ethereum advantages and disadvantages

Ethereum has some advantages and disadvantages compared to other platforms and technologies. Some of the advantages are:

  • Innovation: Ethereum is a pioneer and leader in the field of blockchain and smart contracts, offering a platform for innovation and experimentation for developers and users.
  • Diversity: Ethereum supports a diverse and vibrant ecosystem of applications, projects, communities, and organizations that offer various services and solutions for different needs and preferences.
  • Flexibility: Ethereum allows users to customize and control their own applications, transactions, and data, without relying on intermediaries or central authorities.
  • Potential: Ethereum has the potential to revolutionize various industries and sectors, such as finance, gaming, social media, art, and more, by enabling new business models, opportunities, and possibilities.

Some of the disadvantages are:

  • Complexity: Ethereum is a complex and sophisticated platform that requires a high level of technical knowledge and skills to use and understand. It also faces various challenges and risks, such as security breaches, bugs, hacks, scams, frauds, and attacks.
  • Volatility: Ethereum is a volatile and unpredictable platform that is subject to various factors and influences, such as market demand, supply, competition, regulation, innovation, and speculation. It also suffers from high fees, congestion, scalability issues, and environmental concerns.
  • Uncertainty: Ethereum is an evolving and experimental platform that is constantly changing and improving. It also faces uncertainty and controversy regarding its future development and direction, such as the transition to PoS, the implementation of upgrades, the resolution of disputes, and the adoption of standards.

What’s so special about Ethereum?

Ethereum is special because it is more than just a cryptocurrency or a blockchain. It is a programmable platform that enables users to create and run various applications based on smart contracts. Smart contracts are self-executing agreements that are written in code and stored on the blockchain. They can automate various tasks and functions, such as payments, escrow, voting, identity verification, and more.

Ethereum is special because it supports a diverse and vibrant ecosystem of applications, projects, communities, and organizations that offer various services and solutions for different needs and preferences. Some examples of these are:

  • DeFi: Decentralized finance (DeFi) is a movement that aims to provide alternative financial services that are open, transparent, accessible, and inclusive. DeFi applications use smart contracts to enable users to lend, borrow, trade, invest, save, insure, and more without intermediaries or central authorities.
  • NFTs: Non-fungible tokens (NFTs) are unique digital assets that represent ownership of various items or content, such as art, music, games, collectibles and more. NFTs use smart contracts to verify their authenticity, provenance and scarcity.
  • DAOs: Decentralized autonomous organizations (DAOs) are entities that are governed by smart contracts rather than human managers or leaders. DAOs can coordinate collective actions and decisions among members without hierarchy or bureaucracy.

The Future of Ethereum

Ethereum has a bright future ahead as it continues to grow and improve its platform and its applications. Some of the developments and trends that will shape the future of Ethereum are:

  • Eth2: Eth2 is a major upgrade that will transition Ethereum from PoW to PoS, improving its security scalability efficiency and sustainability Eth2 will also introduce new features such as sharding which will increase the network’s capacity and performance and beacon chain which will coordinate the network’s consensus and rewards Eth2 is expected to be fully implemented by 2024.
  • EIP-1559: EIP-1559 is an improvement proposal that will change the way transaction fees are calculated and paid on Ethereum.3 EIP-1559 will introduce a base fee that will adjust dynamically according to the network’s demand and supply and a tip that will incentivize miners to include transactions in blocks. EIP-1559 will also burn some of the base fee reducing the supply of ether and potentially increasing its value. EIP-1559 is expected to be implemented in July 2021.
  • Layer 2 is a term that refers to solutions that are built on top of the Ethereum blockchain, but operate on a separate layer. Layer 2 solutions aim to improve the scalability, speed, and cost of Ethereum transactions by moving some of the computation and storage off-chain, while maintaining the security and decentralization of the main chain.

Some examples of Layer 2 solutions are:

  • Rollups: Rollups are a technique that aggregates multiple transactions into a single transaction that is verified and settled on the main chain, while the execution and state are stored off-chain. Rollups can be either optimistic or zero-knowledge, depending on the method of verification and fraud prevention.
  • Plasma: Plasma is a framework that creates child chains that are connected to the main chain, but operate independently and with their own rules. Plasma chains can process transactions faster and cheaper than the main chain, but they require users to trust the operators and exit mechanisms.
  • State channels: State channels are a method that allows users to exchange transactions directly with each other without involving the main chain, until they decide to close the channel and settle the final state on the main chain. State channels can enable instant and free transactions, but they require users to lock up funds and be online.

Real-World Use Cases of Ethereum

Ethereum has many real-world applications that demonstrate its potential and value in various industries and sectors. Here are some of the most prominent use cases of Ethereum:

Decentralized Finance (DeFi)

Decentralized finance (DeFi) is a term that refers to a range of financial services and products that are built on top of Ethereum and other blockchains. DeFi aims to provide users with more access, control, transparency, and efficiency in their financial activities, without relying on centralized intermediaries or intermediaries. Some examples of DeFi applications are:

  • Lending and Borrowing: Users can lend and borrow crypto assets using smart contracts and protocols that automatically match lenders and borrowers, set interest rates, and enforce repayment. For example, Compound is a DeFi protocol that allows users to earn interest on their crypto assets or borrow against them.
  • Trading and Investing: Users can trade and invest in various crypto assets using decentralized exchanges (DEXs) and platforms that enable peer-to-peer transactions without intermediaries or fees. For example, Uniswap is a DeFi protocol that enables users to swap tokens and provide liquidity without intermediaries or fees.
  • Stablecoins: Users can create and use stablecoins, which are crypto assets that are pegged to a stable asset such as the US dollar or gold, to reduce volatility and facilitate payments and transactions. For example, MakerDAO is a DeFi platform that allows users to create stablecoins (DAI) backed by collateral (ETH) and access credit services.

You should read the unique article we wrote about DeFi! DeFi 101: A Beginner’s Guide to Decentralized Finance

Digital Identity

Digital identity is a term that refers to the representation of a person or an entity in the digital world. Digital identity can include information such as name, address, email, phone number, biometrics, preferences, etc. Ethereum can empower users to control their own identity and data using self-sovereign identity (SSI) solutions that leverage smart contracts and blockchain technology. Some examples of SSI solutions are:

  • uPort: A platform that allows users to create and manage their own identity credentials and access DApps without intermediaries. Users can store their identity data on IPFS and link it to their Ethereum address.
  • Civic: A platform that allows users to verify their identity and share their data securely and selectively using blockchain technology. Users can store their identity data on Civic’s servers and link it to their Ethereum address.

Health Applications

Health applications are software applications that aim to improve the health and well-being of individuals and communities using technology. Health applications can include services such as diagnosis, treatment, prevention, monitoring, education, etc. Ethereum can enable health applications that leverage blockchain technology to improve the security, privacy, interoperability, and efficiency of health data and services. Some examples of health applications are:

  • MediBloc: A platform for user-owned and controlled health data on blockchain.
  • Healthereum: A platform for rewarding users for completing health-related tasks on Ethereum.

Security Infrastructure

Security infrastructure is a term that refers to the systems and protocols that ensure the security and integrity of data and transactions on the internet. Security infrastructure can include services such as encryption, authentication, authorization, verification, etc. Ethereum can enable security infrastructure that leverages blockchain technology to improve the trust, transparency, and resilience of data and transactions on the internet. Some examples of security infrastructure are:

  • NuCypher: A platform for encrypting and sharing data using proxy re-encryption on blockchain.
  • Chainlink: A platform for connecting smart contracts with external data sources using oracles on blockchain.

Payments

Payments are transactions that involve the transfer of money or value between parties for goods or services. Payments can include services such as remittance, e-commerce, peer-to-peer, etc. Ethereum can enable payments that leverage blockchain technology to improve the speed, cost, and convenience of money or value transfer. Some examples of payment applications are:

  • OmiseGO: A platform for sending and receiving any value across any network or asset on blockchain.
  • Request Network: A platform for creating and managing invoices using blockchain technology.

Privacy from Third Parties

Privacy from third parties is a term that refers to the protection of personal data and information from unauthorized access or use by third parties such as governments, corporations, hackers, etc. Privacy from third parties can include services such as anonymization, encryption, obfuscation, etc. Ethereum can enable privacy from third parties using blockchain technology and various techniques such as zero-knowledge proofs, mixers, ring signatures, etc. Some examples of privacy applications are:

  • Aztec Protocol: A platform for private transactions using zero-knowledge proofs on Ethereum.
  • Tornado Cash: A platform for anonymous transactions using mixers on blockchain.

Politics

Politics is a term that refers to the activities and processes that involve the governance and decision-making of a group or an organization. Politics can include services such as voting, campaigning, lobbying, fundraising, etc. Ethereum can enable politics that leverage blockchain technology to improve the democracy, transparency, and accountability of political processes and outcomes. Some examples of political applications are:

  • Aragon: A platform for creating and managing decentralized organizations using blockchain technology.
  • Horizon State: A platform for secure and transparent voting using blockchain technology.

Storing Data

Storing data is a term that refers to the process of saving and retrieving data on a device or a network. Storing data can include services such as cloud storage, file sharing, backup, etc. Ethereum can enable storing data using blockchain technology and various protocols such as IPFS, Swarm, Storj, etc. Some examples of data storage applications are:

  • IPFS: A protocol for storing and accessing data on a distributed network using peer-to-peer technology.
  • Storj: A platform for renting and purchasing storage space using blockchain technology.

Initial Coin Offerings

Initial coin offerings (ICOs) are a type of crowdfunding that involves the creation and sale of new crypto tokens or coins to raise funds for a project or a venture. ICOs can include services such as token creation, distribution, marketing, etc. Ethereum can enable ICOs using smart contracts and blockchain technology to facilitate the creation and sale of new crypto tokens or coins.

History of Ethereum

Ethereum was conceived in 2013 by Vitalik Buterin, a young programmer and co-founder of Bitcoin Magazine. Buterin was inspired by Bitcoin’s innovation, but he also saw its limitations and envisioned a more general and flexible platform that could support various applications beyond money. He wrote a whitepaper describing his vision for Ethereum, a programmable platform that would enable users to create and run smart contracts and DApps.4

Ethereum was officially launched in 2015 after a successful crowdfunding campaign that raised over $18 million worth of ether from investors. Ethereum quickly gained popularity and support from developers and users who were attracted by its innovation and potential. Ethereum also faced various challenges and controversies along its journey, such as the DAO hack, the hard fork, the scalability issues, the regulatory uncertainty, and the competition from other platforms.

Ethereum is still evolving and improving its platform and its applications as it strives to achieve its vision and mission of creating a more open transparent accessible and inclusive internet and web for everyone.

Conclusion

Ethereum is a programmable platform that enables users to create and run various applications based on smart contracts. Ethereum supports a diverse and vibrant ecosystem of applications, projects, communities, and organizations that offer various services and solutions for different needs and preferences. Ethereum also has a bright future ahead as it continues to grow and improve its platform and its applications.

Ethereum is one of the most influential and revolutionary platforms in the history and future of blockchain and cryptocurrency. It is more than just a digital currency or a distributed ledger. It is a platform that aims to create a more open, transparent, accessible, and inclusive internet and web for everyone.

We hope that this article has helped you understand and appreciate the innovation and potential of Ethereum and its ecosystem. If you want to learn more about Ethereum, you can visit its official website, blog, wiki, or social media channels. You can also join its community forums, chat rooms, or meetups to interact with other users, developers, or enthusiasts.

  1. Ethereum. Ethereum Wallets ↩︎
  2. Ethereum Classic. Ethereum Classic History ↩︎
  3. Ethereum. EIP-1559: Fee market change for ETH 1.0 chain ↩︎
  4. Ethereum. Ethereum Whitepaper ↩︎
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